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

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

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

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

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

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

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

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

The registrant had ~~15,334,091~~15,375,670 shares of Common Stock, $0.01 par value, outstanding as of ~~July 29, 2022.~~May 1, 2023.

This Form 10-Q/A amends the Quarterly Report on Form 10-Q of Financial Institutions, Inc. for the quarterly period ended March 31, 2023 (“Form 10-Q”), as filed with the Securities and Exchange Commission on May 8, 2023, for the sole purpose of correcting the outstanding shares on the cover page as of May 1, 2023.

No other changes have been made to the Form 10-Q other than the correction as described above. This Form 10-Q/A speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the Form 10-Q.

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

(1.) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Financial Institutions, Inc. (the “Company”) is a financial holding company organized in 1931 under the laws of New York State (“New York”). The Company provides diversified financial services through its subsidiaries, Five Star Bank, SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York chartered banking subsidiary, Five Star Bank (the “Bank”). The Bank also has a commercial loan production ~~office~~offices in Ellicott City (Baltimore), Maryland and Syracuse, New York, and indirect lending network relationships with franchised automobile dealers in the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. On May 1, 2023, the Company announced the completion of the merger of HNP Capital with and into Courier Capital. Refer to Note 17. Subsequent Event, for further details on the merger. Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. Corn Hill Innovations Lab, LLC (“CHIL”), which oversaw the Company’s Banking-as-a-Service (“BaaS”) and financial technology (“FinTech”) relationships, was dissolved on March 28, 2023, and all assets and liabilities were transferred to the Bank.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation of the consolidated statements of financial condition, income, comprehensive income, changes in shareholders’ equity and cash flows for the periods indicated and contain adequate disclosure to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s ~~2021~~ Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year or any other period.

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

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

•

~~Accounting for Loan Modifications~~ - The CARES Act provided that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 made between March 1, 2020 and January 1, 2022 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 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.

•

~~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.~~

~~Table of Contents~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~(1.)BASIS OF PRESENTATION OF SIGNIFICANT ACCOUNTING POLICIES (Continued)~~

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

•

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

•

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

•

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

~~As of June 30, 2022, the Bank has helped more than~~ ~~2,900~~ ~~customers obtain more than $378~~ ~~million in loans through the PPP and helped customers complete the forgiveness process for approximately $369~~ ~~million of PPP loans.~~

~~The Company had $532.4~~ ~~million of loans with modifications related to COVID-19 during 2020, with $4.0~~ ~~million and $46.2~~ ~~million still on deferral as of June 30, 2022 and December 31, 2021, respectively, and 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 June 30, 2022 as the majority of customers whose loans were subject to COVID-19 related deferrals have returned to making regular payments.~~

Reclassifications

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

Use of Estimates

The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates relate to the determination of the allowance for credit ~~losses,~~losses.

Cash Flow Reporting

Supplemental cash flow information is summarized as follows for the ~~carrying value of goodwill~~three months ended March 31, 2023 and ~~deferred tax assets, and assumptions used in the defined benefit pension plan accounting.~~2022 (in thousands):


	2023		2022
Supplemental information:
Cash paid for interest	$	28,666	$	4,623
Cash paid (refunded) for income taxes		1,134		(441	)
Noncash investing and financing activities:
Real estate and other assets acquired in settlement of loans	101			—
Accrued and declared unpaid dividends		4,976		4,809

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(1.)BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)~~

~~Cash Flow Reporting~~

~~Supplemental cash flow information is summarized as follows for the six months ended June 30, 2022 and 2021 (in thousands):~~

2022

2021

Supplemental information:

Cash paid for interest

$
6,129

$
8,148

Cash (refunded) paid for income taxes

(871
)

7,100

Noncash investing and financing activities:

Accrued and declared unpaid dividends

4,810

4,638

Common stock issued for acquisition

0

301

Assets acquired and liabilities assumed in business combinations:

Fair value of assets acquired

0

449

~~Recent Accounting Pronouncements~~

In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), who is responsible for regulating the London Interbank Offered Rate (“LIBOR”), announced its intention that it would no longer be necessary to persuade or compel its panel banks to submit LIBOR rates after December 31, 2021. On March 5, 2021, the ICE Benchmark Administration (“IBA”), the administrator of LIBOR, released the results of its consultation on the cessation timeline for certain LIBOR tenors. In coordination with the IBA, the FCA also confirmed when certain LIBOR tenors will cease to exist. The results of the consultation indicated that certain LIBOR tenors (overnight, one-month, three-month, six-month, and twelve-month USD LIBOR) will be extended to June 30, 2023 to allow some legacy contracts that cannot be easily amended to mature on their current terms. Notwithstanding the extension of certain LIBOR tenors to 2023, banks may no longer offer new LIBOR-based contracts after December 31, 2021. Given that LIBOR is a widely used pricing index for loan and derivative contracts, a Company-wide initiative was introduced to assess all LIBOR exposures through the Company’s loan, deposit, borrowing and derivative categories, while developing a plan for the ultimate cessation of the index. In developing the transition plan, the Company has followed best practice recommendations from the Federal Reserve’s Alternative Reference Rate Committee, our third-party derivative advisor and the Internal Swaps and Derivatives Association. To date, the Company has identified the portion of loan notes that reference LIBOR, which are primarily representative of commercial relationships. Additionally, the Company has 1 designated derivative instrument that is utilized to hedge the LIBOR characteristic of a future dated borrowing (i.e. Federal Home Loan Bank Advance, Brokered Time Deposits, etc.). 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.

~~Table of Contents~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

(1.) BASIS OF PRESENTATION OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

~~Standards Not Yet Effective~~Recent Accounting Pronouncements

In March 2022, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU~~Accounting Standards Update (“ASU”) No. 2022-02, Financial Instruments -– Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures. The ~~ASU updates~~amendments eliminate the accounting ~~and disclosure~~guidance for troubled debt ~~restructurings.~~restructurings (“TDRs”) by creditors and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross write-offs for financing receivables by year of origination in the vintage disclosures. ASU 2022-02 ~~will be~~became effective for ~~fiscal years beginning after December 15, 2022, including interim periods within those years, with an option to early adopt.~~the Company on January 1, 2023 and was applied on a prospective basis. The ~~Company is currently evaluating the impact the~~ adoption of this guidance ~~will~~did not have a material effect on ~~its~~the Company’s consolidated financial statements. See Note 5. Loans, for additional information regarding loan refinancings and restructurings made when a borrower is experiencing financial difficulties and updates to vintage disclosures.

In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging -– Portfolio Layer Method. The ASU expands the scope in which an entity can apply the portfolio layer method of hedge accounting, allowing for more consistent accounting for similar hedges. The amendments in this update became effective for the Company on January 1, 2023. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Standards Not Yet Effective

In March 2023, the FASB issued ASU No. 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The ASU allows for entities to consistently account for tax credit equity investments utilizing the proportional amortization method across all types of tax credits when certain requirement are met. The election of proportional amortization method must be made on a programmatic basis rather than an individual investment basis. For previously held tax credit investments, the amendments will be applied either on a modified retrospective basis or a retrospective basis. The amendments are effective for fiscal years beginning after December 15, ~~2022, and~~2023, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact ~~the adoption of~~ this guidance will have on its consolidated financial statements.

(2.)~~BUSINESS COMBINATIONS~~

~~2022 Activity – None~~

~~2021 Activity~~

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.

~~(3.~~) RESTRUCTURING CHARGES

On July 17, 2020, the Bank announced management’s decision to adapt to a full-service branch model to streamline retail branches to better align with shifting customer needs and preferences. The transformation resulted in 6six 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 10ten percent of the branch network and impacted approximately 6six 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 1one additional branch that closed 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 in 2020 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. Additional related restructuring charges of $~~1.3~~1.6 million and $111 thousand were incurred ~~during the three~~in 2022 and ~~six months ended June 30, 2022~~2021, respectively, as a result of property valuation adjustments to write-down certain real estate assets to fair market value based on existing purchase offers and current market conditions. There were no

12 restructuring charges incurred for the three months ended March 31, 2023.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(3.~~(2.) RESTRUCTURING CHARGES (Continued)

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


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2022			2021			2022			2021			2023			2022
Balance at beginning of period	$	445		$	1,161		$	445		$	1,245		$	302		$	445
Restructuring charges		1,269			0			1,269			0
Cash payments		(37	)		(68	)		(37	)		(146	)		(14	)		(22	)
Charges against assets		(1,353	)		(5	)		(1,353	)		(11	)
Balance at end of period	$	324		$	1,088		$	324		$	1,088		$	288		$	423

In contemplation of the transactions noted above, certain long-lived assets have met the held for sale criteria as of ~~June 30, 2022.~~March 31, 2023. Long lived assets held for sale totaled $~~1.8~~ ~~million and $2.6~~1.5 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively.~~2022, and are included in other assets on the Company’s consolidated statements of financial condition.

~~(4.~~(3.) EARNINGS PER COMMON SHARE (“EPS”)

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


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2022			2021			2022			2021			2023			2022
Net income available to common shareholders	$	15,283		$	19,834		$	29,902		$	40,179		$	11,724		$	14,618
Weighted average common shares outstanding:
Total shares issued		16,100			16,100			16,100			16,100			16,100			16,100
Unvested restricted stock awards		(5	)		(6	)		(5	)		(6	)		(6	)		(5	)
Treasury shares		(789	)		(269	)		(655	)		(237	)		(746	)		(518	)
Total basic weighted average common shares outstanding		15,306			15,825			15,440			15,857			15,348			15,577
Incremental shares from assumed:
Vesting of restricted stock awards		79			88			92			86			87			122
Total diluted weighted average common shares outstanding		15,385			15,913			15,532			15,943			15,435			15,699
Basic earnings per common share	$	1.00		$	1.25		$	1.94		$	2.53		$	0.76		$	0.94
Diluted earnings per common share	$	0.99		$	1.25		$	1.93		$	2.52		$	0.76		$	0.93

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

Three months ended
June 30,

Six months ended
June 30,

2022

2021

2022

2021

Stock option

0

0

0

0

Restricted stock awards

21

1

15

6

Total

21

1

15

6


	Three months ended March 31,
	2023		2022
Restricted stock awards		3		—

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(5.~~(4.) INVESTMENT SECURITIES

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


	Amortized			Unrealized		Unrealized		Fair		Amortized			Unrealized		Unrealized		Fair
	Cost			Gains		Losses		Value		Cost			Gains		Losses		Value
June 30, 2022
March 31, 2023
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	24,535		$	0	$	2,345	$	22,190	$	24,535		$	—	$	2,877	$	21,658
Mortgage-backed securities:
Federal National Mortgage Association		575,815			2		54,832		520,985		536,221			—		68,817		467,404
Federal Home Loan Mortgage Corporation		430,099			1		52,524		377,576		398,487			—		62,373		336,114
Government National Mortgage Association		116,934			2		12,413		104,523		111,527			1		18,295		93,233
Collateralized mortgage obligations:
Federal National Mortgage Association		13,188			0		1,770		11,418		11,938			—		2,326		9,612
Federal Home Loan Mortgage Corporation		22,734			0		2,773		19,961		21,143			—		4,064		17,079
Privately issued		0			365		0		365		—			342		—		342
Total mortgage-backed securities		1,158,770			370		124,312		1,034,828		1,079,316			343		155,875		923,784
Total available for sale securities	$	1,183,305		$	370	$	126,657	$	1,057,018	$	1,103,851		$	343	$	158,752	$	945,442
Securities held to maturity:
U.S. Government agency and government sponsored enterprises	$	16,288		$	0	$	105	$	16,183	$	16,400		$	—	$	544	$	15,856
State and political subdivisions		105,978			106		5,618		100,466		93,678			32		6,012		87,698
Mortgage-backed securities:
Federal National Mortgage Association		8,844			4		305		8,543		6,038			—		457		5,581
Federal Home Loan Mortgage Corporation		8,077			0		986		7,091		7,786			—		1,256		6,530
Government National Mortgage Association		24,641			1		1,156		23,486		21,783			—		1,723		20,060
Collateralized mortgage obligations:
Federal National Mortgage Association		16,312			0		619		15,693		13,536			—		963		12,573
Federal Home Loan Mortgage Corporation		20,100			0		638		19,462		16,781			—		1,022		15,759
Government National Mortgage Association		4,698			0		171		4,527		4,055			—		300		3,755
Total mortgage-backed securities		82,672			5		3,875		78,802		69,979			—		5,721		64,258
Total held to maturity securities		204,938		$	111	$	9,598	$	195,451		180,057		$	32	$	12,277	$	167,812
Allowance for credit losses - securities		(5	)
Allowance for credit losses – securities											(5	)
Total held to maturity securities, net	$	204,933								$	180,052
December 31, 2021
December 31, 2022
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	15,793		$	195	$	97	$	15,891	$	24,535		$	—	$	3,420	$	21,115
Mortgage-backed securities:
Federal National Mortgage Association		576,163			6,565		5,242		577,486		545,797			—		76,193		469,604
Federal Home Loan Mortgage Corporation		430,010			952		6,435		424,527		410,829			—		68,608		342,221
Government National Mortgage Association		122,266			298		2,082		120,482		112,202			1		18,037		94,166
Collateralized mortgage obligations:
Federal National Mortgage Association		15,346			26		433		14,939		12,175			—		2,603		9,572
Federal Home Loan Mortgage Corporation		25,257			0		477		24,780		21,519			—		4,163		17,356
Privately issued		0			410		0		410		—			337		—		337
Total mortgage-backed securities		1,169,042			8,251		14,669		1,162,624		1,102,522			338		169,604		933,256
Total available for sale securities	$	1,184,835		$	8,446	$	14,766	$	1,178,515	$	1,127,057		$	338	$	173,024	$	954,371

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(5.~~(4.) INVESTMENT SECURITIES (Continued)


	Amortized			Unrealized		Unrealized		Fair		Amortized			Unrealized		Unrealized		Fair
	Cost			Gains		Losses		Value		Cost			Gains		Losses		Value
December 31, 2021 (continued)
December 31, 2022 (continued)
Securities held to maturity:
U.S. Government agencies and government sponsored enterprises										$	16,363		$	—	$	848	$	15,515
State and political subdivisions	$	111,399		$	2,412	$	300	$	113,511		97,583			24		7,172		90,435
Mortgage-backed securities:
Federal National Mortgage Association		9,275			411		0		9,686		8,332			—		582		7,750
Federal Home Loan Mortgage Corporation		8,706			137		144		8,699		7,959			—		1,396		6,563
Government National Mortgage Association		27,400			706		2		28,104		22,541			—		2,116		20,425
Collateralized mortgage obligations:																		-
Federal National Mortgage Association		19,485			368		3		19,850		14,268			—		1,119		13,149
Federal Home Loan Mortgage Corporation		23,840			565		0		24,405		17,712			—		1,253		16,459
Government National Mortgage Association		5,481			84		0		5,565		4,222			—		330		3,892
Total mortgage-backed securities		94,187			2,271		149		96,309		75,034			—		6,796		68,238
Total held to maturity securities		205,586		$	4,683	$	449	$	209,820		188,980		$	24	$	14,816	$	174,188
Allowance for credit losses - securities		(5	)
Allowance for credit losses – securities											(5	)
Total held to maturity securities, net	$	205,581								$	188,975

The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. For available for sale (“AFS”) debt securities, AIR totaled $~~2.2~~2.0 million and $2.1 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. For held to maturity (“HTM”) debt securities, AIR totaled $~~733~~1.0 ~~thousand~~million and $~~696~~695 thousand as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.

For the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ credit loss (credit) expense ~~(credit)~~ for HTM investment securities was a credit of less than $1 thousand in each period. ~~For the six months ended June 30, 2022 and 2021, credit loss expense (credit) for HTM investment securities was less than $~~1 ~~thousand and $(~~1~~) thousand, respectively.~~

Investment securities with a total fair value of $~~815.8~~891.5 million and $~~637.6~~850.4 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

~~Sales~~There were no sales of securities available for sale ~~were as follows (in thousands):~~for the three months ended March 31, 2023 and 2022.

Three months ended
June 30,

Six months ended
June 30,

2022

2021

2022

2021

Proceeds from sales

$
6,252

$
25,216

$
6,252

$
51,891

Gross realized gains

0

162

0

251

Gross realized losses

15

165

15

180

The scheduled maturities of securities available for sale and securities held to maturity at ~~June 30, 2022~~March 31, 2023 are shown below (in thousands). Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.


