What changed in this filing

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Item 1A. Risk Factors

2024-03-13 compared with 2023-03-22 · 58 added, 72 removed, 280 unchanged (32% of the section changed)

19 unchanged sentences

Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny where total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months.

Commercial real estate loans represent 382.9% of our risk-based capital at December 31, 2022 and the outstanding balance of our commercial real estate loan portfolio has increased by greater than 50% during the 36 months preceding December 31, 2022.

Commercial real estate loans represent 403.6% of Bank risk-based capital at December 31, 2023 and the outstanding balance of our commercial real estate loan portfolio has increased by greater than 50% during the 36 months preceding December 31, 2023.

In December 2015, the Agencies released a new statement on prudent risk management for commercial real estate lending (the “2015 Statement”).

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If the Bank’s regulators were to impose restrictions on the amount of such loans it can hold in its portfolio or require it to implement additional compliance measures, for reasons noted above or otherwise, the Corporation’s earnings would be adversely affected as would earnings per share.

Commercial real estate and business loans increase the Corporation’s exposure to credit risks.

At December 31, 2022, the Corporation’s portfolio of commercial real estate and business loans totaled $1.249 billion or 68.3% of total loans.

The Corporation plans to continue to emphasize the origination of these types of loans, which generally expose the Corporation to a greater risk of nonpayment and loss than residential real estate or consumer loans because repayment of commercial real estate and business loans often depends on the successful operation and income stream of the borrower’s business.

Commercial real estate and commercial and industrial loans increase the Corporation’s exposure to credit risks.

At December 31, 2023, the Corporation’s portfolio of commercial real estate and commercial and industrial loans totaled $1.387 billion or 70.3% of total loans.

The Corporation plans to continue to emphasize the origination of these types of loans, which generally expose the Corporation to a greater risk of nonpayment and loss than residential real estate or consumer loans because repayment of commercial real estate and commercial and industrial loans often depends on the successful operation and income stream of the borrower’s business.

Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate and consumer loans.

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Consequently, an adverse development with respect to one loan or one credit relationship can expose the Corporation to a significantly greater risk of loss compared to an adverse development with respect to residential real estate and consumer loans.

In some instances, the Corporation has originated unsecured commercial loans with certain high net worth individuals who have personally guaranteed such loans.

In some instances, the Corporation has originated unsecured commercial loans to certain high net worth individuals who are personally liable.

This type of commercial loan has an increased risk of loss if the Corporation is unable to collect repayment through legal action due to personal bankruptcy or other financial limitations of the borrower.

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If general economic conditions negatively impact these businesses, the Corporation’s results of operations and financial condition may be adversely affected.

Changes in occupancy trends resulting from shifts in macroeconomic conditions could adversely impact our commercial borrowers, particularly in relation to borrowers with substantial office or retail-specific exposures.

Loan participations may have a higher risk of loss than loans the Bank originates because the Bank is not the lead lender and has limited control over credit monitoring.

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Loan participations may have a higher risk of loss than loans the Bank originates because we rely on the lead lender to monitor the performance of the loan.

Moreover, our decisions regarding the classification of a loan participation and loan loss provisions associated with a loan participation are made in part based upon information provided by the lead lender.

Moreover, our decisions regarding the classification of a loan participation and credit loss provisions associated with a loan participation are made in part based upon information provided by the lead lender.

A lead lender also may not monitor a participation loan in the same manner as we would for loans that the Bank originates.

At December 31, 2023, loan participation balances where the Bank is not the lead lender totaled $177.6 million, or 9.00% of our loan portfolio.

At December 31, 2022, commercial and industrial loan participations outside our market area totaled $12.0 million, or 4.77% of the commercial and industrial loan portfolio and commercial real estate loan participations outside our market area totaled $0.2 million, or 0.02% of the commercial real estate loan portfolio.

At December 31, 2023, commercial and industrial loan participations outside our market area totaled $11.6 million, or 4.38% of the commercial and industrial loan portfolio.

There were no commercial real estate loan participations outside our market area.

If the Bank’s underwriting of these participation loans is not sufficient, our non-performing loans may increase and our earnings may decrease.

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The Judicial foreclosure process is protracted, which delays our ability to resolve non-performing loans through the sale of the underlying collateral.