	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Debt securities available for sale:
Due in one year or less	$	5,550	$	5,535	$	6	$	6
Due from one to five years		86,194		83,372		94,972		88,334
Due after five years through ten years		152,838		141,476		136,369		121,867
Due after ten years		938,723		826,635		872,504		735,235
Total available for sale securities	$	1,183,305	$	1,057,018	$	1,103,851	$	945,442
Debt securities held to maturity:
Due in one year or less	$	35,543	$	35,602	$	29,636	$	29,584
Due from one to five years		45,992		45,676		41,802		41,036
Due after five years through ten years		39,273		38,008		39,142		36,799
Due after ten years		84,130		76,165		69,477		60,393
Total held to maturity securities	$	204,938	$	195,451	$	180,057	$	167,812

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(5.~~(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, were as follows (in thousands):


	Less than 12 months				12 months or longer				Total				Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
June 30, 2022
March 31, 2023
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	22,190	$	2,345	$	—	$	—	$	22,190	$	2,345	$	—	$	—	$	21,658	$	2,877	$	21,658	$	2,877
Mortgage-backed securities:
Federal National Mortgage Association		407,151		36,437		113,541		18,395		520,692		54,832		276		3		467,128		68,814		467,404		68,817
Federal Home Loan Mortgage Corporation		225,921		27,154		151,571		25,370		377,492		52,524		8,698		514		327,416		61,859		336,114		62,373
Government National Mortgage Association		73,597		8,827		30,773		3,586		104,370		12,413		138		3		93,071		18,292		93,209		18,295
Collateralized mortgage obligations:
Federal National Mortgage Association		6,206		748		5,212		1,022		11,418		1,770		—		—		9,612		2,326		9,612		2,326
Federal Home Loan Mortgage Corporation		15,749		1,911		4,212		862		19,961		2,773		—		—		17,079		4,064		17,079		4,064
Total mortgage-backed securities		728,624		75,077		305,309		49,235		1,033,933		124,312		9,112		520		914,306		155,355		923,418		155,875
Total available for sale securities		750,814		77,422		305,309		49,235		1,056,123		126,657		9,112		520		935,964		158,232		945,076		158,752
Total temporarily impaired securities	$	750,814	$	77,422	$	305,309	$	49,235	$	1,056,123	$	126,657
December 31, 2021
Total AFS debt securities with unrealized losses													$	9,112	$	520	$	935,964	$	158,232	$	945,076	$	158,752
December 31, 2022
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	9,438	$	97	$	—	$	—	$	9,438	$	97	$	—	$	—	$	21,115	$	3,420	$	21,115	$	3,420
Mortgage-backed securities:
Federal National Mortgage Association		333,489		3,597		61,249		1,645		394,738		5,242		154,006		14,708		315,598		61,485		469,604		76,193
Federal Home Loan Mortgage Corporation		283,965		3,353		110,931		3,082		394,896		6,435		28,493		2,199		313,728		66,409		342,221		68,608
Government National Mortgage Association		108,448		2,082		—		—		108,448		2,082		10,301		921		83,841		17,116		94,142		18,037
Collateralized mortgage obligations:
Federal National Mortgage Association		13,364		433		0		—		13,364		433		1,000		94		8,572		2,509		9,572		2,603
Federal Home Loan Mortgage Corporation		24,780		477		—		—		24,780		477		—		—		17,356		4,163		17,356		4,163
Total mortgage-backed securities		764,046		9,942		172,180		4,727		936,226		14,669		193,800		17,922		739,095		151,682		932,895		169,604
Total available for sale securities		773,484		10,039		172,180		4,727		945,664		14,766		193,800		17,922		760,210		155,102		954,010		173,024
Total temporarily impaired securities	$	773,484	$	10,039	$	172,180	$	4,727	$	945,664	$	14,766
Total AFS debt securities with unrealized losses													$	193,800	$	17,922	$	760,210	$	155,102	$	954,010	$	173,024

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(5.~~(4.) INVESTMENT SECURITIES (Continued)

The total number of available for sale securities positions in the investment portfolio, for which an allowance for credit losses has not been recorded, in the investment portfolio in an unrealized loss position at ~~June 30, 2022~~March 31, 2023 was ~~207~~222 compared to ~~116~~226 at December 31, ~~2021.~~2022. At ~~June 30, 2022,~~March 31, 2023, the Company had positions in 55189 investment securities with a fair value of $~~305.3~~936.0 million and a total unrealized loss of $~~49.2~~158.2 million that had been in a continuous unrealized loss position for more than 12 months. At ~~June 30, 2022,~~March 31, 2023, there were a total of ~~152~~33 securities positions in the Company’s investment portfolio with a fair value of $~~750.8~~9.1 million and a total unrealized loss of $~~77.4~~520 ~~million~~thousand that had been in a continuous unrealized loss position for less than 12 months. At December 31, ~~2021,~~2022, the Company had a position in 28127 investment securities with a fair value of $~~172.2~~760.2 million and a total unrealized loss of $~~4.7~~155.1 million that had been in a continuous unrealized loss position for more than 12 months. At December 31, ~~2021,~~2022, there were a total of 8899 securities positions in the Company’s investment portfolio with a fair value of $~~773.5~~193.8 million and a total unrealized loss of $~~10.0~~17.9 million 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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 0no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities were impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

Securities Held to Maturity

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

The Company monitors the credit quality of our municipal bonds through the use of a credit rating agency or by ratings that are derived by an internal scoring model. The scoring methodology for the internally derived ratings is based on a series of financial ratios for the municipality being reviewed as compared to typical industry figures. This information is used to determine the financial strengths and weaknesses of the municipality, which is indicated with a numeric rating. This number is then converted into a letter rating to better match the system used by the credit rating agencies. As of ~~June 30, 2022,~~March 31, 2023, $~~98.6~~87.3 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $~~7.4~~6.0 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA ~~rating.~~rating, and $0.4 million in non-rated bonds all of which mature in 2023. Additionally, no municipal bonds were rated below investment grade. As of December 31, ~~2021,~~2022, $~~105.6~~90.6 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $~~5.8~~6.9 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA ~~rating.~~rating, no municipal bonds were rated below investment grade.

As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had 0no past due or nonaccrual held to maturity investment securities.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(6.~~(5.) LOANS

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


	Principal Amount Outstanding		Net Deferred Loan (Fees) Costs			Loans, Net			Principal Amount Outstanding		Net Deferred Loan (Fees) Costs			Loans, Net
June 30, 2022
March 31, 2023
Commercial business	$	610,587	$	515		$	611,102		$	694,427	$	683		$	695,110
Commercial mortgage		1,451,016		(2,864	)		1,448,152			1,845,762		(4,281	)		1,841,481
Residential real estate loans		561,155		13,629			574,784			578,363		13,483			591,846
Residential real estate lines		72,972		3,136			76,108			72,793		3,293			76,086
Consumer indirect		1,000,252		38,999			1,039,251			984,302		37,900			1,022,202
Other consumer		14,508		113			14,621			16,495		112			16,607
Total	$	3,710,490	$	53,528			3,764,018		$	4,192,142	$	51,190			4,243,332
Allowance for credit losses - loans							(42,452	)
Allowance for credit losses – loans															(47,528	)
Total loans, net						$	3,721,566							$	4,195,804
December 31, 2021
December 31, 2022
Commercial business	$	639,368	$	(1,075	)	$	638,293		$	663,611	$	638		$	664,249
Commercial mortgage		1,415,486		(2,698	)		1,412,788			1,683,814		(3,974	)		1,679,840
Residential real estate loans		563,579		13,720			577,299			576,279		13,681			589,960
Residential real estate lines		75,515		3,016			78,531			74,432		3,238			77,670
Consumer indirect		923,052		34,996			958,048			985,580		38,040			1,023,620
Other consumer		14,355		122			14,477			15,002		108			15,110
Total	$	3,631,355	$	48,081			3,679,436		$	3,998,718	$	51,731			4,050,449
Allowance for credit losses - loans							(39,676	)
Allowance for credit losses – loans															(45,413	)
Total loans, net						$	3,639,760							$	4,005,036

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $~~4.3~~682 ~~million~~thousand and $~~6.2~~550 ~~million~~thousand as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively.~~

The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act established the PPP, an expansion of the SBA’s 7(a) loan program and the EIDL, administered directly by the SBA. The Company had $~~9.3~~ ~~million and $57.5~~ ~~million of PPP loans (included in Commercial business above) as of June 30,~~ 2022, and December 31, 2021, 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 made between March 1, 2020 and January 1, 2022 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 loans on deferral as of June 30, 2022 and December 31, 2021 of $4.0~~ ~~million and $46.2~~ ~~million,~~ respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, AIR for loans totaled $~~13.0~~17.0 million and $~~12.7~~16.6 million, respectively, and is included in other assets on the Company’s consolidated statements of financial condition.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(6.~~(5.) LOANS (Continued)

Past Due Loans Aging

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


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Nonaccrual		Current		Total Loans		Nonaccrual with no allowance		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
June 30, 2022
March 31, 2023
Commercial business	$	108	$	1,392	$	0	$	1,500	$	422	$	608,665	$	610,587	$	369	$	925	$	—	$	—	$	925	$	334	$	693,168	$	694,427	$	233
Commercial mortgage		15		0		0		15		836		1,450,165		1,451,016		806		—		—		—		—		2,550		1,843,212		1,845,762		520
Residential real estate loans		1,052		129		0		1,181		2,738		557,236		561,155		2,738		778		49		—		827		3,267		574,269		578,363		3,267
Residential real estate lines		97		23		0		120		160		72,692		72,972		160		219		30		—		249		159		72,385		72,793		159
Consumer indirect		7,668		1,814		0		9,482		2,389		988,381		1,000,252		2,389		5,812		1,245		—		7,057		2,487		974,758		984,302		2,487
Other consumer		94		0		0		94		3		14,411		14,508		3		104		1		4		109		—		16,386		16,495		—
Total loans, gross	$	9,034	$	3,358	$	0	$	12,392	$	6,548	$	3,691,550	$	3,710,490	$	6,465	$	7,838	$	1,325	$	4	$	9,167	$	8,797	$	4,174,178	$	4,192,142	$	6,666
December 31, 2021
December 31, 2022
Commercial business	$	659	$	34	$	797	$	1,490	$	602	$	637,276	$	639,368	$	477	$	176	$	10	$	—	$	186	$	340	$	663,085	$	663,611	$	233
Commercial mortgage		69		0		0		69		6,414		1,409,003		1,415,486		781		—		—		—		—		2,564		1,681,250		1,683,814		659
Residential real estate loans		1,148		141		0		1,289		2,373		559,917		563,579		2,373		1,306		28		—		1,334		4,071		570,874		576,279		4,071
Residential real estate lines		18		3		0		21		200		75,294		75,515		200		264		102		—		366		142		73,924		74,432		142
Consumer indirect		5,706		770		0		6,476		1,780		914,796		923,052		1,780		12,637		2,073		—		14,710		3,079		967,791		985,580		3,079
Other consumer		121		1		0		122		0		14,233		14,355		0		111		1		1		113		1		14,888		15,002		1
Total loans, gross	$	7,721	$	949	$	797	$	9,467	$	11,369	$	3,610,519	$	3,631,355	$	5,611	$	14,494	$	2,214	$	1	$	16,709	$	10,197	$	3,971,812	$	3,998,718	$	8,185

~~The Company had~~ There were $04 ~~PPP loans greater than 90 days past due and still accruing interest as of June 30, 2022~~thousand and $~~797~~1 thousand as of ~~December 31, 2021 (included in Commercial business above). Repayment of PPP loans is 100% secured by guarantees from the SBA.~~

~~There were~~ 0 consumer overdrafts which were past due greater than 90 days as of ~~June 30, 2022~~March 31, 2023 and ~~less than $~~1 ~~thousand as of~~ December 31, ~~2021.~~2022, respectively. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was 0no interest income recognized on nonaccrual loans during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021.~~2022. Estimated interest income of $~~288~~122 thousand and $~~461~~161 thousand for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

~~Troubled Debt Restructurings~~Loan Modifications for Borrower Experiencing Financial Difficulty

~~A modification of a loan constitutes a TDR~~Loans may be modified when it is determined that a borrower is experiencing financial ~~difficulty~~difficulty. Loan modifications may include principal forgiveness, interest rate reduction, an other-than-insignificant payment delay, and term extensions, or a combination of these concessions.

The following table presents the ~~modification constitutes a concession. Commercial~~amortized cost basis of loans modified ~~in a TDR may involve temporary interest-only payments, term extensions, reducing the interest rate for the remaining term~~to borrowers experiencing financial difficulty, disaggregated by loan class and type 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~~concession granted as of ~~principal, forbearance agreements, or substituting or adding a new borrower or guarantor.~~March 31, 2023 (in thousands):

~~There were~~ 0


	Term Extension
	Amortized Cost Basis		% of Total Loans
Loan Type
Commercial business	$	-		0.00	%
Commercial mortgage		-		0.00	%
Residential real estate loans		158		0.03	%
Residential real estate lines		-		0.00	%
Consumer indirect		-		0.00	%
Other consumer		-		0.00	%
Total	$	158		0.00	%

~~loans modified as a TDR during the six months ended June 30, 2022 and 2021. There were~~ 0 loans modified as a TDR within the previous 12 months that defaulted during the six months ended June 30, 2022 and 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.~~

~~Table of Contents~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~(6.~~(5.) LOANS (Continued)

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:


Term Extension
Loan Type		Financial Effect
Residential real estate loans		Added a weighted average 10.0 years to the life of the loan, which reduced monthly payment amount for the borrower.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the three months ended March 31, 2023 (in thousands):


	Payment Status (Amortized Cost Basis)
	Current		30-89 Days Past Due		90+ Days Past Due
Loan Type
Commercial business	$	-	$	-	$	-
Commercial mortgage		-		-		-
Residential real estate loans		158		-		-
Residential real estate lines		-		-		-
Consumer indirect		-		-		-
Other consumer		-		-		-
Total	$	158	$	-	$	-

Collateral Dependent Loans

Management has determined that specific commercial loans on nonaccrual status, all loans that have had their terms restructured inwhen a ~~troubled debt restructuring,~~borrower is experiencing financial difficulty, 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 June 30, 2022 and December 31, 2021 included certain criticized COVID-19 bridge loans not otherwise classified as nonaccrual.~~ The following table presents the amortized cost basis of collateral dependent loans by collateral type as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 (in thousands):


	Collateral type								Collateral type
	Business assets		Real property		Total		Specific Reserve		Business assets		Real property		Total		Specific Reserve
June 30, 2022
March 31, 2023
Commercial business	$	205	$	974	$	1,179	$	237	$	3,307	$	78	$	3,385	$	732
Commercial mortgage		—		22,764		22,764		2,698		—		18,546		18,546		1,140
Total	$	205	$	23,738	$	23,943	$	2,935	$	3,307	$	18,624	$	21,931	$	1,872

December 31, 2021
December 31, 2022
Commercial business	$	326	$	993	$	1,319	$	1,055	$	147	$	993	$	1,140	$	126
Commercial mortgage		—		37,936		37,936		4,716		—		21,592		21,592		1,152
Total	$	326	$	38,929	$	39,255	$	5,771	$	147	$	22,585	$	22,732	$	1,278

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.)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.

~~Table of Contents~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~(6.)LOANS (Continued)~~

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


	Term Loans Amortized Cost Basis by Origination Year																		Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total		2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
June 30, 2022
Commercial Business
March 31, 2023
Commercial Business:
Uncriticized	$	54,182	$	124,276	$	87,077	$	35,324	$	38,282	$	30,569	$	231,868	$	0	$	601,578	$	28,923	$	152,049	$	94,802	$	46,348	$	26,149	$	64,882	$	252,189	$	—	$	665,342
Special mention		220		2,342		12		194		140		0		1,185		0		4,093		—		237		2,388		18,995		12		187		3,272		—		25,091
Substandard		0		41		25		175		562		1,377		3,251		0		5,431		—		41		1,002		1,295		77		1,392		870		—		4,677
Doubtful		0		0		0		0		0		0		0		0		0		—		—		—		—		—		—		—		—		—
Total	$	54,402	$	126,659	$	87,114	$	35,693	$	38,984	$	31,946	$	236,304	$	0	$	611,102
Commercial Mortgage
Total Commercial Business loans																			$	28,923	$	152,327	$	98,192	$	66,638	$	26,238	$	66,461	$	256,331	$	—	$	695,110
Current period gross write-offs																			$	—	$	5	$	—	$	7	$	5	$	10	$	—	$	—	$	27

Commercial Mortgage:
Uncriticized	$	173,305	$	357,855	$	295,281	$	172,506	$	120,731	$	254,463	$	3,664	$	0	$	1,377,805	$	167,701	$	506,777	$	382,081	$	244,874	$	155,960	$	342,082	$	—	$	—	$	1,799,475
Special mention		0		484		2,370		14,489		195		29,083		0		0		46,621		—		—		—		10,118		—		12,033		—		—		22,151
Substandard		2,862		348		106		83		9,979		10,348		0		0		23,726		—		343		202		105		75		19,130		—		—		19,855
Doubtful		0		0		0		0		0		0		0		0		0		—		—		—		—		—		—		—		—		—
Total	$	176,167	$	358,687	$	297,757	$	187,078	$	130,905	$	293,894	$	3,664	$	0	$	1,448,152
Total Commercial Mortgage loans																			$	167,701	$	507,120	$	382,283	$	255,097	$	156,035	$	373,245	$	—	$	—	$	1,841,481
Current period gross write-offs																			$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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

$
141,925

$
91,338

$
68,433

$
42,631

$
24,847

$
12,033

$
248,338

$
0

$
629,545

Special mention

0

132

166

44

180

1,344

1,993

0

3,859

Substandard

45

256

169

745

415

49

3,210

0

4,889

Doubtful

0

0

0

0

0

0

0

0

0

Total

$
141,970

$
91,726

$
68,768

$
43,420

$
25,442

$
13,426

$
253,541

$
0

$
638,293

Commercial Mortgage

Uncriticized

$
342,483

$
339,988

$
176,753

$
147,247

$
128,381

$
167,739

$
3,712

$
0

$
1,306,303

Special mention

11,184

2,450

29,759

2,344

8,269

27,635

0

0

81,641

Substandard

1,001

77

2,950

11,607

3,209

6,000

0

0

24,844

Doubtful

0

0

0

0

0

0

0

0

0

Total

$
354,668

$
342,515

$
209,462

$
161,198

$
139,859

$
201,374

$
3,712

$
0

$
1,412,788

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(6.~~(5.)LOANS (Continued)


	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
December 31, 2022
Commercial Business
Uncriticized	$	146,581	$	105,001	$	61,115	$	29,644	$	39,625	$	21,467	$	244,848	$	—	$	648,281
Special mention		238		2,351		8,736		7		5		—		1,809		—		13,146
Substandard		—		72		—		42		516		1,034		1,158		—		2,822
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	146,819	$	107,424	$	69,851	$	29,693	$	40,146	$	22,501	$	247,815	$	—	$	664,249
Commercial Mortgage
Uncriticized	$	464,863	$	380,138	$	260,463	$	171,918	$	116,770	$	248,771	$	—	$	—	$	1,642,923
Special mention		—		—		2,319		136		—		11,784		—		—		14,239
Substandard		2,987		202		105		78		10,104		9,202		—		—		22,678
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	467,850	$	380,340	$	262,887	$	172,132	$	126,874	$	269,757	$	—	$	—	$	1,679,840

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) LOANS (Continued)

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


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
March 31, 2023
Residential Real Estate Loans
Performing	$	14,093	$	80,513	$	84,985	$	116,787	$	75,111	$	217,090	$	—	$	—	$	588,579
Nonperforming		—		104		424		575		430		1,734		—		—		3,267
Total Residential Real Estate Loans	$	14,093	$	80,617	$	85,409	$	117,362	$	75,541	$	218,824	$	—	$	—	$	591,846
Current period gross write-offs	$	—	$	—	$	—	$	—	$	32	$	31	$	—	$	—	$	63

Residential Real Estate Lines
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	69,849	$	6,078	$	75,927
Nonperforming		—		—		—		—		—		—		41		118		159
Total Residential Real Estate Lines	$	—	$	—	$	—	$	—	$	—	$	—	$	69,890	$	6,196	$	76,086
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	3	$	13	$	16