The longer timelines were the result of the economic crisis, the COVID-19 pandemic, additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure.

The longer timelines have been the result of additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure.

These reasons, historical issues at the largest mortgage loan servicers, and the legal and regulatory responses have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders.

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Additional risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through non-bank channels, namely automobile dealers.

The allowance for loan losses may prove to be insufficient to absorb losses in the loan portfolio.

The allowance for credit losses may prove to be insufficient to absorb losses in the loan portfolio.

The Corporation’s customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance.

Hence, the Corporation may experience significant loan losses, which could have a material adverse effect on the Corporation's operating results.

Hence, the Corporation may experience significant credit losses, which could have a material adverse effect on the Corporation's operating results.

Management makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans.

In determining the amount of the allowance for loan losses, management relies on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors.

If these assumptions prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the Corporation’s loan portfolio, resulting in additions to the allowance.

Material additions to the allowance would materially decrease net income.

The Corporation’s emphasis on the origination of commercial loans is one of the more significant factors in evaluating its allowance for loan losses.

As the Corporation continues to increase the amount of these loans, additional or increased provisions for loan losses may be necessary, which could result in a decrease in earnings.

The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Bank beginning on January 1, 2023.

This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses.

This will change the current method of establishing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and increase the data we would need to collect and review to determine the appropriate level of our allowance for loan losses.

Bank regulators periodically review the Corporation’s allowance for loan losses and may require the Corporation to increase its provision for loan losses or loan charge-offs.

Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on the Corporation's results of operations and/or financial condition.

In addition, any future credit deterioration, could require us to increase our allowance for loan losses in the future.

In determining the amount of the allowance for credit losses, management relies on its CECL methodology, loan quality reviews, past experience, and an evaluation of forward-looking economic forecasts, among other factors.

If these assumptions prove to be incorrect, the allowance for credit losses may not be sufficient to cover future losses in the Corporation’s loan portfolio, resulting in additions to the allowance.

Material additions to the allowance would materially decrease earnings.

The Corporation’s emphasis on the origination of commercial loans is one of the more significant factors in determining its allowance for credit losses.

As the Corporation continues to increase the amount of these loans, additional or increased provisions for credit losses may be necessary, which may result in a decrease in earnings.

Effective January 1, 2023, the Corporation adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which requires the Corporation to estimate the lifetime expected credit losses in the loan portfolio as of the measurement date.

This methodology is dependent on the relationship between economic variables and historic default, and there is no guarantee that these factors will be similarly correlated in the future.

A departure or decoupling in correlation may increase the risk that the allowance for credit losses is inadequate to absorb anticipated lifetime credit losses, and may require changes in the Corporation's methodology, which may result in increased provision requirements, materially adversely impacting the results of operations and financial condition.

Bank regulators periodically review the Corporation’s allowance for credit losses and may require the Corporation to increase its provision for credit losses or loan charge-offs.

Any increase in the allowance for credit losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on the Corporation's results of operations and/or financial condition.

In addition, any future credit deterioration, may require us to increase our allowance for credit losses in the future.

The Corporation is subject to risks and losses resulting from fraudulent activities that could adversely impact its financial performance and results of operations.

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On April 23, 2020 the Corporation received payment of $461,309 from the lead bank related to its obligation under the participation agreements.

The Bank continues to pursue recovery of the remaining $3.7 million and accumulated expenses as a result of purchasing the participation interest.

The Bank continues to pursue recovery of the remaining $3.7 million, interest, and accumulated expenses as a result of purchasing the participation interest.

While the Corporation believes this incident was an isolated occurrence, there can be no assurance that such losses will not occur again or that such acts will be detected in a timely manner.

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If our internal controls fail to prevent or detect any such occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

Use of appraisals when underwriting loans secured by real property may not accurately represent the net value of collateral the Bank can realize at a future date.

When evaluating decisions to extend credit that is to be secured by real property, it is generally the requirement of the Bank to require an appraisal on the property being collateralized.

Appraisals are only an estimate of the value of the property as of the time of the appraisal, and real estate values may fluctuate over short periods of time, whether on a market basis, or in relation to a specific property.

Therefore, appraised estimates may not accurately represent the net value of collateral in periods after loan closing.

If an appraisal does not reflect the amount that may be realized on the sale of real property, we may not be able to realize an amount which is equal to the indebtedness secured by the property.

Additionally, appraisals are relied upon to establish the fair value of other real estate owned, and to determine specific allocations to the allowance for credit losses on loans that are individually analyzed using the collateral method.

Inaccuracies in these valuations due to appraisals may result in representation in the consolidated financial statements that is not reflective of current conditions existing as of or subsequent to the measurement date, and could materially adversely impact our results of operation and financial condition.

Risks Related to Liquidity

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Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to customers on alternative investments, and general economic conditions.

At December 31, 2023, the Bank had $1.8 billion of deposit liabilities, representing 74.8% of total deposits, that had no maturity and, therefore, may be withdrawn by the depositor at any time without penalty.

The withdrawal of more deposits than the Corporation anticipates could have an adverse impact on profitability as the Corporation may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations.

Such sources include proceeds from Federal Home Loan Bank advances, sales of investment securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits which could cause the Corporation’s overall cost of funding to increase.

Such sources include proceeds from Federal Home Loan Bank and Federal Reserve advances, sales of investment securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits which could cause the Corporation’s overall cost of funding to increase.

While the Corporation believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if the Corporation continues to grow and experience increasing loan demand.

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and (v) loan prepayments.

During 2022, in response to accelerated inflation, the FRB implemented monetary tightening policies, resulting in significantly increased interest rates.

The FRB has signaled that further tightening is anticipated.

During 2022 and 2023, in response to accelerated inflation, the FRB implemented monetary tightening policies, resulting in significantly increased interest rates.

If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, net interest income, and therefore earnings, could be adversely affected.

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Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

In addition, in a falling rate environment or the recent pandemic-related environment where the FRB held the federal reference rate near 0.00%, loans may be prepaid sooner than the Corporation expects, which could result in a delay between when the Corporation receives the prepayment and when it is able to redeploy the funds into new interest-earning assets and in a decrease in the amount of interest income the Corporation is able to earn on those assets.

In addition, in a falling rate environment or the recent pandemic-related environment where the FRB held the targeted federal funds rate near 0.00%, loans and certain investments may be prepaid sooner than the Corporation expects, which could result in a delay between when the Corporation receives the prepayment and when it is able to redeploy the funds into new interest-earning assets and in a decrease in the amount of interest income the Corporation is able to earn on those assets.

If the Corporation is unable to manage these risks effectively, its financial condition and results of operations could be materially adversely affected.

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As part of the Corporation's strategy for continued growth, it may open additional branches.

In 2021, the Corporation opened a new full-service branch in Clarence, New York.

In 2021, the Corporation opened a full-service branch in Clarence, New York, and plans to open a second full-service branch in Williamsville, New York in 2024.

New branches do not initially contribute to operating profits due to the impact of overhead expenses and the start-up phase of generating loans and deposits.

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Currently, the Corporation and its subsidiaries are subject to extensive regulation, supervision, and examination by regulatory authorities.

For example, the FRB regulates the Corporation, the FRB, the FDIC and the NYSDFS regulate the Bank, and CRM is regulated by the Nevada Division of Insurance.

For example, the FRB regulates the Corporation, and the FRB, the FDIC and the NYSDFS regulate the Bank.

Such regulators govern the activities in which the Corporation and its subsidiaries may engage.

These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank, and the adequacy of a bank’s allowance for loan losses.

Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on the Corporation and its operations.

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government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits.

In 2022, the FRB increased the federal funds rate by 425 basis points, which increased market rates dramatically.

Throughout 2022 and 2023, the FRB increased the upper bound of the federal funds rate by 525 basis points, which increased market rates dramatically.

These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits.

Their use also affects interest rates charged on loans or paid on deposits.

Their use also affects interest rates charged on loans or paid on deposits, as well as the value of the Corporation's investment securities.

The monetary policies and regulations of the FRB have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future.

The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

Changes to LIBOR may adversely impact the interest rate paid on certain financial instruments .

The Corporation holds assets, liabilities, and derivatives that are indexed to the various tenors of LIBOR including but not limited to the one-month LIBOR, three-month LIBOR, one-year LIBOR, and the ten-year constant maturing swap rate.

In 2017, the U.K.