Consumer Indirect
Performing	$	84,318	$	418,196	$	305,429	$	112,809	$	51,838	$	47,125	$	—	$	—	$	1,019,715
Nonperforming		—		864		903		337		228		155		—		—		2,487
Total Consumer Indirect Loans	$	84,318	$	419,060	$	306,332	$	113,146	$	52,066	$	47,280	$	—	$	—	$	1,022,202
Current period gross write-offs	$	3	$	1,322	$	1,692	$	497	$	586	$	520	$	—	$	—	$	4,620

Other Consumer
Performing	$	3,748	$	5,367	$	2,285	$	1,735	$	565	$	420	$	2,483	$	—	$	16,603
Nonperforming		—		—		—		—		—		—		4		—		4
Total Other Consumer Loans	$	3,748	$	5,367	$	2,285	$	1,735	$	565	$	420	$	2,487	$	—	$	16,607
Current period gross write-offs	$	265	$	34	$	48	$	9	$	5	$	8	$	13	$	—	$	382

Allowance for Credit Losses – Loans

Term Loans Amortized Cost Basis by Origination Year

2022

2021

2020

2019

2018

Prior

Revolving
Loans
Amortized
Cost Basis

Revolving
Loans
Converted
to Term

Total

June 30, 2022

Residential Real Estate Loans

Performing

$
36,245

$
90,439

$
124,169

$
80,774

$
59,763

$
180,656

$
0

$
0

$
572,046

Nonperforming

0

79

175

657

556

1,271

0

0

2,738

Total

$
36,245

$
90,518

$
124,344

$
81,431

$
60,319

$
181,927

$
0

$
0

$
574,784

Residential Real Estate Lines

Performing

$
0

$
0

$
0

$
0

$
0

$
0

$
68,620

$
7,328

$
75,948

Nonperforming

0

0

0

0

0

0

36

124

160

Total

$
0

$
0

$
0

$
0

$
0

$
0

$
68,656

$
7,452

$
76,108

Consumer Indirect

Performing

$
308,856

$
392,357

$
157,720

$
79,474

$
57,651

$
40,804

$
0

$
0

$
1,036,862

Nonperforming

48

1,208

413

339

261

120

0

0

2,389

Total

$
308,904

$
393,565

$
158,133

$
79,813

$
57,912

$
40,924

$
0

$
0

$
1,039,251

Other Consumer

Performing

$
3,292

$
3,511

$
2,806

$
1,164

$
424

$
667

$
2,754

$
0

$
14,618

Nonperforming

0

0

0

3

0

0

0

0

3

Total

$
3,292

$
3,511

$
2,806

$
1,167

$
424

$
667

$
2,754

$
0

$
14,621

The following table sets forth the changes in the allowance for credit losses – loans for the three months ended March 31, 2023 and 2022 (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

$
92,620

$
129,240

$
85,876

$
65,866

$
50,932

$
150,392

$
0

$
0

$
574,926

Nonperforming

79

55

225

557

899

558

0

0

2,373

Total

$
92,699

$
129,295

$
86,101

$
66,423

$
51,831

$
150,950

$
0

$
0

$
577,299

Residential Real Estate Lines

Performing

$
0

$
0

$
0

$
0

$
0

$
0

$
70,521

$
7,810

$
78,331

Nonperforming

0

0

0

0

0

0

39

161

200

Total

$
0

$
0

$
0

$
0

$
0

$
0

$
70,560

$
7,971

$
78,531

Consumer Indirect

Performing

$
452,601

$
206,472

$
122,849

$
90,998

$
51,598

$
31,750

$
0

$
0

$
956,268

Nonperforming

417

515

436

230

136

46

0

0

1,780

Total

$
453,018

$
206,987

$
123,285

$
91,228

$
51,734

$
31,796

$
0

$
0

$
958,048

Other Consumer

Performing

$
4,422

$
3,738

$
1,681

$
763

$
280

$
1,044

$
2,549

$
0

$
14,477

Nonperforming

0

0

0

0

0

0

0

0

0

Total

$
4,422

$
3,738

$
1,681

$
763

$
280

$
1,044

$
2,549

$
0

$
14,477


	Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended March 31, 2023
Allowance for credit losses – loans:
Beginning balance	$	12,585		$	14,412		$	3,301		$	608		$	14,238		$	269		$	45,413
Charge-offs		(27	)		—			(63	)		(16	)		(4,620	)		(382	)		(5,108	)
Recoveries		151			2			5			—			2,782			79			3,019
Provision		202			781			970			59			1,717			475			4,204
Ending balance	$	12,911		$	15,195		$	4,213		$	651		$	14,117		$	441		$	47,528


	Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended March 31, 2022
Allowance for credit losses – loans:
Beginning balance	$	11,099		$	14,777		$	1,604		$	379		$	11,611		$	206		$	39,676
Charge-offs		(51	)		—			—			—			(2,486	)		(376	)		(2,913	)
Recoveries		88			1			5			5			1,936			91			2,126
Provision (benefit)		(1,015	)		(1,032	)		243			41			3,507			333			2,077
Ending balance	$	10,121		$	13,746		$	1,852		$	425		$	14,568		$	254		$	40,966

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(6.)LOANS (Continued)~~

~~Allowance for Credit Losses - Loans~~

~~The following table sets forth the changes in the allowance for credit losses - loans for the three- and six- month periods ended June 30, 2022 and 2021 (in thousands):~~

Commercial
Business

Commercial
Mortgage

Residential
Real Estate
Loans

Residential
Real Estate
Lines

Consumer
Indirect

Other
Consumer

Total

Three months ended June 30, 2022

Beginning balance

$
10,121

$
13,746

$
1,852

$
425

$
14,568

$
254

$
40,966

Charge-offs

(191
)

0

(56
)

0

(2,672
)

(309
)

(3,228
)
Recoveries

101

2,018

10

12

2,025

102

4,268

Provision (benefit)

109

(3,700
)

��
334

72

3,411

220

446

Ending balance

$
10,140

$
12,064

$
2,140

$
509

$
17,332

$
267

$
42,452

Six months ended June 30, 2022

Beginning balance

$
11,099

$
14,777

$
1,604

$
379

$
11,611

$
206

$
39,676

Charge-offs

(242
)

0

(56
)

0

(5,158
)

(685
)

(6,141
)
Recoveries

189

2,019

15

17

3,961

193

6,394

(Benefit) provision

(906
)

(4,732
)

577

113

6,918

553

2,523

Ending balance

$
10,140

$
12,064

$
2,140

$
509

$
17,332

$
267

$
42,452

Commercial
Business

Commercial
Mortgage

Residential
Real Estate
Loans

Residential
Real Estate
Lines

Consumer
Indirect

Other
Consumer

Total

Three months ended June 30, 2021

Beginning balance

$
12,670

$
22,672

$
3,109

$
482

$
10,557

$
338

$
49,828

Charge-offs

(92
)

0

(56
)

0

(1,157
)

(424
)

(1,729
)
Recoveries

379

7

59

0

1,583

95

2,123

(Benefit) provision

(1,952
)

(1,017
)

(813
)

(87
)

(235
)

247

(3,857
)
Ending balance

$
11,005

$
21,662

$
2,299

$
395

$
10,748

$
256

$
46,365

Six months ended June 30, 2021

Beginning balance

13,580

21,763

3,924

674

12,165

314

52,420

Charge-offs

(178
)

(203
)

(67
)

(70
)

(3,570
)

(505
)

(4,593
)
Recoveries

617

7

64

0

3,253

159

4,100

(Benefit) provision

(3,014
)

95

(1,622
)

(209
)

(1,100
)

288

(5,562
)
Ending balance

$
11,005

$
21,662

$
2,299

$
395

$
10,748

$
256

$
46,365

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(6.~~(5.)LOANS (Continued)


	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
December 31, 2022
Residential Real Estate Loans
Performing	$	79,882	$	85,821	$	118,819	$	76,437	$	55,520	$	169,410	$	—	$	—	$	585,889
Nonperforming		—		305		510		795		677		1,784		—		—		4,071
Total	$	79,882	$	86,126	$	119,329	$	77,232	$	56,197	$	171,194	$	—	$	—	$	589,960
Residential Real Estate Lines
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	70,942	$	6,586	$	77,528
Nonperforming		—		—		—		—		—		—		34		108		142
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	70,976	$	6,694	$	77,670
Consumer Indirect
Performing	$	440,332	$	331,902	$	126,664	$	59,981	$	39,352	$	22,310	$	—	$	—	$	1,020,541
Nonperforming		748		1,209		432		381		205		104		—		—		3,079
Total	$	441,080	$	333,111	$	127,096	$	60,362	$	39,557	$	22,414	$	—	$	—	$	1,023,620
Other Consumer
Performing	$	6,463	$	2,664	$	2,043	$	761	$	213	$	308	$	2,656	$	—	$	15,108
Nonperforming		—		—		—		—		—		—		2		—		2
Total	$	6,463	$	2,664	$	2,043	$	761	$	213	$	308	$	2,658	$	—	$	15,110

(5.) LOANS (Continued)

Risk Characteristics

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

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

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

Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by inflation and 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.~~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.

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.

At ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the allowance for credit losses for unfunded commitments totaled $~~2.2~~4.1 million ~~and $1.8~~ ~~million, respectively,~~at each date, and was included in other liabilities on the ~~Company's~~Company’s consolidated statements of financial condition. The credit loss expense ~~(benefit)~~ for unfunded commitments was as follows (in thousands):

In the ordinary course of business, there are various threatened and pending legal proceedings against the Company. Management believes that the aggregate liability, if any, arising from such litigation, except for the matter described below, would not have a material adverse effect on the Company’s consolidated financial statements.

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 as filed with the SEC on March ~~10, 2022~~9, 2023 and as disclosed in Part II, Item 1 of this Quarterly Report on Form 10-Q, the Company is party to an action filed against it 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 ~~along with~~seeking to recover statutory damages, interest and declaratory relief. The plaintiffs sought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from the Company for the purchase of vehicles that the Company 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. The Company disputes and believes it has meritorious defenses against these claims and ~~plan~~plans to vigorously defend itself.

On September 30, 2021, the Court granted plaintiffs’ motion for class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). There are approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes. ~~The Company is currently awaiting a ruling from~~

On September 26, 2022, the ~~Superior~~lower Court ~~of Pennsylvania on its motion seeking permission to appeal~~denied the ~~denial of its motion to dismiss the action for lack of standing. On February 8, 2022, plaintiffs filed a~~plaintiffs’ motion for partial summary ~~judgement~~judgment for most of the relief they ~~seek. The Company filed a cross motion for summary judgement seeking~~seek and found that there were questions of fact as to whether the ~~dismissal of a portion~~members of the class had purchased the subject vehicles for “consumer use” within the meaning of the relevant statutes. The Court also denied the Company’s motion for partial summary judgment and ~~sought~~seeking an offset in the form of recoupment ~~which reduces~~reducing any liability that may be imposed against the Company by the amounts that the borrowers owe ~~to the Bank~~ for failing to repay their motor vehicle ~~loans. At this time, the briefing on the motions for partial summary judgment is complete. Although~~loans, determining that the Court ~~has indicated~~could not enter a ~~hearing would be held~~judgment on ~~these motions, it has not been scheduled and~~recoupment – which is a set off from liability – without first determining whether there was liability. Also pending with the ~~Company has no indication of when or if such a hearing will in fact be held. In addition, on April 25,~~lower Court is the Company’s motion to compel discovery.

On October 7, 2022, the Superior Court of Pennsylvania ~~Supreme Court declared unconstitutional a statute on which~~granted the ~~Court may have based jurisdiction in this case. Therefore, on June 27, 2022, the Company has filed a motion~~Company’s December 20, 2021 Request for ~~reconsideration~~an Interlocutory Appeal of the ~~Court's June 5, 2018 decision overruling~~denial of the ~~Company's preliminary objections based on~~Company’s motion to dismiss the claims brought by New York borrowers for lack of ~~personal~~subject matter jurisdiction ~~as to~~and lack of standing. The case is stayed until the ~~New York plaintiffs. Plaintiffs have responded to that motion claiming an alternative basis for jurisdiction. Discovery~~appeal is ~~now ongoing and through a Case Management Order dated February 10, 2022, it must be completed~~decided by ~~October 3, 2022. Based on~~ the ~~current schedule, pre-trial motions must be submitted by November 21, 2022, and the case must be ready for trial on March 6, 2023.~~ Superior Court.

The Company has not accrued a contingent liability for this matter at this time because, given its defenses, it is unable to conclude whether a liability is probable to occur nor is it able to currently reasonably estimate the amount of potential loss.

If the Company settles these claims or the action is not resolved in its favor, the Company may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by its ~~existing insurance policies.~~insurer. The Company can provide no assurances that its insurer will ~~insure~~cover the full legal costs, settlements or judgments it ~~incurs in excess of its deductible.~~incurs. If the Company is unsuccessful in defending itself from these claims or if its insurer does not ~~insure~~cover the ~~Company against~~full amount of legal costs it incurs, ~~in excess of its deductible,~~ the result may materially adversely affect the ~~Company's~~Company’s business, results of operations and financial condition.

There were 0no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021.~~2022.

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

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

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

~~(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 (the date of acquisition).~~

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

This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

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

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022 (the “Form 10-K”), including, but not limited to, those presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Factors that might cause such material differences include, but are not limited to:

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

The Parent is a financial holding company headquartered in New York State, providing diversified financial services through its operating subsidiaries, Five Star Bank (the “Bank”), SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York-chartered banking subsidiary, the Bank. The Bank also has a commercial loan production ~~office~~offices in Ellicott City (Baltimore), Maryland, and ~~our~~Syracuse, New York, serving the Mid-Atlantic and Central New York regions. Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. In May 2023, the Company announced the completion of the merger of HNP Capital with and into Courier Capital. Refer to Note 17. Subsequent Event, of the notes to the consolidated financial statements for further details on the merger.

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

Our business strategy has been to maintain a community bank philosophy, which consists of focusing on and understanding the individualized banking and other financial needs of individuals, municipalities and businesses of the local communities surrounding our primary service area. We believe this focus allows us to be more responsive to our customers’ needs and provide a high level of personal service that differentiates us from larger competitors, resulting in long-standing and broad-based banking relationships. Our core customers are primarily small- to medium-sized businesses, individuals and community organizations who prefer to build banking, insurance and wealth management relationships with a community bank that combines high quality, competitively-priced products and services with personalized service. Because of our identity and 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 center branches have a smaller footprint than our traditional branches, focus on technology to provide solutions that fit our customer preferences for transacting business with us, and these branches are staffed by certified personal bankers who are trained to meet a broad array of customer needs. ~~In recent years,~~We expanded our footprint into the Mid-Atlantic region with the opening of a loan production office in Baltimore, Maryland in February 2022, and further expanded our footprint in Central New York with the opening of a commercial loan production office in Syracuse, New York in January 2023. Additionally, we ~~have opened four financial solution centers~~are focused on the continued expansion of product delivery channels and are investing in our digital banking platform to allow for greater flexibility in the ~~Rochester and Buffalo markets.~~customer experience. We believe that the foregoing factors all help to grow our core deposits, which ~~supports~~support a central element of our business strategy -– the growth of a diversified and high-quality loan portfolio.

Our Banking-as-a-Service (“BaaS”) and financial technology (“FinTech”) relationships offer BaaS to technology firms and other non-bank financial service providers, allowing them to provide banking services to their clients. With the help of the Bank’s partners, we can offer banking services and products beyond our traditional footprint.

Net income decreased ~~$4.6~~$2.9 million to ~~$15.6~~$12.1 million for the ~~second~~first quarter of ~~2022~~2023 compared to ~~$20.2~~$15.0 million for the ~~second~~first quarter of ~~2021.~~2022. Net income available to common shareholders for the ~~second~~first quarter of ~~2022~~2023 was ~~$15.3~~$11.7 million, or ~~$0.99~~$0.76 per diluted share, compared with ~~$19.8~~$14.6 million, or ~~$1.25~~$0.93 per diluted share, for the ~~second~~first quarter of ~~2021.~~2022. Return on average common equity was ~~14.64%~~11.87% and return on average assets was ~~1.12%~~0.84% for the ~~second~~first quarter of ~~2022~~2023 compared to ~~17.34%~~12.49% and ~~1.52%~~1.09%, respectively, for the ~~second~~first quarter of ~~2021.~~2022.

The decrease in net income for the ~~second~~first quarter of ~~2022~~2023 largely reflected a ~~$563 thousand~~$4.2 million provision for credit losses as compared to ~~a benefit of $4.6~~$2.3 million in the ~~second~~first quarter of ~~2021.~~2022. Loan loss provision ~~returned to a more normalized level in 2022, excluding a $2.0 million commercial loan recovery recognized~~reflected the impact of an increase in the ~~second quarter, due to the impact of~~national unemployment forecast and qualitative factors reflecting economic uncertainty associated with higher interest ~~rates~~rates. The increase in provision for credit losses in the first quarter of 2023 was primarily driven by higher loan growth and ~~global political unrest, partially offset by lower~~ net charge-offs ~~national unemployment trends and a reduction~~ in ~~overall specific reserve levels.~~comparison to the first quarter of 2022. Also contributing to the decrease in net income was a ~~$5.9~~$3.5 million increase in noninterest expense, including ~~$1.3~~a $1.5 million ~~of restructuring charges related to the current period fair value adjustments on five locations closed~~increase in ~~2020.~~salaries and employee benefits expense and a $1.0 million increase in other expenses.

Net interest income totaled ~~$41.6~~$41.8 million in the ~~second~~first quarter of ~~2022,~~2023, an increase of ~~$3.9~~$2.3 million compared to ~~$37.7~~$39.6 million in the ~~second~~first quarter of ~~2021.~~2022. Average interest-earning assets for the ~~second~~first quarter of ~~2022~~2023 were ~~$273.8~~$319.1 million higher than the ~~second~~first quarter of ~~2021~~2022 due to a ~~$359.2 million increase in average investment securities, and a $103.5~~$418.8 million increase in average loans, and an $18.8 million increase in the average balance of federal funds sold and interest-earning deposits, partially offset by a ~~$188.9~~$118.4 million decrease in the average balance of ~~Federal Reserve interest-earning cash.~~investment securities.

Net interest margin was 3.09% for the first quarter of 2023 compared to 3.11% in the first quarter of 2022, as a result of a shift in mix from lower cost transactional accounts to higher cost time deposits, as well as seasonality and repricing within the public deposit portfolio.

The provision for credit losses -– loans was ~~$446 thousand~~$4.2 million in the ~~second~~first quarter of ~~2022~~2023, compared to a ~~benefit~~provision of ~~$3.9~~$2.1 million in the ~~second~~first quarter of ~~2021.~~2022. Net ~~recoveries~~charge-offs during the recent quarter were ~~$1.0~~$2.1 million compared to ~~$394~~$787 thousand in the ~~second~~first quarter of 2021. During the second quarter of 2022, we recovered $2.0 million in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the fourth quarter of 2021.2022. Net ~~recoveries~~charge-offs expressed as an annualized percentage of average loans outstanding was ~~0.11%~~0.21% during the ~~second~~first quarter of ~~2022~~2023 compared to ~~0.04%~~0.09% during the ~~second~~first quarter of ~~2021.~~2022. See the “Allowance for Credit Losses -– Loans” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion regarding the provision ~~(benefit)~~ for credit losses -– loans and net charge-offs.

Noninterest income totaled ~~$11.4~~$10.9 million in the ~~second~~first quarter of ~~2022,~~2023, compared to ~~$10.2~~$11.3 million in the ~~second~~first quarter of ~~2021.~~2022. The ~~increase~~decrease in noninterest income for the ~~second~~first quarter of ~~2022~~2023 was primarily due to ~~increases~~decreases in income from ~~derivative instruments, net. Income from derivative instruments, net is based~~investments in limited partnerships and service charges on ~~the number and value of interest rate swap transactions executed during the quarter combined with the impact of changes in the fair market value of borrower-facing trades.~~

Noninterest expense totaled ~~$32.9~~$33.7 million in the ~~second~~first quarter of ~~2022,~~2023, compared to ~~$26.9~~$30.1 million in the ~~second~~first quarter of ~~2021.~~2022. The increase in noninterest expense was primarily the result of increases in salaries and employee benefits expense, other expenses, computer and data processing expense, ~~restructuring charges, occupancy~~ and ~~equipment expense, and other expenses.~~FDIC assessments. The increase in salaries and employee benefits expense was primarily the result of investments in personnel ~~higher stock-based compensation expense, annual merit increases, along with~~and hourly wage pressures driven by the current competitive labor market. The increase in other expenses was the result of a combination of factors, including interest charges related to collateral held for derivative transactions, the timing of deposit account-related fraud charge-offs, higher insurance costs and the impact of inflationary pressures. Computer and data processing expense increased ~~as a result~~due to the timing of our strategic investment in technology, including digital banking initiatives, a customer relationship management solution across all business lines, and ~~Banking as a Service~~Banking-as-a-Service, or BaaS, initiatives. In the second quarter of 2022, restructuring charges of $1.3 million were recognized in connection with the write-down of real estate assets to fair market value based upon existing purchase offers and current market conditions for five locations that were closed in the second half of 2020. The increase in ~~occupancy and equipment expense~~FDIC assessments was due in part to the ~~purchase~~impact of ~~laptop computers to support our flexible work model and repairs and maintenance~~an increase in the branch network. The increase in other expense was due to a number of factors, including inflation and the outsourcing of certain functions previously handled internally. The increases are also partly attributable to the impacts of the pandemic receding as we began to see a return to normal activities in areas such as training, conferences, travel and entertainment.initial base deposit insurance assessment rate schedules by two basis points.

The regulatory Common Equity Tier 1 Ratio and Total Risk-Based Capital Ratio were ~~10.29%~~9.55%, and ~~12.75%~~11.93%, respectively, at ~~June 30, 2022.~~March 31, 2023. See the “Liquidity and Capital Management” section of this Management’s Discussion and Analysis for further discussion regarding regulatory capital and the Basel III capital rules.

On June 13, 2022, we announced a stock repurchase program for up to 766,447 shares of our common stock, or approximately 5% of our then outstanding common shares. Shares may be repurchased in open market transactions and pursuant to any trading plan adopted in accordance with Rule 10b5-1 for the Securities Exchange Act of 1934. The timing and number of shares repurchased will depend on a variety of factors, including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate us to purchase any shares and it may be extended, modified, or discontinued at any time. No shares have been repurchased to-date under this program.

~~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:

~~We helped more than 2,900 customers obtain more than $378 million in loans through the PPP. We have helped customers complete the forgiveness process for approximately $369 million of these PPP loans.~~

We had $532.4 million of loans with modifications related to COVID-19 during 2020, with $4.0 million and $46.2 million still on deferral as of June 30, 2022 and December 31, 2021, respectively. 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 June 30, 2022 as the majority of customers whose loans were subject to COVID-19 related deferrals have returned to making regular payments.

Net interest income is our primary source of revenue, comprising 79% ~~and 78%~~ of revenue during the three ~~and six~~ months ended ~~June 30, 2022, respectively.~~March 31, 2023. 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 interest-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 interest-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 interest earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.

The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis (dollars in thousands):

Analysis of Net Interest Income for the Three Months Ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~

Net interest income on a taxable equivalent basis for the three months ended ~~June 30, 2022,~~March 31, 2023, was ~~$41.7~~$41.9 million, an increase of ~~approximately $3.8~~$2.2 million versus the comparable quarter last year of ~~$37.9~~$39.7 million. The increase in net interest income was primarily due to ana $21.4 million increase in ~~average investment securities of $359.2 million, or 34%, and an increase in average loans of $103.5 million, or 3%, as well as~~interest income, resulting from the impact of the interest rate increases ~~in 2022~~ having a positive impact on ~~yields. Average PPP~~yields, as well an increase in average loans ~~net~~ of ~~deferred fees were $21.6~~$418.8 million, ~~for~~or 11%, partially offset by a decrease in average investment securities of $118.4 million, or 8%. The increase in interest income was partially offset by an increase in interest expense of $19.2 million. The increase in interest expense was primarily the three months ended June 30, 2022 compared to $40.3 million for the three months ended June 30, 2021. Revenue related to PPP loans was $262 thousand lower in the second quarter of 2022 than the second quarter of 2021. PPP loan balances are significantly lower in 2022 as a result of ~~loan forgiveness.~~continued repricing of time deposits at higher rates.

Our net interest margin for the ~~second~~first quarter of ~~2022~~2023 was ~~3.19%~~3.09%, ~~13-basis~~2-basis points ~~higher~~lower than ~~3.06%~~3.11% for the same period in ~~2021. This comparable period improvement was primarily due~~2022 as a result of a shift in our deposit mix from lower cost transactional accounts to higher cost time deposits, as well as seasonality and repricing within the ~~impact of the interest rate increases that have occurred in 2022 and a decrease in the level of Federal Reserve interest earning cash in comparison to the prior year.~~public deposit portfolio.

For the ~~second~~first quarter of ~~2022,~~2023, the average yield on average interest earning assets of ~~3.47%~~4.71% was ~~16-basis~~139-basis points higher than the ~~second~~first quarter of ~~2021~~2022 of ~~3.31%~~3.32% due to the increase in market interest rates. ~~Loan yields~~Average loan yield increased ~~15-basis~~164-basis points during the ~~second~~first quarter of ~~2022~~2023 to ~~4.13%~~5.61% from ~~3.98%~~3.97% for the same period in ~~2021.~~2022. The average yield on investment securities increased ~~5-basis~~16-basis points during the ~~second~~first quarter of ~~2022~~2023 to ~~1.82%~~1.90% from ~~1.77%~~1.74% for the same period in ~~2021.~~2022. Overall, a favorable volume variance increased interest income by ~~$2.8~~$4.0 million during the ~~second~~first quarter of ~~2022,~~2023, and the interest earning asset rate changes increased interest income by ~~$1.5~~$17.4 million which collectively drove ~~a $4.3~~the $21.4 million increase in interest income.

Average interest-earning assets were ~~$5.25~~$5.49 billion for the ~~second~~first quarter of 2023 compared to $5.17 billion for the first quarter of 2022, ~~compared to $4.97 billion for the second quarter of 2021,~~ an increase of ~~$273.8~~$319.1 million, or 6%, from the comparable quarter last year, with average ~~securities~~loans up ~~$359.2~~$418.8 million from ~~$1.06~~$3.70 billion for the first quarter of 2022 to $4.12 billion for the first quarter of 2023, and average securities down $118.4 million from $1.42 billion ~~and average loans up $103.5 million from $3.67~~for the first quarter of 2022 to $1.30 billion ~~to $3.77 billion.~~for the first quarter of 2023. Securities represented ~~27.0%~~23.7% of average interest-earning assets during the ~~second~~first quarter of ~~2022~~2023 compared to ~~21.3%~~27.5% during the ~~second~~first quarter of ~~2021.~~2022. The ~~increase~~decrease in average investment securities iswas due to a decrease in the ~~redeployment~~market value of ~~excess liquidity intended~~the portfolio due to ~~benefit~~rising interest ~~income~~rates combined with the ~~intent~~use of ~~reducing net interest margin compression relative~~portfolio cash flow to ~~interest earned on federal funds sold and interest-earning deposits.~~primarily fund loan originations rather than reinvest in securities. Loans comprised ~~71.9%~~75.1% of average interest-earning assets during the ~~second~~first quarter of ~~2022~~2023 compared to ~~73.7%~~71.7% during the ~~second~~first quarter of ~~2021.~~2022. The growth in average loans was primarily due to organic growth bolstered by our February 2022 expansion into the Mid-Atlantic Region. Loans generally have significantly higher yields compared to other interest-earning assets and, as such, have a more positive effect on the net interest margin. The average yield on average loans was ~~4.13%~~5.61% for the ~~second~~first quarter of ~~2022,~~2023, an increase of ~~15-basis~~164-basis points compared to ~~3.98%~~3.97% for the comparable quarter in ~~2021~~2022 due to the impact of the current rising interest rate ~~increases that have occurred in 2022.~~environment. An increase in the volume of average loans resulted in a ~~$1.3~~$4.6 million increase in interest income and ~~a $1.2 million increase due to the favorable~~ rate ~~variance.~~changes increased interest income by $16.2 million.

~~The~~For the first quarter of 2023, the average cost of average interest-bearing liabilities of ~~0.37% in~~2.12% was 183-basis points higher than the ~~second~~first quarter of 2022 ~~compared to 0.35% in the second quarter of 2021, was 2-basis points higher~~ and the average cost of ~~average~~ interest-bearing deposits ~~increased one basis~~of 1.99% was 181-basis points ~~from 0.24%~~higher than the first quarter of 2022 due to ~~0.25%.~~the rising interest rate environment that occurred in 2022 and continued into 2023.

Average interest-bearing liabilities were ~~$3.95~~$4.19 billion for the ~~second~~first quarter of 2023, compared to $3.90 billion for the first quarter of 2022, ~~compared to $3.71 billion for the second quarter of 2021,~~ an increase of ~~$236.0~~$289.1 million, or 6%7%. On average, interest-bearing deposits grew ~~$141.5~~$127.9 million from ~~$3.64~~$3.80 billion for the ~~second~~first quarter of ~~2021~~2022 to ~~$3.78~~$3.93 billion for the current quarter and total borrowings increased $161.2 million, from $98.6 million for the first quarter of 2022, to $259.8 million for the current quarter. The increase in average deposits was primarily due to growth in ~~non-public, public, and~~ brokered ~~deposits, partially offset by a decline in reciprocal~~ deposits. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities -– Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in ~~a $458 thousand increase in~~$17.6 million higher interest expense during the ~~second~~first quarter of ~~2022,~~2023, primarily due to the ~~overall~~ higher rate market conditions.

~~Analysis of Net Interest Income for the Six Months Ended June 30, 2022 and 2021~~

Net interest income on a taxable equivalent basis for the six months ended June 30, 2022, was $81.4 million, an increase of $5.5 million versus the comparable quarter last year of $75.9 million. The increase in net interest income was primarily due to an increase in average investment securities of $431.9 million, or 43.8% compared to the six months ended June 30, 2021, an $86.7 million increase in average loans, and a decrease in interest expense of $164 thousand. The decrease in interest expense was primarily the result of continued repricing of time deposits at lower rates throughout 2021 and into 2022. Average PPP loans, net of deferred fees were $30.9 million for the six months ended June 30, 2022 compared to $240.2 million for the six months ended June 30, 2021. Revenue related to PPP loans was $3.8 million lower in the first six months of 2022 than the first six months of 2021. PPP loan balances are significantly lower in 2022 as a result of loan forgiveness and repayment process.

Our net interest margin for the six months ended June 30, 2022 was 3.15%, two basis points lower than 3.17% for the same period in 2021. This comparable period decrease was a combination of a one basis point decrease in the interest rate spread and a one basis point decrease in the contribution of interest-free funds. The lower interest rate spread was a result of a five basis point decrease in the average yield on average interest-earning assets and a four basis point decrease in the average cost of average interest-bearing liabilities.

For the six months ended June 30, 2022, the average yield on average interest earning assets of 3.40% was five basis points lower than the six months ended June 30, 2021 of 3.45%. The average loan yield remained consistent at 4.05% for the six months ended June 30, 2022 and 2021. The average yield on investment securities decreased five basis points during the six months ended June 30, 2022, to 1.78% from 1.83% for the comparable six month period last year. Overall, volume variances in average interest-earning assets and average interest-bearing liabilities increased net interest income by $4.9 million during the six months ended June 30, 2022, while the interest-bearing deposit rate changes decreased interest expense by $617 thousand which, along with other rate/yield variances, drove a $568 thousand increase in net interest income.

Average interest-earning assets were $5.21 billion for the six months ended June 30, 2022 compared to $4.82 billion for the six months ended June 30, 2021, an increase of $384.6 million, or 8.0%, from the comparable six month period last year, with average securities up $431.9 million from $986.1 million to $1.42 billion and average loans up $86.7 million from $3.65 billion to $3.74 billion. Securities represented 27.7% of average interest-earning assets during the six months ended June 30, 2022 compared to 20.4% during the six months ended June 30, 2021. The increase in investment securities was due to the redeployment of excess liquidity intended to benefit interest income with the intent of reducing net interest margin compression versus federal funds sold and interest-earning deposits. Loans comprised 71.8% of average interest-earning assets during the six months ended June 30, 2022 compared to 75.7% during the six months ended June 30, 2021. Loans generally have significantly higher yields compared to other interest-earning assets and, as such, have a more positive effect on the net interest margin. An increase in the volume of average loans resulted in a $2.1 million increase in interest income, which was partially offset by a $407 thousand decrease in interest income due to changes in interest rates.

The average cost of average interest-bearing liabilities was 0.33% in the six months ended June 30, 2022 compared to 0.37% in the six months ended June 30, 2021 and the average cost of average interest-bearing deposits decreased three basis points from 0.25% to 0.22%.

Average interest-bearing liabilities of $3.92 billion in the six months ended June 30, 2022 were $339.3 million, or 9.5%, higher than the six months ended June 30, 2021. On average, interest-bearing deposits grew $279.9 million from $3.51 billion to $3.79 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up $22.6 million from $1.07 billion to $1.09 billion. The increase in average deposits was primarily due to growth in non-public and public demand deposits and an increase in reciprocal deposit programs. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities - Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in a $164 thousand decrease in interest expense during the six months ended June 30, 2022, primarily due to the lag in the re-pricing of time deposits, which resulted in higher interest expense in the prior year than current year despite the recent interest rate increases experienced in 2022.

The following ~~tables set~~table sets forth certain information relating to the consolidated balance sheets and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the periods indicated (dollars in thousands). Average balances were derived from daily balances.

(2) The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.

(4) Loans include net unearned income, net deferred loan fees and costs and non-accruing loans. Net deferred loan fees (costs) included in interest income were as follows (in thousands):

~~(2)~~ ~~The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.~~

~~(3)~~ ~~Loans include net unearned income, net deferred loan fees and costs and non-accruing loans. Net deferred loan fees (costs) included in interest income were as follows (in thousands):~~

The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands). No out-of-period adjustments were included in the rate/volume analysis.

The provision for credit losses for the ~~three and six months ended June 30, 2022~~first quarter of 2023 was ~~$0.6~~$4.2 million, ~~and $2.9 million, respectively,~~ compared to ~~benefit for credit losses of $4.6 million and $6.6~~$2.3 million for the ~~corresponding periods in 2021. Included in the second~~first quarter of ~~2022 was a $2.0 million recovery in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the second quarter of 2021.~~2022. Loan loss provision ~~returned to a more normalized level in 2022, excluding the commercial loan recovery recognized this quarter, due to~~reflected the impact of an increase in the national unemployment forecast and qualitative factors reflecting economic uncertainty associated with higher interest ~~rates~~rates. The increase in provision for credit losses in the first quarter of 2023 was primarily driven by higher loan growth and ~~global political unrest, partially offset by low~~ net charge-offs ~~national unemployment trends and a reduction~~ in ~~overall specific reserve levels. The benefits in 2021 were due~~comparison to ~~improvement in~~ the ~~national unemployment forecast following the initial impact~~first quarter of ~~the COVID-19 pandemic, the designated loss driver for our current expected credit loss ("CECL") model, and positive trends in qualitative factors, resulting in a release of credit loss reserves.~~2022.

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

The following table details the major categories of noninterest income for the periods presented (in thousands):

~~Insurance income increased $87~~Service charges on deposits decreased $342 thousand ~~or 8%,~~ to $1.2 million for the second quarter of 2022 compared to $1.1 million for the second quarter of 2021. For the first six months of 2022, insurance income increased $788 thousand, or 31%, to $3.3 million compared to $2.5$1.0 million for the first six months of 2021. The increase was driven by the two 2021 bolt on acquisitions (North Woods in August 2021 and Landmark in February 2021), growth in the legacy SDN business, including the impact of increasing insurance premiums, and higher contingent revenues in 2022.

~~Company owned life insurance income increased $176 thousand, or 25%, to $869 thousand for the second~~ quarter of ~~2022 compared to $693 thousand for second quarter of 2021. For the first six months of 2022, company owned life insurance income increased $352 thousand, or 26% to $1.7 million~~2023 compared to $1.4 million for ~~the~~ first ~~six months~~quarter of ~~2021. We made additional investments~~2022 due to a reduction in ~~company-owned life insurance~~nonsufficient funds fees as a result of ~~$20.0 million~~January 2023 changes in the ~~third quarter of 2021 to take advantage of attractive tax-equivalent yields and partially offset employee benefit expenses.~~Bank’s consumer overdraft program that align with trends in community banking.

~~Income (loss) from derivative instruments, net, increased $1.2 million, or 209%,~~Investments in limited partnerships income decreased $544 thousand to ~~income of $645~~$251 thousand for the ~~second~~first quarter of ~~2022~~2023 compared to ~~a loss of $592~~$795 thousand for ~~the second~~first quarter of ~~2021. For~~2022. The Company has made several investments in limited partnerships, primarily small business investment companies, and accounts for these investments under the ~~first six months of 2022, income from derivative instruments, net decreased $119 thousand, or 9%, to $1.2 million compared to $1.3 million for the first six months of 2021.~~equity method. Income from ~~derivative instruments, net is~~these investments fluctuates based on the ~~number~~maturity and ~~value~~performance of ~~interest rate swap transactions executed during~~ the ~~period combined with the impact of changes in the fair market value of borrower-facing trades.~~underlying investments.

Net gain (loss) on sale of loans held for sale was ~~$828~~a net gain of $112 thousand for the ~~second~~first quarter of ~~2022~~2023 compared to ~~$790~~a net loss of $91 thousand for the ~~second~~first quarter of ~~2021. For~~2022. The net loss in the first ~~six months of 2022, net gain on sale of loans held for sale was $737 thousand compared to $1.9 million for the first six months of 2021. Included in the second~~ quarter of 2022 was a gain of $586 thousand related to the sale of a $31.2 million portfolio of indirect loans. Sales volumes and margins for residential loans have moderated in 2022, following historically high levels in 2021 as a result of the ~~rising~~fair market value of pipeline commitments at that time, negatively impacted by interest ~~rate environment.~~rates.

Net (loss) gain on tax credit investments was a net loss of $92 thousand for the second quarter of 2022, compared to a $276 thousand net gain for the second quarter of 2021. For the first six months of 2022, net (loss) gain on tax credit investments was a net loss of $319 thousand compared to a $191 thousand net gain for the first six months of 2021. These losses include the amortization of tax credit investments, partially offset by New York investment tax credits that are refundable and recorded in noninterest income.

The following table details the major categories of noninterest expense for the periods presented (in thousands):

Salaries and employee benefits expense increased ~~$2.4~~$1.5 million, or ~~17%~~9%, to $17.0 million for the second quarter of 2022 compared to $14.5 million for the second quarter of 2021. For the first six months of 2022, salaries and employee benefits expense increased $4.6 million, or 16%, to $33.6 million compared to $29.0$18.1 million for the first ~~six months~~quarter of ~~2021.~~2023 compared to $16.6 million for the first quarter of 2022. The increase in salaries and employee benefits expense was primarily the result of investments in personnel ~~higher stock-based compensation expense,~~ and ~~annual merit increases, along with~~hourly wage pressures driven by the ~~current~~ competitive labor market.

Occupancy and equipment expense increased $0.7 million, or 22%, to $4.0 million for the second quarter of 2022 compared to $3.3 million for the second quarter of 2021. For the first six months of 2022, occupancy and equipment expense increased $1.1 million, or 17%, to $7.8 million compared to $6.7 million for the first six months of 2021. The increase in occupancy and equipment expense in 2022 was primarily due to the purchase of laptop computers in the second quarter of 2022 to support our flexible work model, as well as repairs and maintenance in the branch network.

Professional services expense decreased $334 thousand, or 20.8%, to $1.3 million for the second quarter of 2022 compared to $1.6 million for the second quarter of 2021. For the first six months of 2022, professional services expense decreased $573 thousand, or 16.4%, to $2.9 million compared to $3.5 million for the first six months of 2021. The decrease in professional services expense was primarily as a result of higher expense incurred in the prior year for enterprise standardization expense and miscellaneous consulting fees.

Computer and data processing expense increased ~~$1.1 million,~~$712 thousand, or ~~32%~~18%, to $4.6 million for the second quarter of 2022 compared to $3.5 million for the second quarter of 2021. For the first six months of 2022, computer and data processing expense increased $2.0 million, or 30%, to $8.6 million compared to $6.6$4.7 million for the first ~~six months~~quarter of ~~2021.~~2023 compared to $4.0 million for the first quarter of 2022. The increase was ~~a result~~primarily due to the timing of our strategic ~~investment~~investments in technology, including digital banking initiatives, a customer relationship management solution across all lines of business, and Banking as a Service, ~~(BaaS)~~or BaaS, initiatives.

~~Restructuring charges~~FDIC assessments expense increased $602 thousand to $1.1 million for the first quarter of ~~$1.3 million were recognized in~~2023 compared to $513 thousand for the ~~second~~first quarter of 2022, due in ~~connection with~~part to the ~~write-down~~impact of ~~real estate assets to fair market value based upon existing purchase offers and current market conditions for five locations that were closed~~an increase in the ~~second half of 2020.~~base deposit insurance assessment rate schedules by 2-basis points.

Other expense increased ~~$0.6 million, or 24%, to $3.1 million for the second quarter of 2022 compared to $2.5 million for the second quarter of 2021. For the first six months of 2022, other expense increased~~ $1.0 million, or ~~22%~~42%, to ~~$5.5 million compared to $4.5~~$3.5 million for the first ~~six months~~quarter of ~~2021.~~2023 compared to $2.4 million for the first quarter of 2022. The increase was due to a combination of factors, including ~~inflation~~interest charges related to collateral held for derivative transactions, the timing of deposit account-related fraud charge-offs, higher insurance costs and the ~~outsourcing~~impact of ~~certain functions previously handled internally, as well as a return to more normal expense levels post-pandemic in areas, such as, training, conferences, travel and entertainment.~~inflationary pressures.

Our efficiency ratio for the first ~~six months~~quarter of ~~2022~~2023 was ~~60.51%~~63.68% compared with ~~54.22%~~59.06% for the first ~~six months~~quarter of ~~2021.~~2022. The higher efficiency ratio was primarily the result of an increase in noninterest expense in ~~2022~~2023 as described above, coupled with the ~~$3.8~~$1.1 million decline in interest and fee income in connection with PPP ~~revenue~~loans in ~~2022~~2023 versus ~~2021.~~2022. 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.

For the ~~three and six months ended June 30, 2022,~~first quarter of 2023, we recorded income tax expense of ~~$3.9~~$2.8 million, ~~and $7.3 million, respectively,~~ versus ~~$5.4 million and $10.7~~$3.4 million for the ~~same periods in the prior year.~~first quarter of 2022. In the ~~second~~first quarter of ~~2022,~~2023, we recognized federal and state tax benefits related to tax credit investments placed in service resulting in a reduction in income tax expense of ~~$426~~$584 thousand, versus ~~$424~~$589 thousand for the same period in the prior year. ~~The six months ended June 30, 2022 and 2021 also included related benefits of $1.0 million and $668 thousand, respectively.~~

During the second quarter of 2021, New York State enacted legislation that temporarily increases the corporate tax rate from 6.5% to 7.25% for taxable years beginning in 2021 through 2023 for taxpayers with New York State income over $5.0 million. This rate change did not result in a material impact to our tax provision.

Our effective tax ~~rates~~rate was 18.7% for both the ~~three~~first quarter of 2023 and six months ended June 30, 2022 were 19.8% and 19.2%, respectively, versus 21.1% and 20.8% for the same periods in the prior year. The increase in effective tax rates was the result of lower pre-tax earnings in comparison to the prior year.2022. 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~~company owned life insurance and the impact of tax credit investments. In addition, our effective tax rate for ~~2022~~2023 and ~~2021~~2022 reflects the New York State tax benefit generated by our real estate investment trust.

The following table summarizes the composition of our investment securities portfolio as of the dates indicated (in thousands):

Our available for sale (“AFS”) investment securities portfolio decreased ~~$1.5~~$23.2 million from December 31, ~~2021~~2022 to June 30, 2022. Our primary investment strategy for the past several quarters has been to deploy excess liquidity into cash flowing agency mortgage-backed securities, reallocating excess Federal Reserve cash balances into securities demonstrating higher yields; however, activity has slowed as a portion of the cash flow from the portfolio was utilized to fund loan originations during the second quarter of 2022.March 31, 2023. The AFS portfolio had a net unrealized loss of ~~$126.3~~$158.4 million at ~~June 30, 2022~~March 31, 2023 and ~~$6.3~~$172.7 million at December 31, ~~2021,~~2022, respectively. The decline in the portfolio balance was ~~largely driven by a decrease in~~primarily the ~~market value~~result of the use of portfolio ~~due~~cash flow to ~~rising interest rates. The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change.~~

The following table sets forth certain information regarding the amortized cost (“Cost”), weighted average yields (“Yield”) and contractual maturities of our debt securities portfolio as of ~~June 30, 2022.~~March 31, 2023. In this table, Yield is defined as the book yield weighted against the ending book value. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Actual maturities may differ from the contractual maturities presented because borrowers may have the right to call or prepay certain investments. No tax-equivalent adjustments were made to the weighted average yields (dollars in thousands).

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 ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.

The following table summarizes the composition of our loan portfolio, excluding loans held for sale and including net unearned income and net deferred fees and costs, as of the dates indicated (dollars in thousands).

Total loans increased ~~$84.6~~$192.9 million to ~~$3.76~~$4.24 billion at ~~June 30, 2022~~March 31, 2023 from ~~$3.68~~$4.05 billion at December 31, ~~2021.~~2022. The increase in loans was primarily attributable to our organic growth initiatives.

Total commercial loans increased ~~$8.2~~$192.5 million during the ~~six~~first three months ~~ended June 30, 2022~~of 2023 to $2.54 billion and represented ~~54.7%~~59.8% of total loans as of ~~June 30, 2022.~~March 31, 2023. The increase was primarily a result of our continued commercial business development efforts. PPP loans, net of deferred fees, were $8.9 million and $55.3 million at June 30, 2022 and December 31, 2021, respectively, and are included in our commercial business loans. PPP loan balances were significantly lower in 2022 as a result of the PPP loan forgiveness and repayment process. We expect the PPP loan balances will continue to decline as loans are forgiven by the SBA.

Total consumer loans increased ~~$76.4 million~~$381 thousand to ~~$1.70~~$1.71 billion and represented ~~45.3%~~40.2% of total loans as of ~~June 30, 2022.~~March 31, 2023. During the first ~~six~~three months of ~~2022,~~2023, we originated ~~$304.6~~$97.7 million in indirect automobile loans with a mix of approximately ~~27%~~25% new automobile loans and ~~73%~~75% used ~~automobile.~~automobile loans. During the first ~~six~~three months of ~~2021,~~2022, we originated ~~$230.0~~$129.9 million in indirect automobile loans with a mix of approximately ~~28%~~25% new automobile and ~~72%~~75% used automobile loans. Origination volumes and mix of new and used vehicles financed fluctuate depending on general market conditions. Growth in the consumer indirect portfolio in the current period was primarily a result of increased customer demand for automobiles with the Company well-positioned to take advantage of the market opportunity given our deep history and experience in this line of business.

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 March 31, 2023, no significant concentrations, as defined above, existed in our portfolio in excess of 10% of total loans.

Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled ~~$4.3 million~~$682 thousand and ~~$6.2 million~~$550 thousand as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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 ~~$361.8~~$273.4 million and ~~$272.7~~$275.3 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

The following table summarizes the activity in the allowance for credit losses -– loans for the periods indicated (dollars in thousands).

Loans not analyzed for a specific reserve are segmented into ~~"pools"~~“pools” of loans based upon similar risk characteristics. This is referred to as the ~~"pooled loan"~~“pooled loan” component of the allowance for credit losses estimate. The allowance for credit losses for pooled loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information. 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 Loan 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, ~~troubled debt restructurings (“TDRs”),~~ and other loans deemed appropriate by management, collectively referred to as collateral dependent loans. See Note 6.5. Loans, of the notes to the consolidated financial statements for further details on collateral dependent loans.

Assessing the adequacy of the allowance for credit losses -– loans 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.

The adequacy of the allowance for credit losses -– loans 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 a financial institution’s allowance for credit losses -– loans. Such agencies may require the financial institution to increase the allowance based on their judgments about information available to them at the time of their examination.

~~Net recoveries of $1.0~~$2.1 million in the ~~second~~first quarter of ~~2022~~2023 represented ~~0.11%~~0.21% of average loans on an annualized basis compared to net ~~recoveries~~charge-offs of ~~$394~~$787 thousand, or ~~0.04%~~0.09% of average loans for the ~~second~~first quarter of 2021. For the six months ended June 30, 2022, net recoveries of $253 thousand represented 0.01% of average loans, compared to net charge-offs of $493 thousand, or 0.03% of average loans for the same period in 2021. During the second quarter of 2022, we recovered $2.0 million in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the fourth quarter of 2021.2022. The allowance for credit losses -– loans was ~~$42.5~~$47.5 million at ~~June 30, 2022,~~March 31, 2023, compared with ~~$46.4~~$41.0 million at ~~June 30, 2021.~~March 31, 2022. The ratio of the allowance for credit losses -– loans to total loans was ~~1.13%~~1.12% and ~~1.28%~~1.10% at ~~June 30,~~March 31, 2023 and March 31, 2022, ~~and June 30, 2021,~~ respectively. The ratio of allowance for credit losses -– loans to non-performing loans was ~~648%~~540% at ~~June 30, 2022,~~March 31, 2023, compared with ~~699%~~426% at ~~June 30, 2021.~~March 31, 2022.

The following table sets forth the allocation of the allowance for credit losses -– loans by loan category as of the dates indicated (dollars in thousands). 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.

The table below summarizes our non-performing assets at the dates indicated (dollars in thousands).

Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at ~~June 30, 2022~~March 31, 2023 were ~~$6.5~~$8.9 million, a decrease of ~~$5.6~~$1.3 million from the ~~$12.2~~$10.2 million balance at December 31, ~~2021. The decrease in non-performing assets related primarily to the pay-off of a nonaccrual commercial mortgage that resulted in the $2.0 million recovery noted previously.~~2022. The primary component of non-performing assets is non-performing loans, which were ~~$6.5~~$8.8 million or ~~0.17%~~0.21% of total loans at ~~June 30, 2022,~~March 31, 2023, down from ~~$12.2~~$10.2 million or ~~0.33%~~0.25% of total loans at December 31, ~~2021~~2022 primarily due to pay-downs or payments received and applied to principal for the non-performing loans.

Approximately ~~$3.7~~$1.2 million, or ~~56%~~14%, of the ~~$6.5~~$8.8 million in non-performing loans as of ~~June 30, 2022~~March 31, 2023 were current with respect to payment of principal and interest but were classified as non-accruing because repayment in full of principal and/or interest was uncertain. ~~We had no TDRs included in nonaccrual loans at June 30, 2022 and December 31, 2021. Additionally, there were no TDRs accruing interest as of June 30, 2022 and December 31, 2021.~~

Foreclosed assets consist of real property formerly pledged as collateral for loans, which we have acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. We had no$101 thousand and $19 thousand of properties representing foreclosed asset holdings at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022, respectively.

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 ~~$27.9~~$25.8 million and $22.7 million in loans that continued to accrue interest which were classified as substandard as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

The following table summarizes the contractual maturities of our loan portfolio at ~~June 30, 2022.~~March 31, 2023. 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 as reported as due in one year or less (in thousands).

(1) Amounts include prepayment assumptions based on actual historical experience.

The following table summarizes the composition of our deposits at the dates indicated (dollars in thousands):

As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was ~~$1.24~~$2.17 billion and ~~$1.29~~$2.05 billion, respectively. The portion of our time deposits by account that were in excess of the FDIC insurance limit was ~~$131.5~~$294.6 million and ~~$182.3~~$258.7 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The maturities of our uninsured time deposits at ~~June 30, 2022~~March 31, 2023 were as follows: ~~$83.7~~$138.3 million in three months or less; ~~$19.7~~$82.9 million between three months and six months; ~~$27.9~~$61.6 million between six months and one year; and ~~$244 thousand~~$11.8 million 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 ~~June 30, 2022,~~March 31, 2023, total deposits were ~~$4.82~~$5.14 billion, representing ~~a decrease~~an increase of ~~$6.6~~$211.9 million from December 31, ~~2021.~~2022. The ~~decrease~~increase was ~~due to lower~~primarily the result of seasonally higher public deposits and an increase in reciprocal ~~deposits, partially offset by growth in non-public deposits and brokered~~ deposits. The decrease in public and reciprocal deposits was due to a combination of seasonal outflows and less demand due to the rising interest rate environment presenting alternative investment opportunities for customers. Time deposits were approximately ~~20%~~29% and ~~19%~~26% of total deposits at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

Non-public deposits, the largest component of our funding sources, totaled ~~$2.76~~$2.79 billion and ~~$2.70~~$2.77 billion at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, and represented ~~57%~~54% and 56% of total deposits as of ~~the end of~~ each ~~period,~~date, 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~~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 area. 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 ~~$1.02~~$1.18 billion and ~~$1.10~~$1.12 billion at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, and represented ~~21% and~~ 23% of total deposits as of each ~~date, respectively.~~date. The ~~decrease~~increase in public deposits ~~during~~as of March 31, 2023 in comparison to December 31, 2022 was due largely to seasonality.

We also 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. Prior to the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) enacted on May 14, 2018, all reciprocal deposits were considered brokered deposits for regulatory reporting purposes. With the enactment of EGRRCPA, reciprocal deposits, subject to certain restrictions, are no longer required to be reported as brokered deposits. Reciprocal deposits totaled ~~$672.3~~$779.0 million at ~~June 30, 2022,~~March 31, 2023, compared to ~~$771.4~~$696.1 million at December 31, ~~2021, as customers have been withdrawing funds from the program to re-balance operating accounts. Reciprocal deposits represented~~2022, representing 15% and 14% ~~and 16%~~ of total deposits as of each date, respectively.

Brokered deposits totaled ~~$367.6~~$395.0 million and ~~$254.7~~$347.2 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, and represented 8% and 5%7% of total deposits as of each date, respectively.

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 the dates indicated (in thousands):

Short-term Federal Home Loan Bank (“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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 consisted of ~~$109.0~~$116.0 million and ~~$30.0~~$205.0 million ~~respectively,~~ in short-term ~~borrowings.~~borrowings, respectively. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits. $50 million of the short-term borrowings balance at ~~June 30, 2022~~March 31, 2023 is designated as a cash-flow hedge, which became effective in April 2022, at a fixed rate of ~~0.79%~~0.787% and $30 million of the short-term borrowings balance at March 31, 2023 is designated as a cash-flow hedge, which became effective in January 2023, at a fixed rate of 3.669%.

We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements. We had approximately ~~$354.0~~$253.1 million of immediate credit capacity with the FHLB as of ~~June 30, 2022.~~March 31, 2023. We had approximately ~~$602.7~~$592.4 million in secured borrowing capacity at the Federal Reserve Bank (“FRB”) discount window, none of which was outstanding at ~~June 30, 2022.~~March 31, 2023. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans. We had ~~approximately $130.0~~$145.0 million of credit available under unsecured federal funds purchased lines with various banks as of ~~June 30, 2022~~both March 31, 2023 and December 31, ~~2021.~~2022. Additionally, we had approximately ~~$859.1~~$215.6 million of unencumbered liquid securities available for pledging at ~~June 30, 2022.~~March 31, 2023.

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 ~~June 30, 2022,~~March 31, 2023, no amounts have been drawn on the line of credit.

As of March 31, 2023 we had a long-term advance payable to FHLB of $50.0 million. The advance matures on January 20, 2026 and bears interest at a fixed rate of 4.05%. FHLB advances are collateralized by securities from our investment portfolio and certain qualifying loans.

On October 7, 2020, we completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes 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. Proceeds, net of debt issuance costs of $740 thousand, were $34.3 million. The 2020 Notes qualify as Tier 2 capital for regulatory purposes.

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 2015 Notes qualify as Tier 2 capital for regulatory purposes.

We continue to actively monitor our liquidity profile and funding concentrations in accordance with our Board approved Liquidity Policy. While funding pressures have not occurred, management is actively monitoring customer activity by way of commercial and consumer line of credit utilization, as well as deposit flows. As of ~~June 30, 2022,~~March 31, 2023, all structural liquidity ratios and early warning indicators remain in compliance, with what we believe are ample funding sources available in the event of a stress scenario.

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, 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 other banking institutions, the FHLB, the FRB Discount Window and newly-established Bank Term Funding Program, and brokered deposit relationships. The primary source of our non-deposit short-term borrowings is FHLB advances, of which we had ~~$109.0~~$116.0 million outstanding at ~~June 30, 2022.~~March 31, 2023. In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately ~~$1.09 billion~~$990.5 million as of March 31, 2023 from various funding sources which include the FHLB, the FRB and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position.

The Parent’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of non-bank subsidiaries, repurchases of our stock, and acquisitions. The Parent obtains funding to meet obligations from dividends received from the Bank, net taxes collected from subsidiaries included in the federal consolidated tax return, and the issuance of debt and equity securities. In addition, the Parent maintains a revolving line of credit with a commercial bank for an aggregate amount of up to $20.0 million, all of which was available at ~~June 30, 2022.~~March 31, 2023. The line of credit has a one-year term and matures in May 2023. Funds drawn would be used for general corporate purposes and backup liquidity.

Cash and cash equivalents were ~~$109.7~~$140.0 million as of ~~June 30, 2022,~~March 31, 2023, up ~~$30.6~~$9.5 million from ~~$79.1~~$130.5 million as of December 31, ~~2021.~~2022. Net cash provided by operating activities totaled ~~$81.8~~$6.6 million and the principal source of operating activity cash flow was net income adjusted for noncash income and expense ~~items and an increase in other liabilities.~~items. Net cash used in investing activities totaled ~~$98.9~~$164.6 million, which included outflows of ~~$84.3~~$195.0 million for net loan originations, ~~and $10.0~~partially offset by $31.3 million net cash provided from ~~net purchases of company owned life insurance.~~investment securities. Net cash provided by financing activities of ~~$47.7~~$167.5 million was primarily attributed to a ~~$79.0~~$211.9 million net increase in ~~short-term~~deposits, and a $50.0 million net increase in long-term borrowings, partially offset by ~~$15.3~~an $89.0 million net decrease in short-term borrowings, and $4.8 million in ~~common stock repurchases $9.4 million~~ dividend ~~payments and a $6.6 million decrease in deposits.~~payments.

We actively manage capital, commensurate with our risk profile, to enhance shareholder value. We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory “well-capitalized” thresholds. Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.

Banks and financial holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material impact on our consolidated financial statements. 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.

Shareholders’ equity was ~~$425.8~~$422.8 million at ~~June 30, 2022, a decrease~~March 31, 2023, an increase of ~~$79.3~~$17.2 million from ~~$505.1~~$405.6 million at December 31, ~~2021.~~2022. Accumulated other comprehensive loss included in shareholders’ equity decreased $10.1 million during the three months ended March 31, 2023 due primarily to a decrease in net unrealized losses on securities available for sale. Net income for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 increased shareholders’ equity by ~~$15.6~~$12.1 million, offset by common and preferred stock dividends declared of ~~$9.6~~$5.0 million. Accumulated other comprehensive loss included in shareholders’ equity increased $86.5 million during the six months ended June 30, 2022 due primarily to increased net unrealized losses on securities available for sale as a result of the increase in market interest rates.

The FRB and FDIC have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies. As of ~~June 30, 2022,~~March 31, 2023, the Company’s capital levels remained characterized as “well-capitalized” under the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks.

The following table reflects the ratios and their components (dollars in thousands):

(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~~Current Expected Credit Losses (“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~~has begun to phase ~~in to~~into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, we were 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 began to phase ~~in to~~into regulatory capital at 25% per year commencing January 1, 2022.

Under the Basel III Capital Rules, the current minimum capital ratios, including an additional capital conservation buffer applicable to the Company and the Bank, are:

Banking institutions with a capital conservation buffer below the minimum level will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. 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. Strict eligibility criteria for regulatory capital instruments were also implemented under the Basel III Capital Rules.

The following table presents actual and required capital ratios as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 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, under the Basel III Capital Rules (dollars in thousands):

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.

Market risk refers to the potential impact on earnings or capital arising from movements in interest rates. The Bank’s market risk management framework has been developed to control both short-term and long-term exposure within Board approved policy limits and is monitored by the Asset-Liability Management Committee and Board of Directors. Quantitative and qualitative disclosures about market risk were presented at December 31, ~~2021~~2022 in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, as filed with the Securities and Exchange Commission on March ~~10, 2022.~~9, 2023. The following is an update of the discussion provided therein.

There was no material change in the composition of assets, deposit liabilities or borrowings from December 31, ~~2021~~2022 to June 30, 2022, aside from asset growth due to an increased liquidity position. The prolonged excess liquidity position has resulted from continued deposit growth and has driven higher investment security balances in 2021 and 2022.March 31, 2023. See the section titled “Analysis of Financial Condition” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of asset, deposit and borrowing activity during the period.

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 ~~June 30, 2023~~March 31, 2024 assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):

In the rising rate scenarios, the static model results indicate that net interest income is modeled to ~~decrease~~increase compared to the flat rate scenario over a one-year ~~timeframe.~~time frame. This is a result of ~~borrowing costs in~~ the short-term repricing quicker than assets, and a model change from last quarter that places net income into non-interest rate sensitive accounts rather than back into Federal Reserve balances which reprice at the full forceincreasing of the ~~market rate changes.~~funding curve in shorter maturities driving up the funding costs for wholesale, municipal, and reciprocal deposits, which were used to fund loan growth on a quarter-over-quarter basis. This simulation does not consider balance sheet growth or a change in the balance sheet mix. As intermediate and longer-term assets continue to mature and are replaced at higher yields, net interest income should improve over ~~longer term timeframes.~~longer-term time frames. Model results in the declining rate scenario also indicate ~~a higher degree of~~ decreases in net interest income due to assets having the ability to reprice downward near full market rate shocks, while deposit and borrowing liabilities have the ability to reprice downward but 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. Furthermore, given the static balance sheet approach, retained earnings are considered to be reinvested in a non-interest earning asset.

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 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.

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 (back-testing).

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 ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 (dollars in thousands). The analysis additionally presents a measurement of the interest rate sensitivity at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock Scenario. An increase in the EVE amount is considered favorable, while a decline is considered unfavorable. The following table sets forth the estimated changes to EVE assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):

The ~~increase~~decrease in the Pre-Shock Scenario EVE at ~~June 30, 2022~~March 31, 2023 compared to December 31, ~~2021~~2022 is the result of ~~the~~a deposit mix shift from non-maturity, non-public to time reciprocal, and municipal deposits. The deposits don’t receive as much deposit valuation increase in ~~market rates. Although fixed rate assets decreased in value, this was offset by a positive trend in deposit premiums due~~comparison to ~~deposit cost controls during the first half of the year.~~non-maturity, non-public deposits. The ~~slight decrease in~~ sensitivity in the +100 basis point Rate Shock Scenario to EVE stayed relatively flat at ~~June 30, 2022~~March 31, 2023 compared to December 31, ~~2021~~2022. This is a result of ~~increased wholesale borrowing during the six month period which doesn't realize the same economic value benefit as core deposits~~non-maturity deposit valuation being similar to last quarter, while asset mix also remained similar to last quarter, resulting in ~~higher rate environments.~~a minimal variance on a quarter-over-quarter basis.

As of ~~June 30, 2022,~~March 31, 2023, 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 and Chief 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 SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Company’s 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 report.

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 Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended ~~June 30, 2022~~March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs sought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed. The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. We dispute and believe we have meritorious defenses against these claims and plan to vigorously defend ourselves.

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. ~~We are currently awaiting a ruling from~~

On September 26, 2022, the ~~Superior~~lower Court ~~of Pennsylvania on our motion seeking permission to appeal~~denied the ~~denial of our motion to dismiss the action for lack of standing. On February 8, 2022, plaintiffs filed a~~plaintiffs’ motion for partial summary ~~judgement~~judgment for most of the relief they ~~seek. We filed a cross motion for summary judgement seeking~~seek and found that there were questions of fact as to whether the ~~dismissal of a portion~~members of the class ~~and sought~~had purchased the subject vehicles for “consumer use” within the meaning of the relevant statutes. The Court also denied our motion for partial summary judgment seeking an offset in the form of recoupment ~~which reduces~~reducing any liability that may be imposed against us by the amounts that the borrowers owe ~~to the Bank~~ for failing to repay their motor vehicle ~~loans. At this time, the briefing on the motions for partial summary judgment is complete. Although~~loans, determining that the Court ~~had indicated~~could not enter a ~~hearing would be held~~judgment on ~~these motions, it has not been scheduled and we have no indication of when or if such~~recoupment – which is a ~~hearing will in fact be held. In addition, on April 25,~~set off from liability – without first determining whether there was liability. Also pending with the lower Court is our motion to compel discovery.

On October 7, 2022, the Superior Court of Pennsylvania ~~Supreme Court declared unconstitutional a statute on which the Court may have based jurisdiction in this case. Therefore, on June 27, 2022, we filed a motion~~granted our December 20, 2021 Request for ~~reconsideration~~an Interlocutory Appeal of the ~~Court's June 5, 2018 decision overruling~~denial of our ~~preliminary objections based on~~motion to dismiss the claims brought by New York borrowers for lack of ~~personal~~subject matter jurisdiction ~~as to~~and lack of standing. The case is stayed until the ~~New York plaintiffs. Plaintiffs have responded to that motion claiming an alternative basis for jurisdiction. Discovery~~appeal is ~~now ongoing~~briefed and ~~through a Case Management Order dated February 10, 2022, it must be completed~~decided by ~~October 3, 2022. Based on~~ the ~~current schedule, pre-trial motions must be submitted by November 21, 2022, and the case must be ready for trial on March 6, 2023.~~ Superior Court.

We have not accrued a contingent liability for this matter at this time because, given our defenses, we are unable to conclude whether a liability is probable to occur nor are we able to currently reasonably estimate the amount of potential loss.

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.~~insurer. We can provide no assurances that our insurer will ~~insure~~cover the full legal costs, settlements or judgments we ~~incur in excess of our deductible.~~incur. If we are unsuccessful in defending ourselves from these claims or if our insurer does not ~~insure us against~~cover the full amount of legal costs we incur, ~~in excess of our deductible,~~ the result may materially adversely affect our business, results of operations and financial condition.

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The risk factors set forth below also identify 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.

Recent events involving the failure of three financial institutions may adversely affect our business, and the market price of our common stock.

Recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank, Signature Bank, and First Republic Bank that resulted in the failure of those institutions have resulted in decreased confidence in banks among depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These events and developments could materially and adversely impact our business or financial condition, including through potential liquidity pressures, reduced net interest margins, and potential increased credit losses. These recent events and developments have, and could continue to, adversely impact the market price and volatility of our common stock. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our businesses. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

Lawmakers’ failure to address the federal debt ceiling in a timely manner, downgrades of the U.S. credit rating and uncertain credit and financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may affect the valuation or liquidity of our investment securities portfolio and increase future borrowing costs.

As a result of uncertain political, credit and financial market conditions, including the potential consequences of the federal government defaulting on its obligations for a period of time due to federal debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose credit default and liquidity risks. Given that future deterioration in the U.S. credit and financial markets is a possibility, no assurance can be made that losses or significant deterioration in the fair value of our U.S. government issued or guaranteed investments will not occur. At March 31, 2023, we had approximately $40.9 million and $1.15 billion invested in U.S. government agency securities and residential mortgage-backed securities issued or guaranteed by government-sponsored enterprises, respectively, and no investments in U.S. treasury securities. Downgrades to the U.S. credit rating could affect the stability of securities issued or guaranteed by the federal government and the valuation or liquidity of our portfolio of such investment securities, and could result in our counterparties requiring additional collateral for our borrowings. Further, unless and until U.S. political, credit and financial market conditions have been sufficiently resolved or stabilized, it may increase our future borrowing costs.

In June 2022, the Company’s Board of Directors authorized a share repurchase program for up to 766,447 shares of common stock. 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 ~~second~~first quarter of ~~2022~~2023 were as follows:

(a) The following is a list of all exhibits filed or incorporated by reference as part of this Report:

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


New York		16-0816610
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

220 LIBERTY STREET, WARSAW, New York		14569
(Address of principal executive offices)		(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	FISI	Nasdaq Global Select Market


		PAGE
PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Statements of Financial Condition (Unaudited) -– at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	32

	Consolidated Statements of Income (Unaudited) -– Three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~	3

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three months ended March 31, 2023 and 2022	4

	~~Consolidated Statements of Comprehensive (Loss) Income (Unaudited) - Three and six months ended June 30, 2022 and 2021~~	5

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) -– Three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~	65

	Consolidated Statements of Cash Flows (Unaudited) ~~- Six~~– Three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~	86

	Notes to Consolidated Financial Statements (Unaudited)	97

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4439

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	6857

ITEM 4.	Controls and Procedures	6959

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	7060

ITEM 1A.	Risk Factors	61

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7062

ITEM 6.	Exhibits	7163

	Signatures	7264


(Dollars in thousands, except share and per share data)	June 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
ASSETS
Cash and due from banks	$	109,705		$	79,112		$	139,974		$	130,466
Securities available for sale, at fair value		1,057,018			1,178,515
Securities held to maturity, at amortized cost (net of allowance for credit losses of $5 in each period) (fair value of $195,451 and $209,820, respectively)		204,933			205,581
Securities available for sale, at fair value (amortized cost of $1,103,851 and $1,127,057, respectively)								945,442			954,371
Securities held to maturity, at amortized cost (net of allowance for credit losses of $5 as of each period) (fair value of $167,812 and $174,188, respectively)								180,052			188,975
Loans held for sale		4,265			6,202			682			550
Loans (net of allowance for credit losses of $42,452 and $39,676, respectively)		3,721,566			3,639,760
Loans (net of allowance for credit losses of $47,528 and $45,413, respectively)								4,195,804			4,005,036
Company owned life insurance		135,611			123,898			140,488			139,482
Premises and equipment, net		40,461			40,111			41,609			41,986
Goodwill and other intangible assets, net		73,897			74,400			73,180			73,414
Other assets		220,742			173,200			249,761			262,992
Total assets	$	5,568,198		$	5,520,779		$	5,966,992		$	5,797,272
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	1,114,460		$	1,107,561		$	1,067,011		$	1,139,214
Interest-bearing demand		877,661			864,528			901,251			863,822
Savings and money market		1,845,186			1,933,047			1,701,663			1,643,516
Time deposits		983,209			921,954			1,471,382			1,282,872
Total deposits		4,820,516			4,827,090			5,141,307			4,929,424
Short-term borrowings		109,000			30,000			116,000			205,000
Long-term borrowings, net of issuance costs of $933 and $1,089, respectively		74,067			73,911
Long-term borrowings, net of issuance costs of $701 and $778, respectively								124,299			74,222
Other liabilities		138,814			84,636			162,563			183,021
Total liabilities		5,142,397			5,015,637			5,544,169			5,391,667
Shareholders’ equity:
Series A 3% preferred stock, $100 par value; 1,533 shares authorized; 1,435 shares issued		143			143			143			143
Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized; 171,486 shares issued		17,149			17,149			17,149			17,149
Total preferred equity		17,292			17,292			17,292			17,292
Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares issued		161			161			161			161
Additional paid-in capital		125,568			126,105			125,476			126,636
Retained earnings		405,019			384,007			428,453			421,340
Accumulated other comprehensive loss		(99,725	)		(13,207	)		(127,372	)		(137,487	)
Treasury stock, at cost – 765,465 and 354,103 shares, respectively		(22,514	)		(9,216	)
Treasury stock, at cost – 724,077 and 759,555 shares, respectively								(21,187	)		(22,337	)
Total shareholders’ equity		425,801			505,142			422,823			405,605
Total liabilities and shareholders’ equity	$	5,568,198		$	5,520,779		$	5,966,992		$	5,797,272


(In thousands, except per share amounts)	Three months ended June 30,						Six months ended June 30,
	2022			2021			2022			2021
Interest income:
Interest and fees on loans	$	38,872		$	36,393		$	75,170		$	73,452
Interest and dividends on investment securities		6,294			4,498			12,330			8,685
Other interest income		110			61			127			88
Total interest income		45,276			40,952			87,627			82,225
Interest expense:
Deposits		2,366			2,165			4,071			4,400
Short-term borrowings		252			0			280			119
Long-term borrowings		1,061			1,055			2,121			2,117
Total interest expense		3,679			3,220			6,472			6,636
Net interest income		41,597			37,732			81,155			75,589
Provision (benefit) for credit losses		563			(4,622	)		2,882			(6,603	)
Net interest income after provision (benefit) for credit losses		41,034			42,354			78,273			82,192
Noninterest income:
Service charges on deposits		1,437			1,287			2,806			2,579
Insurance income		1,234			1,147			3,331			2,543
Card interchange income		2,103			2,194			4,055			4,152
Investment advisory		2,906			2,886			5,947			5,658
Company owned life insurance		869			693			1,702			1,350
Investments in limited partnerships		242			238			1,037			1,093
Loan servicing		135			91			244			188
Income (loss) from derivative instruments, net		645			(592	)		1,164			1,283
Net gain on sale of loans held for sale		828			790			737			1,868
Net (loss) gain on investment securities		(15	)		(3	)		(15	)		71
Net gain on other assets		7			153			7			148
Net (loss) gain on tax credit investments		(92	)		276			(319	)		191
Other		1,061			1,030			1,986			2,025
Total noninterest income		11,360			10,190			22,682			23,149
Noninterest expense:
Salaries and employee benefits		16,966			14,519			33,582			28,984
Occupancy and equipment		4,015			3,286			7,771			6,668
Professional services		1,269			1,603			2,925			3,498
Computer and data processing		4,573			3,460			8,552			6,581
Supplies and postage		469			430			1,010			914
FDIC assessments		621			480			1,134			1,245
Advertising and promotions		406			436			786			760
Amortization of intangibles		249			266			503			537
Restructuring charges		1,269			0			1,269			0
Other		3,050			2,464			5,490			4,497
Total noninterest expense		32,887			26,944			63,022			53,684
Income before income taxes		19,507			25,600			37,933			51,657
Income tax expense		3,859			5,400			7,302			10,747
Net income	$	15,648		$	20,200		$	30,631		$	40,910
Preferred stock dividends		365			366			729			731
Net income available to common shareholders	$	15,283		$	19,834		$	29,902		$	40,179
Earnings per common share (Note 4):
Basic	$	1.00		$	1.25		$	1.94		$	2.53
Diluted	$	0.99		$	1.25		$	1.93		$	2.52
Cash dividends declared per common share	$	0.29		$	0.27		$	0.58		$	0.54


Large accelerated filer	☐	Accelerated filer	☑

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐


(Dollars in thousands)	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2022			2021			2022			2021			2023			2022
Net income	$	15,648		$	20,200		$	30,631		$	40,910		$	12,089		$	14,983
Other comprehensive (loss) income, net of tax:
Other comprehensive income (loss), net of tax:
Securities available for sale and transferred securities		(33,415	)		5,002			(89,188	)		(9,400	)		10,634			(55,773	)
Hedging derivative instruments		737			(501	)		2,575			1,063			(663	)		1,838
Pension and post-retirement obligations		47			137			95			275			144			48
Total other comprehensive (loss) income, net of tax		(32,631	)		4,638			(86,518	)		(8,062	)
Comprehensive (loss) income	$	(16,983	)	$	24,838		$	(55,887	)	$	32,848
Total other comprehensive income (loss), net of tax														10,115			(53,887	)
Comprehensive income (loss)													$	22,204		$	(38,904	)


(Dollars in thousands, except per share data)	Preferred Equity		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity			Preferred Equity		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity
Balance at December 31, 2021	$	17,292	$	161	$	126,105		$	384,007		$	(13,207	)	$	(9,216	)	$	505,142
Comprehensive income:
Net income		—		—		—			14,983			—			—			14,983
Other comprehensive loss, net of tax		—		—		—			—			(53,887	)		—			(53,887	)
Purchases of common stock for treasury		—		—		—			—			—			(15,026	)		(15,026	)
Share-based compensation plans:
Share-based compensation		—		—		443			—			—			—			443
Restricted stock units released		—		—		(667	)		—			—			667			—
Cash dividends declared:
Series A 3% Preferred-$0.75 per share		—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share		—		—		—			(364	)		—			—			(364	)
Common-$0.29 per share		—		—		—			(4,444	)		—			—			(4,444	)
Balance at March 31, 2022	$	17,292	$	161	$	125,881		$	394,181		$	(67,094	)	$	(23,575	)	$	446,846
Balance at December 31, 2022																				$	17,292	$	161	$	126,636		$	421,340		$	(137,487	)	$	(22,337	)	$	405,605
Comprehensive income:
Net income		—		—		—			15,648			—			—			15,648			—		—		—			12,089			—			—			12,089
Other comprehensive income, net of tax		—		—		—			—			(32,631	)		—			(32,631	)		—		—		—			—			10,115			—			10,115
Purchases of common stock for treasury		—		—		—			—			—			(301	)		(301	)		—		—		—			—			—			(561	)		(561	)
Share-based compensation plans:
Share-based compensation		—		—		947			—			—			—			947			—		—		551			—			—			—			551
Restricted stock units released		—		—		(917	)		—			—			917			—			—		—		(1,711	)		—			—			1,711			—
Restricted stock awards issued		—		—		(332	)		—			—			332			—
Stock awards						(11	)								113			102
Cash dividends declared:
Series A 3% Preferred-$0.75 per share		—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share		—		—		—			(363	)		—			—			(363	)
Common-$0.29 per share		—		—		—			(4,446	)		—			—			(4,446	)
Balance at June 30, 2022	$	17,292	$	161	$	125,568		$	405,019		$	(99,725	)	$	(22,514	)	$	425,801
Series A 3% Preferred–$0.75 per share																					—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred–$2.12 per share																					—		—		—			(364	)		—			—			(364	)
Common–$0.30 per share																					—		—		—			(4,611	)		—			—			(4,611	)
Balance at March 31, 2023																				$	17,292	$	161	$	125,476		$	428,453		$	(127,372	)	$	(21,187	)	$	422,823


		June 30,			December 31,				March 31,			December 31,
	Balance Sheet Location	2022			2021			Balance Sheet Location	2023			2022
Operating Lease Right of Use Assets:
Gross carrying amount	Other assets	$	27,239		$	27,063		Other assets	$	36,960		$	36,723
Accumulated amortization	Other assets		(5,989	)		(4,993	)	Other assets		(6,010	)		(5,603	)
Net book value		$	21,250		$	22,070			$	30,950		$	31,120

Operating Lease Liabilities:
Right of use lease obligations	Other liabilities	$	23,193		$	23,867		Other liabilities	$	33,148		$	33,229


Twelve months ended June 30,
2023	$	1,091
2024		1,769
2025		1,456
2026		1,382
2027		1,299
Thereafter		29,573
Total future minimum operating lease payments		36,570
Amounts representing interest		(13,377	)
Present value of net future minimum operating lease payments	$	23,193


Twelve months ended March 31,
2024	$	2,248
2025		2,899
2026		2,795
2027		2,641
2028		2,612
Thereafter		39,337
Total future minimum operating lease payments		52,532
Amounts representing interest		(19,384	)
Present value of net future minimum operating lease payments	$	33,148


	Banking		All Other (1)		Total
Balance, December 31, 2021	$	48,536	$	18,535	$	67,071
Acquisitions		0		0		0
Balance, June 30, 2022	$	48,536	$	18,535	$	67,071


2022 (remainder of year)	$	482
2023		910
2023 (remainder of year)			$	676
2024		838		838
2025		766		766
2026		694		694
2027		623		623
2028				551
Thereafter				1,961
Total				6,109


Effective Date	Expiration Date	Notional Amount		Pay Fixed Rate
4/11/2022	4/11/2027	$	50,000	0.787%
1/24/2023	1/24/2026	$	30,000	3.669%


					Asset derivatives					Liability derivatives									Asset derivatives					Liability derivatives
	Gross notional amount				Balance	Fair value				Balance	Fair value				Gross notional amount					Fair value					Fair value
	June 30, 2022		December 31, 2021		sheet line item	June 30, 2022		December 31, 2021		sheet line item	June 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022		Balance sheet line item	March 31, 2023		December 31, 2022		Balance sheet line item	March 31, 2023		December 31, 2022
Derivatives designated as hedging instruments
Cash flow hedges	$	50,000	$	50,000	Other assets	$	5,048	$	1,559	Other liabilities	$	—	$	0	$	80,000	$	50,000	Other assets	$	5,972	$	6,725	Other liabilities	$	—	$	—
Total derivatives	$	50,000	$	50,000		$	5,048	$	1,559		$	—	$	0	$	80,000	$	50,000		$	5,972	$	6,725		$	—	$	—
Derivatives not designated as hedging instruments
Interest rate swaps (1)		942,004		820,693	Other assets		33,033		14,702	Other liabilities		33,037		14,708		1,040,437		1,006,386	Other assets		36,784		47,736	Other liabilities		36,788		47,738
Credit contracts		116,104		106,671	Other assets		0		0	Other liabilities		0		1		84,529		104,497	Other assets		—		—	Other liabilities		—		—
Mortgage banking		14,614		18,199	Other assets		117		243	Other liabilities		90		4		11,027		7,884	Other assets		93		96	Other liabilities		21		13
Total derivatives	$	1,072,722	$	945,563		$	33,150	$	14,945		$	33,127	$	14,713	$	1,135,993	$	1,118,767		$	36,877	$	47,832		$	36,809	$	47,751


		Gain (loss) recognized in income					Gain (loss) recognized in income							Gain (loss) recognized in income
	Line item of gain (loss)	Three months ended June 30,					Six months ended June 30,						Line item of gain (loss)	Three months ended March 31,
Undesignated derivatives	recognized in income	2022		2021			2022			2021			recognized in income	2023			2022
Interest rate swaps	Income from derivative instruments, net		596		(333	)		1,358			1,439		Income from derivative instruments, net		501			762
Credit contracts	Income from derivative instruments, net		18		(12	)		18			36		Income from derivative instruments, net		7			—
Mortgage banking	Income from derivative instruments, net		31		(247	)		(212	)		(192	)	Income from derivative instruments, net		(12	)		(243	)
Total undesignated		$	645	$	(592	)	$	1,164		$	1,283			$	496		$	519


	Outstanding			Treasury			Issued
2022
Shares at December 31, 2021		15,745,453			354,103			16,099,556
Restricted stock units released		23,271			(23,271	)		—
Treasury stock purchases		(469,647	)		469,647			—
Shares at March 31, 2022		15,299,077			800,479			16,099,556
Restricted stock awards issued		11,300			(11,300	)		—
Stock awards		3,848			(3,848	)		—
Restricted stock units released		31,141			(31,141	)
Treasury stock purchases		(11,275	)		11,275			—
Shares at June 30, 2022		15,334,091			765,465			16,099,556
2021
Shares at December 31, 2020		16,041,926			57,630			16,099,556
Shares issued for Landmark Group acquisition		12,831			(12,831	)		—
Restricted stock units released		18,819			(18,819	)		—
Treasury stock purchases		(244,677	)		244,677			—
Shares at March 31, 2021		15,828,899			270,657			16,099,556
Restricted stock awards issued		9,350			(9,350	)		—
Stock awards		3,680			(3,680	)		—
Shares at June 30, 2021		15,841,929			257,627			16,099,556


	Pre-tax Amount			Tax Effect			Net-of-tax Amount			Pre-tax Amount			Tax Effect			Net-of-tax Amount
Three months ended June 30, 2022
March 31, 2023
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	(44,966	)	$	(11,520	)	$	(33,446	)
Change in unrealized gain during the period										$	14,278		$	3,658		$	10,620
Reclassification adjustment for net gains included in net income (1)		41			10			31			19			5			14
Total securities available for sale and transferred securities		(44,925	)		(11,510	)		(33,415	)		14,297			3,663			10,634
Hedging derivative instruments:
Change in unrealized gain/loss during the period		991			254			737
Pension and post-retirement obligations:
Change in unrealized loss during the period											(891	)		(228	)		(663	)
Pension obligations:
Amortization of prior service credit included in income		0			0			0			(122	)		(31	)		(91	)
Amortization of net actuarial loss included in income		64			17			47			316			81			235
Total pension and post-retirement obligations		64			17			47
Other comprehensive loss	$	(43,870	)	$	(11,239	)	$	(32,631	)
Six months ended June 30, 2022
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	(119,983	)	$	(30,741	)	$	(89,242	)
Reclassification adjustment for net gains included in net income (1)		72			18			54
Total securities available for sale and transferred securities		(119,911	)		(30,723	)		(89,188	)
Hedging derivative instruments:
Change in unrealized gain/loss during the period		3,462			887			2,575
Pension and post-retirement obligations:
Amortization of prior service credit included in income		0			0			0
Amortization of net actuarial loss included in income		128			33			95
Total pension and post-retirement obligations		128			33			95
Other comprehensive loss	$	(116,321	)	$	(29,803	)	$	(86,518	)
Total pension obligations											194			50			144
Other comprehensive income										$	13,600		$	3,485		$	10,115


	Hedging Derivative Instruments			Securities Available for Sale and Transferred Securities			Pension and Post- retirement Obligations			Accumulated Other Comprehensive Income (Loss)
March 31, 2023
Balance at beginning of period	$	4,735		$	(128,634	)	$	(13,588	)	$	(137,487	)
Other comprehensive (loss) income before reclassifications		(663	)		10,620			—			9,957
Amounts reclassified from accumulated other comprehensive income		—			14			144			158
Net current period other comprehensive (loss) income		(663	)		10,634			144			10,115
Balance at end of period	$	4,072		$	(118,000	)	$	(13,444	)	$	(127,372	)

March 31, 2022
Balance at beginning of period	$	1,160		$	(4,971	)	$	(9,396	)	$	(13,207	)
Other comprehensive income (loss) before reclassifications		1,838			(55,796	)		—			(53,958	)
Amounts reclassified from accumulated other comprehensive income		—			23			48			71
Net current period other comprehensive income (loss)		1,838			(55,773	)		48			(53,887	)
Balance at end of period	$	2,998		$	(60,744	)	$	(9,348	)	$	(67,094	)


Details About Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)						Affected Line Item in the Consolidated Statement of Income
	Three months ended March 31,
	2023			2022
Realized loss on sale of investment securities	$	—		$	—		Net (loss) gain on investment securities
Amortization of unrealized holding gain on investment securities transferred from available for sale to held to maturity		(19	)		(31	)	Interest income
		(19	)		(31	)	Total before tax
		5			8		Income tax expense
		(14	)		(23	)	Net of tax
Amortization of pension and post-retirement items:
Prior service credit (1)		122			—		Salaries and employee benefits
Net actuarial losses (1)		(316	)		(64	)	Salaries and employee benefits
		(194	)		(64	)	Total before tax
		50			16		Income tax benefit
		(144	)		(48	)	Net of tax
Total reclassified for the period	$	(158	)	$	(71	)


Details About Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive (Loss) Income						Affected Line Item in the Consolidated Statement of Income
	Three months ended June 30,

	2022			2021
Realized loss on sale of investment securities	$	(15	)	$	(3	)	Net (loss) gain on investment securities
Amortization of unrealized holding gain on investment securities transferred from available for sale to held to maturity		(26	)		(61	)	Interest income
		(41	)		(64	)	Total before tax
		10			16		Income tax expense
		(31	)		(48	)	Net of tax
Amortization of pension and post-retirement items:
Prior service credit (1)		0			0		Salaries and employee benefits
Net actuarial losses (1)		(64	)		(185	)	Salaries and employee benefits
		(64	)		(185	)	Total before tax
		17			48		Income tax benefit
		(47	)		(137	)	Net of tax
Total reclassified for the period	$	(78	)	$	(185	)

	Six months ended
	June 30,
	2022			2021
Realized (loss) gain on sale of investment securities	$	(15	)	$	71		Net (loss) gain on investment securities
Amortization of unrealized holding gains on investment securities transferred from available for sale to held to maturity		(57	)		(134	)	Interest income
		(72	)		(63	)	Total before tax
		18			16		Income tax expense
		(54	)		(47	)	Net of tax
Amortization of pension and post-retirement items:
Prior service credit (1)		0			1		Salaries and employee benefits
Net actuarial losses (1)		(128	)		(371	)	Salaries and employee benefits
		(128	)		(370	)	Total before tax
		33			95		Income tax benefit
		(95	)		(275	)	Net of tax
Total reclassified for the period	$	(149	)	$	(322	)


	Number of Underlying Shares		Weighted Average Per Share Grant Date Fair Value		Number of Underlying Shares		Weighted Average Grant Date Fair Value
RSUs		79,140	$	29.35		132,310	$	16.65
PSUs		29,324		29.35		53,060		16.66


	Number of Shares			Weighted Average Market Price at Grant Date
Outstanding at beginning of year		195,990		$	26.56
Granted		119,764			29.08
Vested		(60,362	)		26.38
Forfeited		(2,000	)		26.56
Outstanding at end of period		253,392		$	27.80


	June 30, 2022		December 31, 2021
Commitments to extend credit	$	1,120,253	$	936,298
Standby letters of credit		15,785		24,913


	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		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
June 30, 2022
March 31, 2023
Measured on a recurring basis:
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	—	$	22,190		$	—	$	22,190		$	—	$	21,658		$	—	$	21,658
Mortgage-backed securities		—		1,034,828			—		1,034,828			—		923,784			—		923,784
Other assets:
Hedging derivative instruments		—		5,048			—		5,048			—		5,972			—		5,972
Fair value adjusted through comprehensive income	$	—	$	1,062,066		$	—	$	1,062,066		$	—	$	951,414		$	—	$	951,414
Other assets:
Derivative instruments - interest rate swaps		—		33,033			—		33,033
Derivative instruments - credit contracts		—		0			—		0
Derivative instruments - mortgage banking		—		117			—		117
Derivative instruments – interest rate swaps												—		36,784			—		36,784
Derivative instruments – credit contracts												—		—			—		-
Derivative instruments – mortgage banking												—		93			—		93
Other liabilities:
Derivative instruments - interest rate swaps		—		(33,037	)		—		(33,037	)
Derivative instruments - credit contracts		—		0			—		0
Derivative instruments - mortgage banking		—		(90	)		—		(90	)
Derivative instruments – interest rate swaps												—		(36,788	)		—		(36,788	)
Derivative instruments – credit contracts												—		—			—		-
Derivative instruments – mortgage banking												—		(21	)		—		(21	)
Fair value adjusted through net income	$	—	$	23		$	—	$	23		$	—	$	68		$	—	$	68
Measured on a nonrecurring basis:
Loans:
Loans held for sale	$	—	$	4,265		$	—	$	4,265		$	—	$	682		$	—	$	682
Collateral dependent loans		—		—			21,008		21,008			—		—			20,059		20,059
Other assets:
Long-lived assets held for sale		—		0			1,813		1,813			—		—			1,509		1,509
Loan servicing rights		—		—			1,498		1,498			—		—			1,453		1,453
Other real estate owned												—		—			101		101
Total	$	—	$	4,265		$	24,319	$	28,584		$	—	$	682		$	23,122	$	23,804