Financial Conduct Authority, which regulates London Interbank Offered Rates (“LIBOR”), announced that the publication of LIBOR is not guaranteed beyond 2021.

In December 2020, the administrator of LIBOR announced its intention to (i) cease the publication of the one-week and two-month U.S.

dollar LIBOR after December 31, 2021, and (ii) cease the publication of all other tenors of U.S.

dollar LIBOR (one, three, six and 12 month LIBOR) after June 30, 2023.

There are multiple alternative reference rates available as a viable replacement for LIBOR.

The Secured Overnight Financing Rate (or “SOFR”) is considered the most likely alternative reference rate suitable for replacing LIBOR.

SOFR has been published by the Federal Reserve Bank of New York (FRBNY) since March 2018, and it is intended to be a broad measure of the cost of borrowing cash overnight collateralized by U.S.

Treasury securities.

The FRBNY currently publishes SOFR daily on its website.

Uncertainty remains as to the adoption or market acceptance or continued availability of SOFR or other alternative reference rates.

The Company has adhered to the International Swaps and Derivatives Association 2021 Fallbacks Protocol for its interest rate swap agreements.

At this time, it is not possible to predict what rate or rates may become accepted alternatives to LIBOR or the effect of any such changes on the interest rate received by the bank on its interest rate swap instruments.

We are subject to the Community Reinvestment Act and fair lending laws, and alleged failure to comply with fair lending laws has led to material penalties.

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Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk.

Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.

In addition in March 2023, the failures of Silicon Valley Bank, Signature Bank and First Republic Bank resulted in decreased confidence in banks among depositors and other investors.

Accordingly, if we are unable to fully anticipate or manage these risks, we could incur losses, impacting our results of operations and financial condition.

We face significant operational risks because the financial services business involves a high volume of transactions.

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In the event of a breakdown in our internal control systems, improper operation of systems, or improper employee actions, we could suffer financial loss, face regulatory action, and/or suffer damage to our reputation.

Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, may have a material effect on the Corporation's operations.

Recent events relating to the failures of certain banking entities in March 2023, i.e.

Silicon Valley Bank and Signature Bank, has caused general uncertainty and concern regarding the liquidity adequacy of the banking sector as a whole.

Uncertainty may be compounded by the reach and depth of media attention, including social media, and its ability to disseminate concerns or rumors about any events of these kinds or other similar risks, and have in the past and may in the future lead to market-wide liquidity problems.

These failures underscore the importance of maintaining diversified sources of funding as key measures to ensure the safety and soundness of a financial institution.

As a result, market conditions and other external factors may impact the competitive landscape for deposits in the banking industry in an unpredictable manner.

The rising interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs.

The Corporation continually encounters technological change and the failure to understand and adapt to these changes could adversely affect its business.

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Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require reimbursement of customer losses.

Operating systems and infrastructure, managed or supplied by third parties on whom we rely, could be interrupted, compromised, or otherwise breached.

The potential for operational risk exposure exists throughout the Corporation's business and, as a result of the Corporation's interactions with and reliance on third parties, is not limited to the Corporation’s own internal operational functions.

The Corporation relies on numerous third-party vendors and service providers to conduct aspects of its business operations and faces operational risks relating to them.

The Corporation's vendors, service providers, and other third parties may expose the Corporation to risk as a result of human error, misconduct, malfeasance, or a failure or breach of systems, networks, and infrastructure.

As a result, the Corporation’s ability to conduct business may be adversely affected by any significant disruptions to third parties with whom the Corporation interacts or relies upon.

Risks Related to Accounting Matters

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Because of the uncertainty surrounding its judgments and the estimates pertaining to these matters, actual outcomes may be materially different from amounts previously estimated.

For example, because of the inherent uncertainty of estimates, management cannot provide any assurance that the Bank will not significantly increase its allowance for loan losses if actual losses are more than the amount reserved.

Any increase in its allowance for loan losses or loan charge-offs could have a material adverse effect on the Corporation's financial condition and results of operations.

For example, because of the inherent uncertainty of estimates, management cannot provide any assurance that the Bank will not significantly increase its allowance for credit losses if actual losses are more than the amount reserved.

Any increase in its allowance for credit losses or loan charge-offs could have a material adverse effect on the Corporation's financial condition and results of operations.