Asset	Fair Value		Valuation Technique	Unobservable Input	Unobservable Input Value or Range	Fair Value		Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Collateral dependent loans	$	21,008	Appraisal of collateral (1)	Appraisal adjustments (2)	24.7% (3) / 0 - 45%	$	20,059	Appraisal of collateral (1)	Appraisal adjustments (2)	15.7%(3) / 0 - 40%
Loan servicing rights	$	1,498	Discounted cash flow	Discount rate	10.2% (3)	$	1,453	Discounted cash flow	Discount rate	10.4% (3)
				Constant prepayment rate	14.4% (3)				Constant prepayment rate	11.6% (3)
Long-lived assets held for sale	$	1,813	Appraisal of collateral (1)	Appraisal adjustments (2)	11-40%	$	1,509	Appraisal of collateral (1)	Appraisal adjustments (2)	10 - 108%
Other real estate owned						$	101	Appraisal of collateral (1)	Appraisal adjustments (2)	39.0%


	Level in	June 30, 2022				December 31, 2021				Level in	March 31, 2023				December 31, 2022
	Fair Value			Estimated				Estimated		Fair Value			Estimated				Estimated
	Measurement	Carrying		Fair		Carrying		Fair		Measurement	Carrying		Fair		Carrying		Fair
	Hierarchy	Amount		Value		Amount		Value		Hierarchy	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	109,705	$	109,705	$	79,112	$	79,112	Level 1	$	139,974	$	139,974	$	130,466	$	130,466
Securities available for sale	Level 2		1,057,018		1,057,018		1,178,515		1,178,515	Level 2		945,442		945,442		954,371		954,371
Securities held to maturity, net	Level 2		204,933		195,451		205,581		209,820	Level 2		180,052		167,812		188,975		174,188
Loans held for sale	Level 2		4,265		4,265		6,202		6,202	Level 2		682		682		550		550
Loans	Level 2		3,700,558		3,643,397		3,606,276		3,642,351	Level 2		4,175,745		4,069,579		3,983,582		3,867,285
Loans (1)	Level 3		21,008		21,008		33,484		33,484	Level 3		20,059		20,059		21,454		21,454
Long-lived assets held for sale	Level 3		1,813		1,813		2,560		2,560	Level 3		1,509		1,509		1,509		1,509
Accrued interest receivable	Level 1		15,872		15,872		15,482		15,482	Level 1		20,167		20,167		19,371		19,371
Derivative instruments – cash flow hedges	Level 2		5,048		5,048		1,559		1,559	Level 2		5,972		5,972		6,725		6,725
Derivative instruments – interest rate products	Level 2		33,033		33,033		14,702		14,702	Level 2		36,784		36,784		47,736		47,736
Derivative instruments – credit contracts	Level 2		0		0		0		0
Derivative instruments – mortgage banking	Level 2		117		117		243		243	Level 2		93		93		96		96
FHLB and FRB stock	Level 2		15,098		15,098		10,770		10,770	Level 2		17,630		17,630		19,385		19,385
Financial liabilities:
Non-maturity deposits	Level 1		3,837,307		3,837,307		3,905,136		3,905,136	Level 1		3,669,925		3,669,925		3,646,552		3,646,552
Time deposits	Level 2		983,209		975,166		921,954		920,699	Level 2		1,471,382		1,460,737		1,282,872		1,268,957
Short-term borrowings	Level 1		109,000		109,000		30,000		30,000	Level 1		116,000		116,000		205,000		205,000
Long-term borrowings	Level 2		74,067		72,519		73,911		77,792	Level 2		124,299		121,042		74,222		70,814
Accrued interest payable	Level 1		1,805		1,805		2,147		2,147	Level 1		12,693		12,693		5,983		5,983
Derivative instruments – cash flow hedges	Level 2		—		—		0		0
Derivative instruments – interest rate products	Level 2		33,037		33,037		14,708		14,708	Level 2		36,788		36,788		47,738		47,738
Derivative instruments – credit contracts	Level 2		0		0		1		1	Level 2		—		—		—		—
Derivative instruments – mortgage banking	Level 2		90		90		4		4	Level 2		21		21		13		13


	Banking		All Other		Consolidated Totals		Banking		All Other		Consolidated Totals
June 30, 2022
March 31, 2023
Goodwill	$	48,536	$	18,535	$	67,071	$	48,536	$	18,535	$	67,071
Other intangible assets, net		1		6,825		6,826		—		6,109		6,109
Total assets		5,529,426		38,772		5,568,198		5,927,077		39,915		5,966,992
December 31, 2021
December 31, 2022
Goodwill	$	48,536	$	18,535	$	67,071	$	48,536	$	18,535	$	67,071
Other intangible assets, net		3		7,326		7,329		—		6,343		6,343
Total assets		5,481,889		38,890		5,520,779		5,756,441		40,831		5,797,272


	Three months ended June 30,																Three months ended March 31,
	2022								2021								2023								2022
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate (3)			Average Balance			Interest		Average Rate (3)
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	60,429		$	109		0.72	%	$	249,312		$	61		0.10	%	$	63,311		$	616		3.95	%	$	44,559		$	18		0.16	%
Investment securities (1):
Taxable		1,307,507			5,746		1.76			925,649			3,863		1.67			1,215,608			5,601		1.84			1,309,122			5,487		1.68
Tax-exempt (2)		108,558			694		2.56			131,249			804		2.45			85,898			577		2.69			110,825			695		2.51
Total investment securities		1,416,065			6,440		1.82			1,056,898			4,667		1.77			1,301,506			6,178		1.90			1,419,947			6,182		1.74
Loans:
Commercial business		626,574			6,568		4.20			791,412			7,006		3.55			670,354			11,232		6.80			627,915			6,004		3.88
Commercial mortgage		1,429,910			15,020		4.21			1,302,136			12,914		3.98			1,744,963			26,400		6.14			1,431,933			13,538		3.83
Residential real estate loans		576,990			4,821		3.34			595,925			5,088		3.42			589,747			5,245		3.56			581,021			4,821		3.32
Residential real estate lines		76,730			671		3.51			82,926			711		3.44			76,627			1,303		6.89			77,610			679		3.55
Consumer indirect		1,045,720			11,422		4.38			878,884			10,282		4.69			1,024,362			12,525		4.96			969,441			10,875		4.55
Other consumer		14,183			372		10.49			15,356			392		10.23			15,156			393		10.51			14,531			381		10.65
Total loans ~~(3)~~(4)		3,770,107			38,874		4.13			3,666,639			36,393		3.98			4,121,209			57,098		5.61			3,702,451			36,298		3.97
Total interest-earning assets		5,246,601			45,423		3.47			4,972,849			41,121		3.31			5,486,026			63,892		4.71			5,166,957			42,498		3.32
Less: Allowance for credit losses		(42,292	)							(52,048	)							(46,668	)							(40,795	)
Other noninterest-earning assets		393,908								419,944								404,428								434,154
Total assets	$	5,598,217							$	5,340,745							$	5,843,786							$	5,560,316
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	938,995			292		0.12	%	$	842,832			301		0.14	%	$	880,093			1,399		0.64	%	$	923,425		$	283		0.12	%
Savings and money market		1,882,998			1,098		0.23			1,856,659			862		0.19			1,665,075			6,556		1.60			1,948,050			787		0.16
Time deposits		954,862			976		0.41			935,885			1,002		0.43			1,382,131			11,339		3.33			927,886			636		0.28
Total interest-bearing deposits		3,776,855			2,366		0.25			3,635,376			2,165		0.24			3,927,299			19,294		1.99			3,799,361			1,706		0.18
Short-term borrowings		94,242			252		1.07			—			—		—			145,533			1,202		3.35			24,672			28		0.45
Long-term borrowings		74,019			1,061		5.73			73,709			1,055		5.73			114,251			1,460		5.11			73,942			1,060		5.74
Total borrowings		168,261			1,313		3.13			73,709			1,055		5.73			259,784			2,662		4.16			98,614			1,088		4.47
Total interest-bearing liabilities		3,945,116			3,679		0.37			3,709,085			3,220		0.35			4,187,083			21,956		2.12			3,897,975			2,794		0.29
Noninterest-bearing demand deposits		1,098,084								1,091,490								1,064,754								1,083,506
Other noninterest-bearing liabilities		119,093								63,984								174,014								86,983
Shareholders’ equity		435,924								476,186								417,935								491,852
Total liabilities and shareholders’ equity	$	5,598,217							$	5,340,745							$	5,843,786							$	5,560,316
Net interest income (tax-equivalent)				$	41,744							$	37,901							$	41,936							$	39,704
Interest rate spread							3.10	%							2.96	%							2.59	%							3.03	%
Net earning assets	$	1,301,485							$	1,263,764							$	1,298,943							$	1,268,982
Net interest margin (tax-equivalent)							3.19	%							3.06	%							3.09	%							3.11	%
Ratio of average interest-earning assets to average interest-bearing liabilities							132.99	%							134.07	%							131.02	%							132.55	%


	Three months ended June 30, 2022 vs. 2021									Six months ended June 30, 2022 vs. 2021									Three months ended March 31, 2023 vs. 2022
Increase (decrease) in:	Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total
Interest income:
Federal funds sold and interest-earning deposits	$	(77	)	$	125		$	48		$	(102	)	$	141		$	39		$	11		$	587		$	598
Investment securities:
Taxable		1,668			215			1,883			3,941			(67	)		3,874			(408	)		522			114
Tax-exempt		(144	)		34			(110	)		(341	)		51			(290	)		(164	)		46			(118	)
Total investment securities		1,524			249			1,773			3,600			(16	)		3,584			(572	)		568			(4	)
Loans:
Commercial business		(1,602	)		1,164			(438	)		(3,350	)		503			(2,847	)		431			4,797			5,228
Commercial mortgage		1,314			792			2,106			2,734			664			3,398			3,433			9,429			12,862
Residential real estate loans		(160	)		(107	)		(267	)		(346	)		(360	)		(706	)		73			351			424
Residential real estate lines		(54	)		14			(40	)		(141	)		35			(106	)		(9	)		633			624
Consumer indirect		1,856			(716	)		1,140			3,302			(1,275	)		2,027			638			1,012			1,650
Other consumer		(31	)		10			(21	)		(73	)		26			(47	)		16			(4	)		12
Total loans		1,323			1,157			2,480			2,126			(407	)		1,719			4,582			16,218			20,800
Total interest income		2,770			1,531			4,301			5,624			(282	)		5,342			4,021			17,373			21,394
Interest expense:
Deposits:
Interest-bearing demand		32			(41	)		(9	)		74			(56	)		18			(14	)		1,130			1,116
Savings and money market		12			224			236			122			10			132			(130	)		5,899			5,769
Time deposits		20			(46	)		(26	)		92			(571	)		(479	)		457			10,246			10,703
Total interest-bearing deposits		64			137			201			288			(617	)		(329	)		313			17,275			17,588
Short-term borrowings		252			—			252			389			(228	)		161			930			244			1,174
Long-term borrowings		4			1			5			9			(5	)		4			525			(125	)		400
Total borrowings		256			1			257			398			(233	)		165			1,455			119			1,574
Total interest expense		320			138			458			686			(850	)		(164	)		1,768			17,394			19,162
Net interest income	$	2,450		$	1,393		$	3,843		$	4,938		$	568		$	5,506		$	2,253		$	(21	)	$	2,232


	Investment Securities Portfolio Composition										Investment Securities Portfolio Composition
	June 30, 2022					December 31, 2021					March 31, 2023					December 31, 2022
	Amortized			Fair		Amortized			Fair		Amortized			Fair		Amortized			Fair
	Cost			Value		Cost			Value		Cost			Value		Cost			Value
Securities available for sale:
U.S. Government agency and government-sponsored enterprise securities	$	24,535		$	22,190	$	15,793		$	15,891	$	24,535		$	21,658	$	24,535		$	21,115
Mortgage-backed securities:
Agency mortgage-backed securities		1,158,770			1,034,828		1,169,042			1,162,214		1,079,316			923,442		1,102,522			932,919
Non-Agency mortgage-backed securities		—			—		—			410		—			342		—			337
Total available for sale securities		1,183,305			1,057,018		1,184,835			1,178,515		1,103,851			945,442		1,127,057			954,371
Securities held to maturity:
U.S. Government agency and government-sponsored enterprise securities		16,288			16,183		—			—		16,400			15,856		16,363			15,515
State and political subdivisions		105,978			100,466		111,399			113,511		93,678			87,698		97,583			90,435
Mortgage-backed securities		82,672			78,802		94,187			96,309		69,979			64,258		75,034			68,238
Total held to maturity securities		204,938			195,451		205,586			209,820		180,057			167,812		188,980			174,188
Allowance for credit losses – securities		(5	)				(5	)				(5	)				(5	)
Total held to maturity securities, net		204,933					205,581					180,052					188,975
Total investment securities	$	1,388,238		$	1,252,469	$	1,390,416		$	1,388,335	$	1,283,903		$	1,113,254	$	1,316,032		$	1,128,559


	Loan Portfolio Composition										Loan Portfolio Composition
	June 30, 2022					December 31, 2021					March 31, 2023					December 31, 2022
	Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total
Commercial business	$	611,102		16.2	%	$	638,293		17.3	%	$	695,110		16.4	%	$	664,249		16.4	%
Commercial mortgage		1,448,152		38.5			1,412,788		38.4			1,841,481		43.4			1,679,840		41.5
Total commercial		2,059,254		54.7			2,051,081		55.7			2,536,591		59.8			2,344,089		57.9
Residential real estate loans		574,784		15.3			577,299		15.7			591,846		13.9			589,960		14.5
Residential real estate lines		76,108		2.0			78,531		2.2			76,086		1.8			77,670		1.9
Consumer indirect		1,039,251		27.6			958,048		26.0			1,022,202		24.1			1,023,620		25.3
Other consumer		14,621		0.4			14,477		0.4			16,607		0.4			15,110		0.4
Total consumer		1,704,764		45.3			1,628,355		44.3			1,706,741		40.2			1,706,360		42.1
Total loans		3,764,018		100.0	%		3,679,436		100.0	%		4,243,332		100.0	%		4,050,449		100.0	%
Less: Allowance for credit losses – loans		42,452					39,676					47,528					45,413
Total loans, net	$	3,721,566				$	3,639,760				$	4,195,804				$	4,005,036


	Credit Loss - Loans Analysis												Credit Loss – Loans Analysis
	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2022			2021			2022			2021			2023			2022
Allowance for credit losses - loans, beginning of period	$	40,966		$	49,828		$	39,676		$	52,420
Allowance for credit losses – loans, beginning of period													$	45,413		$	39,676
Net charge-offs (recoveries):
Commercial business		90			(287	)		53			(439	)		(124	)		(37	)
Commercial mortgage		(2,018	)		(7	)		(2,019	)		196			(2	)		(1	)
Residential real estate loans		46			(3	)		41			3			58			(5	)
Residential real estate lines		(12	)		—			(17	)		70			16			(5	)
Consumer indirect		647			(426	)		1,197			317			1,838			550
Other consumer		207			329			492			346			303			285
Total net (recoveries) charge-offs		(1,040	)		(394	)		(253	)		493
Provision (benefit) for credit losses – loans		446			(3,857	)		2,523			(5,562	)
Total net charge-offs														2,089			787
Provision for credit losses – loans														4,204			2,077
Allowance for credit losses – loans, end of period	$	42,452		$	46,365		$	42,452		$	46,365		$	47,528		$	40,966

Net loan charge-offs (recoveries) to average loans:
Commercial business		0.06	%		(0.15	)%		0.02	%		(0.11	)%		-0.08	%		-0.02	%
Commercial mortgage		(0.57	)%		—			(0.28	)%		0.03	%		0.00	%		0.00	%
Residential real estate loans		0.03	%		—			0.01	%		—			0.04	%		0.00	%
Residential real estate lines		(0.06	)%		—			(0.04	)%		0.17	%		0.09	%		-0.03	%
Consumer indirect		0.25	%		(0.19	)%		0.24	%		0.07	%		0.73	%		0.23	%
Other consumer		5.86	%		8.58	%		6.91	%		4.43	%		8.10	%		7.95	%
Total loans		(0.11	)%		(0.04	)%		(0.01	)%		0.03	%		0.21	%		0.09	%

Allowance for credit losses – loans to total loans		1.13	%		1.28	%		1.13	%		1.28	%		1.12	%		1.10	%
Allowance for credit losses – loans to nonaccrual loans		648	%		530	%		648	%		530	%		540	%		514	%
Allowance for credit losses – loans to non-performing loans		648	%		699	%		648	%		699	%		540	%		426	%


	Allowance for Credit Losses - Loans by Loan Category										Allowance for Credit Losses – Loans by Loan Category
	June 30, 2022					December 31, 2021					March 31, 2023					December 31, 2022
			Percentage					Percentage					Percentage					Percentage
	Credit		of loans by			Credit		of loans by			Credit		of loans by			Credit		of loans by
	Loss		category to			Loss		category to			Loss		category to			Loss		category to
	Allowance		total loans			Allowance		total loans			Allowance		total loans			Allowance		total loans
Commercial business	$	10,140		23.9	%	$	11,099		17.3	%	$	12,911		16.4	%	$	12,585		16.4	%
Commercial mortgage		12,064		28.4			14,777		38.4			15,195		43.4			14,412		41.5
Residential real estate loans		2,140		5.1			1,604		15.7			4,213		13.9			3,301		14.5
Residential real estate lines		509		1.2			379		2.2			651		1.8			608		1.9
Consumer indirect		17,332		40.8			11,611		26.0			14,117		24.1			14,238		25.3
Other consumer		267		0.6			206		0.4			441		0.4			269		0.4
Total	$	42,452		100.0	%	$	39,676		100.0	%	$	47,528		100.0	%	$	45,413		100.0	%


	Non-Performing Assets						Non-Performing Assets
	June 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Nonaccrual loans:
Commercial business	$	422		$	602		$	334		$	340
Commercial mortgage		836			6,414			2,550			2,564
Residential real estate loans		2,738			2,373			3,267			4,071
Residential real estate lines		160			200			159			142
Consumer indirect		2,389			1,780			2,487			3,079
Other consumer		3			—			—			1
Total nonaccrual loans		6,548			11,369			8,797			10,197
Accruing loans 90 days or more delinquent		—			797			4			1
Total non-performing loans		6,548			12,166			8,801			10,198
Foreclosed assets		—			—			101			19
Total non-performing assets	$	6,548		$	12,166		$	8,902		$	10,217

Nonaccrual loans to total loans		0.17	%		0.31	%		0.21	%		0.25	%
Non-performing loans to total loans		0.17	%		0.33	%		0.21	%		0.25	%
Non-performing assets to total assets		0.12	%		0.22	%		0.15	%		0.18	%