In addition, the Corporation cannot guarantee that it will not be required to adjust accounting policies or restate prior financial statements.

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In some cases, the Corporation could be required to apply a new or revised standard retroactively, resulting in its restating prior period financial statements or otherwise adversely affecting its financial condition or results of operations.

Specifically, in June of 2016, FASB issued a new accounting standard, ASU 2016-13, Financial Instruments - Credit Losses (Topic 326 ) that will substantially change the accounting for credit losses under GAAP.

Under GAAP's current standards, credit losses are not reflected in the Corporation's financial statements until it is probable that the credit losses has been incurred.

This methodology has the effect of delaying the recognition of credit losses on loans.

Under the new credit loss standard, the allowance for credit losses will be an estimate of the "expected" lifetime credit losses on loans existing in the portfolio as of the reporting period.

The new credit loss standard may have a negative impact on the reporting of results of operations and financial condition of the Corporation.

The amendments in this ASU became effective for the Corporation for the fiscal year beginning on January 1, 2023.

The Corporation holds certain intangible assets that could be classified as impaired in the future.

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General Business Risk Factors

The COVID-19 pandemic could adversely affect the Corporation’s financial condition and results of operations.

The COVID-19 pandemic had a significant economic impact on the communities in which the Corporation operates, its borrowers and depositors, and the national economy generally.

Although the domestic and global economies have significantly recovered from the COVID-19 pandemic as health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic remain and may persist for some time.

Specifically, despite growth in economic activity and the demand for goods and services as COVID-19 restrictions were lifted, labor shortages and supply chain disruptions have contributed to an increase in inflation, and the risk of a recession.

The ongoing and dynamic nature of COVID-19 makes it difficult to predict future developments.

The Corporation expects the impact of COVID-19 to continue to be present, and last for an undetermined amount of time.

The expected impact of COVID-19 on the Corporation’s business, results of operations, financial condition and capital levels, cannot be determined and is uncertain.

Severe weather and other natural disasters can affect the Corporation’s business.

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While the Corporation maintains adequate insurance against property and casualty losses arising from most natural disasters, and it has successfully overcome the challenges caused by past flooding in Central New York, there can be no assurance that it will be as successful if and when disasters occur.

Additionally, global markets may be adversely affected by natural disasters, the emergence of widespread health emergencies or pandemics, cyber-attacks or campaigns, military conflict such as the current conflict between Russia and Ukraine, terrorism, or other geopolitical events.

Additionally, global markets may be adversely affected by natural disasters, the emergence of widespread health emergencies or pandemics, such as COVID-19, cyber-attacks or campaigns, military conflict such as the current conflict between Russia and Ukraine, terrorism, or other geopolitical events.

Global market disruptions may affect our business liquidity.

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As of December 31, 2023, the year over year consumer price index (“CPI”) increase was 3.4%, primarily driven by increases in food and energy prices.

As a result, the FRB raised interest rates by 425 basis points in 2022 to combat rising inflation.

The FOMC of the FRB's preferred measure of inflation, the year over year personal consumption expenditures index ("PCE"), excluding food end energy, increased 2.9%.

As a result, the FRB raised benchmark interest rates by 100 basis points in 2023 to combat continued inflation.

High inflation, if sustained, could have an adverse effect on our business.

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High inflation and increasing interest rates could also cause increased volatility in the business environment, which could adversely affect loan demand and borrowers’ ability to repay loans.

The geographic concentration of the Corporation's market in upstate New York makes it more sensitive to adverse changes in regional conditions than larger or more geographically diversified competitors.

The Corporation's physical branch network, and by extension its lending footprint, is significantly concentrated in the upstate region of New York State.

A deterioration in local economic conditions or in the residential or commercial real estate markets within our footprint could have an adverse effect on the quality of our loan portfolios, demand for our products and services, the ability of borrowers to timely repay loans, and the value of the collateral securing loans.

If demographic, employment, or other growth in our market is negative for an extended period, subsequent income levels, deposits, and real estate development could be adversely impacted.

Some of our larger competitors that are more geographically diverse may be better able to manage and mitigate risks posed by adverse conditions impacting only local or regional markets.

Risks Relating to Ownership of Our Common Stock

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These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors other than candidates nominated by the Board of Directors.

UNRESOLVED STAFF COMMENTS

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors