What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-05 compared with 2024-05-06 · 270 added, 171 removed, 621 unchanged (42% of the section changed)

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• Our tax strategies and the value of our deferred tax assets and liabilities could adversely affect our operating results and regulatory capital ratios;

• Liquidity is essential to our businesses;

MANAGEMENT'S DISCUSSION AND ANALYSIS

• Liquidity is essential to our businesses;

• We rely on dividends from our subsidiaries for most of our revenue;

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Courier Capital provides customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

As of March 31, 2024, the Company’s fee-based subsidiaries included SDN Insurance Agency, LLC (“SDN”), which provided a broad range of insurance services to personal and business clients, and Courier Capital, which provides customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

On April 1, 2024, the Company announced and closed the sale of the assets of its wholly owned subsidiary SDN Insurance Agency, LLC (“SDN”) to NFP Property & Casualty Services, Inc.

On April 1, 2024, the Company announced and closed the sale of the assets of its wholly owned subsidiary, SDN Insurance Agency, LLC (“SDN”), which provided a broad range of insurance services to personal and business clients, to NFP Property & Casualty Services, Inc.

(“NFP”), a subsidiary of NFP Corp.

Please refer to the “Recent Developments” section below for additional details regarding the sale of SDN.

The sale generated $27 million in proceeds, or a pre-tax gain of $13.5 million, after selling costs.

The all-cash transaction value represented approximately four times our 2023 insurance revenue.

Following the sale of the assets of SDN, we changed the name of the entity to Five Star Advisors LLC and expect to utilize it to serve as a conduit to refer insurance business to NFP.

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, prior to the sale of the assets of SDN, investment advisory and financial services provided to customers or ancillary services tied to loans and deposits.

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These guidelines were issued for the explicit purpose so “that financial institutions can provide services to marijuana-related businesses in a manner consistent with their obligations to know their customers and to report possible criminal activity.” The Bank has and will continue to follow this and other FinCEN guidance in the areas of cannabis banking.

RECENT DEVELOPMENTS

On April 1, 2024, the Company announced and closed the sale of the assets of SDN to NFP.

The sale generated approximately $27 million in proceeds, or an after-tax gain of $11.2 million before selling costs.

The all-cash transaction value represented approximately four times our 2023 insurance revenue.

Fraudulent Activity

In early March 2024, the Company discovered fraudulent activity associated with deposit transactions conducted over the course of several business days by an in-market business customer of the Bank, that resulted in an $18.4 million pre-tax loss for deposit-related charged-off items and approximately $600 thousand of legal and consulting expenses, recorded in the first quarter related to this event.

The Bank is working with the appropriate law enforcement authorities in connection with this matter and is pursuing all legal recourse available to recover additional funds and minimize the loss.

However, there can be no assurance that the Company will be able to recover any further offset to the deposit loss.

EXECUTIVE OVERVIEW

Summary of 2024 First Quarter Results

Net income decreased $10.0 million to $2.1 million for the first quarter of 2024 compared to $12.1 million for the first quarter of 2023.

Net income available to common shareholders for the first quarter of 2024 was $1.7 million, or $0.11 per diluted share, compared with $11.7 million, or $0.76 per diluted share, for the first quarter of 2023.

Return on average common equity was 1.83% and return on average assets was 0.13% for the first quarter of 2024 compared to 11.87% and 0.84%, respectively, for the first quarter of 2023.

First quarter 2024 results reflected an $18.4 million pre-tax loss that was recorded in deposit-related charged-off items and approximately $660 thousand of legal and consulting expenses, recorded in professional services expenses related to the previously mentioned fraud event.

Net interest income totaled $40.1 million in the first quarter of 2024, a decrease of $1.7 million compared to $41.8 million in the first quarter of 2023.

Average interest-earning assets for the first quarter of 2024 were $318.8 million higher than the first quarter of 2023 due to a $342.6 million increase in average loans and a $94.8 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $118.5 million decrease in average investment securities.

Average interest-bearing liabilities for the first quarter of 2024 were $427.7 million higher than the first quarter of 2023 due to a $416.7 million increase in average savings and money market account deposits, a $97.0 million increase in average time deposits, and a $44.5 million increase in average borrowings, partially offset by a $130.6 million decrease in average interest-bearing demand deposits.

Net interest margin was 2.78% for the first quarter of 2024 compared to 3.09% in the first quarter of 2023, primarily due to higher funding costs as a result of the continued high interest rate environment, as well as seasonality and repricing within the public deposit portfolio, partially offset by an increase in the average yield on interest-earning assets.

The benefit for credit losses was $5.5 million in the first quarter of 2024 compared to a provision for credit losses of $4.2 million in the first quarter of 2023.

The benefit for credit losses for the first quarter of 2024 was primarily driven by positive trends in qualitative factors, including an improvement in consumer indirect loan delinquencies during the period, and improvement in forecasted losses, which are based in part on the national unemployment forecast, and a reduction in period-end loan balances.

Net charge-offs during the recent quarter were $3.1 million, representing 0.28% of average loans on an annualized basis, compared to $2.1 million, or an annualized 0.21% of average loans, in the first quarter of 2023.

Summary of 2024 Second Quarter Results

Net income increased $11.3 million to $25.6 million for the second quarter of 2024 compared to $14.4 million for the second quarter of 2023.

Net income available to common shareholders for the second quarter of 2024 was $25.3 million, or $1.62 per diluted share, compared with $14.0 million, or $0.91 per diluted share, for the second quarter of 2023.

Return on average common equity was 23.51% and return on average assets was 1.68% for the second quarter of 2024 compared to 13.64% and 0.95%, respectively, for the second quarter of 2023.

Second quarter 2024 results benefited from a pre-tax gain of $13.5 million, after selling costs, associated with the sale of the assets of SDN on April 1, 2024.

First quarter 2024 results were negatively impacted by our deposit-related fraud event, for which we recorded an $18.4 million pre-tax loss that was recorded in deposit-related charged-off items and approximately $660 thousand of related professional services expenses related to legal expenses.

In the second quarter of 2024, we recorded a small recovery of $143 thousand and incurred approximately $371 thousand of professional services expenses related to the deposit-related fraud event which included legal expenses as well as expenses associated with the engagement of a third party to support our internal review and advise on best practices for fraud prevention and detection.

We continue to aggressively pursue our legal rights and seek any and all recovery avenues to minimize the loss.

Net interest income totaled $41.2 million in the second quarter of 2024, a decrease of $1.1 million compared to $42.3 million in the second quarter of 2023.

Average interest-earning assets for the second quarter of 2024 were $74.0 million higher than the second quarter of 2023 due to a $107.2 million increase in average loans and a $41.2 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $74.4 million decrease in average investment securities.

Average interest-bearing liabilities for the second quarter of 2024 were $113.6 million higher than the second quarter of 2023 due to a $376.6 million increase in average savings and money market account deposits, partially offset by a $154.5 million decrease in average borrowings, a $107.5 million decrease in average interest-bearing demand deposits and a $927 thousand decrease in average time deposits.

Net interest margin was 2.87% for the second quarter of 2024 compared to 2.99% in the second quarter of 2023, primarily due to higher funding costs amid the continued high interest rate environment, partially offset by an increase in the average yield on interest-earning assets.

The provision for credit losses was $2.0 million in the second quarter of 2024 compared to a provision for credit losses of $3.2 million in the second quarter of 2023.

The provision for credit losses for the second quarter of 2024 was primarily driven by a combination of factors, including a modest increase in consumer indirect delinquencies during the period, which increased the qualitative factor for that portfolio, partially offset by improvement in forecasted losses.

Net charge-offs during the recent quarter were $1.1 million, representing 0.10% of average loans on an annualized basis, compared to $636 thousand, or an annualized 0.06% of average loans, in the second quarter of 2023.

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 for credit losses and net charge-offs.

Noninterest income totaled $24.0 million in the second quarter of 2024, compared to $11.5 million in the second quarter of 2023.

Noninterest income for the second quarter of 2024 included the gain of $13.5 million from the sale of the assets of SDN, recorded in net gain (loss) on other assets, which resulted in a decrease of insurance income of $1.3 million.

Also contributing to the increase in noninterest income for the second quarter of 2024 were increases of $407 thousand in company owned life insurance income, due to the higher crediting rate and associated impact to cash surrender value related to the surrender and redeploy strategy executed in the fourth quarter of 2023, $334 thousand of income from investments in limited partnerships, and $362 thousand in other income.

These increases were partially offset by decreases of $326 thousand in income from derivative instruments, net, and $244 thousand in service charges on deposits.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Noninterest income totaled $10.9 million in the first quarters of 2024 and 2023.

Noninterest income for the first quarter of 2024 included decreases of $341 thousand in investment advisory income, primarily due to lower transaction-based fees on retail accounts, and $322 thousand in income from derivative instruments, net, partially offset by increases of $304 thousand in company owned life insurance income, due to the higher crediting rate and associated impact to cash surrender value related to the surrender and redeploy strategy executed in the fourth quarter of 2023, and $406 thousand in other income.

Noninterest expense totaled $54.0 million in the first quarter of 2024, compared to $33.7 million in the first quarter of 2023.

The increase in noninterest expense was primarily the result of the deposit fraud-related charge-off and associated legal and consulting expenses totaling $19.0 million.

Also contributing to the increase in noninterest expense for the first quarter of 2024 were increases in computer and data processing expense, due in part to investments in data efficiency and marketing technology, FDIC assessments expense, and other expenses.

The regulatory Common Equity Tier 1 Ratio and Total Risk-Based Capital Ratio were 9.76%, and 12.04%, respectively, at March 31, 2024.

Noninterest expense totaled $33.0 million in the second quarter of 2024, compared to $33.8 million in the second quarter of 2023.

The decrease in noninterest expense for the second quarter of 2024 was primarily attributable to a decrease in salaries and employee benefits expense of $2.0 million as a result of the sale of the assets of SDN and the previously disclosed fourth quarter 2023 leadership and organizational changes, which reduced salaries and wages expense, partially offset by increases in computer and data processing expense of $592 thousand, due in part to investments in data efficiency and marketing technology, $521 thousand of professional services expense, due to legal and consulting expenses related to the deposit fraud-related event, and $374 thousand of other expenses.

The regulatory Tier 1 Capital Ratio and Total Risk-Based Capital Ratio were 10.36%, and 12.65%, respectively, at June 30, 2024.

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.

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Net Interest Income and Net Interest Margin

Net interest income is our primary source of revenue, comprising approximately 79% of revenue during the three months ended March 31, 2024.

Net interest income is our primary source of revenue, comprising approximately 63% and 70% of revenue during the three and six months ended June 30, 2024, respectively.

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.

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Three months ended

Six months ended

Interest income per consolidated statements of income

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Net interest income on a taxable equivalent basis

Analysis of Net Interest Income for the Three Months Ended March 31, 2024 and 2023

Net interest income on a taxable equivalent basis for the three months ended March 31, 2024, was $40.2 million, a decrease of $1.8 million versus the comparable quarter last year of $41.9 million.

Analysis of Net Interest Income for the Three Months Ended June 30, 2024 and 2023

Net interest income on a taxable equivalent basis for the three months ended June 30, 2024, was $41.3 million, a decrease of $1.2 million versus the comparable quarter last year of $42.5 million.

The decrease in net interest income was primarily due to higher funding costs amid the current high interest rate environment.

Our net interest margin for the first quarter of 2024 was 2.78%, 31-basis points lower than 3.09% for the same period in 2023 due to higher funding costs as a result of the continued high interest rate environment, as well as seasonality and repricing within the public deposit portfolio, partially offset by an increase in the average yield on interest-earning assets.

For the first quarter of 2024, the average yield on average interest earning assets of 5.43% was 72-basis points higher than the first quarter of 2023 of 4.71% primarily due to an increase in market interest rates.

Average loan yields increased 72-basis points during the first quarter of 2024 to 6.33% from 5.61% for the first quarter of 2023.

The average yield on investment securities increased 19-basis points during the first quarter of 2024 to 2.09% from 1.90% for the first quarter of 2023.

Overall, a favorable volume variance increased interest income by $6.0 million during the first quarter of 2024, and the average interest rate changes increased interest income by $8.6 million which collectively drove a $14.6 million increase in interest income.

Our net interest margin for the second quarter of 2024 was 2.87%, 12-basis points lower than 2.99% for the same period in 2023 due to higher funding costs as a result of the continued high interest rate environment, partially offset by an increase in the average yield on interest-earning assets.

For the second quarter of 2024, the average yield on average interest earning assets of 5.50% was 48-basis points higher than the second quarter of 2023 of 5.02% primarily due to an increase in market interest rates.

Average loan yields increased 47-basis points during the second quarter of 2024 to 6.40% from 5.93% for the second quarter of 2023.

The average yield on investment securities increased 28-basis points during the second quarter of 2024 to 2.17% from 1.89% for the second quarter of 2023.

Overall, the average interest rate changes increased interest income by $5.8 million and volume variance increased interest income by $1.8 million during the second quarter of 2024, which collectively drove a favorable variance of $7.6 million.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Average interest-earning assets were $5.80 billion for the first quarter of 2024 compared to $5.49 billion for the first quarter of 2023, an increase of $318.8 million, or 6%, from the comparable quarter last year, with average loans up $342.6 million from $4.12 billion for the first quarter of 2023 to $4.46 billion for the first quarter of 2024, and a $94.8 million increase in average Federal Reserve interest-earning cash, partially offset by a decrease in average securities of $118.5 million from $1.30 billion for the first quarter of 2023 to $1.18 billion for the first quarter of 2024.

Average loans comprised 77% of average interest-earning assets during the first quarter of 2024 compared to 75% during the first quarter of 2023.

Average interest-earning assets were $5.77 billion for the second quarter of 2024 compared to $5.69 billion for the second quarter of 2023, an increase of $74.0 million, or 1%, from the comparable quarter last year, with average loans up $107.2 million from $4.33 billion for the second quarter of 2023 to $4.44 billion for the second quarter of 2024, and a $41.2 million increase in average Federal Reserve interest-earning cash, partially offset by a decrease in average securities of $74.4 million from $1.27 billion for the second quarter of 2023 to $1.19 billion for the second quarter of 2024.

Average loans comprised 77% of average interest-earning assets during the second quarter of 2024 compared to 76% during the second quarter of 2023.

The increase in average loans was primarily due to organic growth in commercial mortgages.

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 6.33% for the first quarter of 2024, an increase of 72-basis points compared to 5.61% for the comparable quarter in 2023 due to the impact of the higher market interest rates.

An increase in the volume of average loans resulted in a $5.5 million increase in interest income and rate changes on average loans increased interest income by $7.7 million.

Average investment securities represented 20% of average interest-earning assets during the first quarter of 2024 compared to 24% during the first quarter of 2023.

The average yield on average loans was 6.40% for the second quarter of 2024, an increase of 47-basis points compared to 5.93% for the comparable quarter in 2023 due to the impact of the higher market interest rates.

Interest rate changes on average loans increased interest income by $4.9 million, and an increase in the volume of average loans resulted in a $1.7 million increase.

Average investment securities represented 21% of average interest-earning assets during the second quarter of 2024 compared to 22% during the second quarter of 2023.

The decrease in average investment securities was primarily due to repayment and maturities of investment securities, and the use of cash to fund loan originations, including the sale of approximately $54 million in lower yielding available-for-sale agency mortgage-backed securities in the fourth quarter of 2023.

For the first quarter of 2024, the average cost of average interest-bearing liabilities of 3.34% was 122-basis points higher than the first quarter of 2023 and the average cost of interest-bearing deposits of 3.29% was 130-basis points higher than the first quarter of 2023 due to the continued repricing of deposits at higher interest rates.

The average cost of total borrowings decreased 8-basis points to 4.08% in the first quarter of 2024, compared to 4.16% in the first quarter of 2023.

Average interest-bearing liabilities were $4.61 billion for the first quarter of 2024, compared to $4.19 billion for the first quarter of 2023, an increase of $427.7 million, or 10% driven by increases in both average balances of interest-bearing deposits and average total borrowings.

On average, interest-bearing deposits grew $383.2 million from $3.93 billion for the first quarter of 2023 to $4.31 billion for the current quarter while noninterest-bearing demand deposits (a principal component of net free funds) decreased $102.2 million to $962.5 million for the first quarter of 2024.

For the second quarter of 2024, the average cost of average interest-bearing liabilities of 3.32% was 72-basis points higher than the second quarter of 2023 and the average cost of interest-bearing deposits of 3.29% was 89-basis points higher than the second quarter of 2023 due to the continued repricing of deposits at higher interest rates.

The average cost of total borrowings decreased 69-basis points to 3.83% in the second quarter of 2024, compared to 4.52% in the second quarter of 2023.

The reduction in the cost of total borrowings was driven by a wholesale mix shift, lower level of outstanding balances, and the benefit of the Bank’s cash flow hedging program.

Average interest-bearing liabilities were $4.55 billion for the second quarter of 2024, compared to $4.43 billion for the second quarter of 2023, an increase of $113.6 million, or 3%, driven by increases in average balances of interest-bearing deposits.

On average, interest-bearing deposits grew $268.2 million from $4.02 billion for the second quarter of 2023 to $4.28 billion for the current quarter while noninterest-bearing demand deposits (a principal component of net free funds) decreased $78.9 million to $950.8 million for the second quarter of 2024.

The increase in average interest-bearing deposits was due to growth in non-public deposits, public deposits, and reciprocal deposits, partially offset by a decrease in brokered deposits.

For further discussion of our reciprocal and brokered deposits, refer to the “Funding Activities – Deposits” section of this Management’s Discussion and Analysis.

Overall, interest-bearing deposit rate changes resulted in a $13.4 million increase in interest expense, and volume changes resulted in a $2.6 million increase in interest expense during the first quarter of 2024.

Total average borrowings increased to $304.3 million, up $44.5 million from the first quarter of 2023.

The increase in average borrowings volume contributed $439 thousand to interest expense.

Overall, interest-bearing deposit rate changes resulted in a $9.1 million increase in interest expense, and volume changes resulted in a $1.9 million increase in interest expense during the second quarter of 2024.

Total average borrowings decreased to $264.8 million, down $154.5 million from the second quarter of 2023.

A decrease in average interest rates on short term borrowings decreased interest expense by $2.2 million during the second quarter of 2024.

Analysis of Net Interest Income for the Six Months Ended June 30, 2024 and 2023

Net interest income on a taxable equivalent basis for the six months ended June 30, 2024, was $81.4 million, a decrease of $2.9 million versus the comparable period in 2023 of $84.4 million.

The decrease in net interest income was primarily due to higher funding costs amid the current high interest rate environment.

Our net interest margin for the six months ended June 30, 2024 was 2.83%, 21-basis points lower than 3.04% for the same period in 2023 due to higher funding costs as a result of the continued high interest rate environment, partially offset by an increase in the average yield on interest-earning assets.

For the six months ended June 30, 2024, the average yield on average interest earning assets of 5.47% was 60-basis points higher than the six months ended June 30, 2023 of 4.87%.

The average yield on loans increased 59-basis points during the six months ended June 30, 2024, to 6.37% from 5.78% for the comparable period last year.

The average yield on investment securities increased 24-basis points to 2.13% for the six months ended June 30, 2024 compared to 1.89% for the six months ended June 30, 2023.

Overall, the impact of the interest rate increases in 2023 and 2024 has a positive impact on yields, increasing interest income by $14.3 million, while volume variances in average interest-earning assets and average interest-bearing liabilities increased net interest income by $7.9 million during the six months ended June 30, 2024.

Average interest-earning assets were $5.79 billion for the six months ended June 30, 2024 compared to $5.59 billion for the six months ended June 30, 2023, an increase of $195.9 million, or 3.50%, with average loans up $224.3 million from $4.23 billion for the six months ended June 30, 2023 to $4.45 billion for the six months ended June 30, 2024, and a $67.9 million increase in average Federal Reserve interest-earning cash, partially offset by a decrease in average investment securities of $96.4 million from $1.29 billion for the six months ended June 30, 2023 to $1.19 billion for the six months ended June 30, 2024.

Average investment securities represented 20.6% of average interest-earning assets during the six months ended June 30, 2024 compared to 23.0% during the six months ended June 30, 2023.

Loans comprised 76.9% of average interest-earning assets during the six months ended June 30, 2024 compared to 75.6% during the six months ended June 30, 2023.

The increase in average loans was primarily due to organic growth in commercial mortgages.

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.

Higher interest rates on loans increased interest income by $12.6 million, and an increase in the volume of average loans resulted in a $7.3 million increase in interest income.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following 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).

For the six months ended June 30, 2024, the average cost of average interest-bearing liabilities of 3.33% was 96-basis points higher than the average cost of 2.37% for the six months ended June 30, 2023, with the average cost of average interest-bearing deposits of 3.29% increasing 109-basis points from 2.20% for the six months ended June 30, 2023 due to the higher interest rate environment that began in 2023 and continued into 2024.

Average interest-bearing liabilities of $4.58 billion in the six months ended June 30, 2024 were $270.0 million, or 6.3%, higher than the six months ended June 30, 2023.

The increase was driven by an increase in average interest-bearing deposits, partially offset by a decrease in total average borrowings.

Total average borrowings decreased to $284.5 million, down $55.4 million from the six months ended June 30, 2023.

On average, interest-bearing deposits increased $325.4 million from $3.97 billion for the six months ended June 30, 2023 to $4.30 billion for the current period, while noninterest-bearing demand deposits (a principal component of net free funds) decreased $90.5 million to $956.7 million for the six months ended June 30, 2024.

The increase in average deposits was primarily due to growth in non-public and reciprocal deposits, partially offset by a decrease in brokered and public 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 changes resulted in a $22.4 million increase in interest expense and volume changes contributed $4.6 million during the six months ended June 30, 2024, primarily due to the higher interest rate environment.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following tables set 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.

Three months ended March 31,

Three months ended June 30,

Interest-earning assets:

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Other consumer

Six months ended

Interest-earning assets:

Federal funds sold and interest-earning deposits

Investment securities (1) :

Tax-exempt (2)

Total investment securities

Commercial business

Commercial mortgage

Residential real estate loans

Residential real estate lines

Consumer indirect

Other consumer

Total loans (4)

Total interest-earning assets

Allowance for credit losses

Other noninterest-earning assets

Interest-bearing liabilities:

Interest-bearing demand

Savings and money market

Time deposits

Total interest-bearing deposits

Short-term borrowings

Long-term borrowings

Total borrowings

Total interest-bearing liabilities

Noninterest-bearing demand deposits

Other noninterest-bearing liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest income (tax-equivalent)

Interest rate spread

Net earning assets

Net interest margin (tax-equivalent)

Ratio of average interest-earning assets to average

interest-bearing liabilities

MANAGEMENT'S DISCUSSION AND ANALYSIS

(1) Investment securities are shown at amortized cost.

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

(3) Annualized.

(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):

Six months ended

Commercial business

Commercial mortgage

Residential real estate loans

Residential real estate lines

Consumer indirect

Other consumer

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated.

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June 30, 2024 vs.

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June 30, 2024 vs.

Increase (decrease) in:

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Net interest income

MANAGEMENT'S DISCUSSION AND ANALYSIS

(Benefit) Provision for Credit Losses

The benefit for credit losses for the first quarter of 2024 was $5.5 million compared to a provision for credit losses of $4.2 million for the first quarter of 2023.

The benefit for credit losses – loans was $4.9 million for the first quarter of 2024, compared to a provision for credit losses – loans of $4.2 million for the first quarter of 2023.

The benefit for credit losses – loans in the first quarter of 2024 was driven by a combination of factors, including improvement in forecasted losses, positive trends in qualitative factors, including a reduction in consumer indirect loan delinquencies during the period, and a reduction in total period-end loan balances.

Also included in the (benefit) provision for credit losses was a credit loss benefit for unfunded commitments of $569 thousand and $11 thousand for the first quarters of 2024 and 2023, respectively.

Provision (Benefit) for Credit Losses

The provision for credit losses for the three and six months ended June 30, 2024 was a provision of $2.0 million and a benefit of $3.4 million, respectively, compared to provisions for credit losses of $3.2 million and $7.4 million for the corresponding periods in 2023.

The provision for credit losses in the second quarter of 2024 was driven by a combination of factors, including a modest increase in consumer indirect delinquencies during the period, which increased the qualitative factors for that portfolio, partially offset by improvement in forecasted losses.

Also included in the (benefit) provision for credit losses was a credit loss for unfunded commitments of $43 thousand and $287 thousand for the second quarters of 2024 and 2023, respectively.

The benefit for credit losses for the six months ended June 30, 2024 was reflective of the $4.9 million benefit for credit losses – loans for the first quarter of 2024, which was driven by improvement in forecasted losses, positive trends in qualitative factors, including a reduction in consumer indirect loan delinquencies during the period, and a reduction in total period-end loan balances.

Also included in the benefit for credit losses for the six months ended June 30, 2024 and 2023 was a credit loss benefit for unfunded commitments of $527 thousand and a credit loss for unfunded commitments of $298 thousand for the six months ended June 30, 2024 and 2023, respectively.

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.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Noninterest Income

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Three months ended

Six months ended

Service charges on deposits

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Net gain on sale of loans held for sale

Net (loss) gain on other assets

Net loss on tax credit investments

Net gain (loss) on other assets

Net gain on tax credit investments

Total noninterest income

Investment advisory income decreased $341 thousand, or 12%, to $2.6 million for the first quarter of 2024 compared to $2.9 million for the first quarter of 2023, primarily due to lower transaction-based fees on retail accounts in the most recent period.

Income from company owned life insurance increased $304 thousand, or 31%, to $1.3 million for the first quarter of 2024 compared to $1.0 million for the first quarter of 2023, primarily due to the higher crediting rate and associated impact to cash surrender value recorded in the linked quarter related to the previously mentioned surrender and redeploy strategy executed in the fourth quarter of 2023.

Income from derivative instruments, net decreased $322 thousand, or 65%, to $174 thousand for first quarter of 2024 compared to $496 thousand.

Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed during the quarter combined with the impact of changes in the fair value of borrower-facing trades.

Service charges on deposits decreased $244 thousand, or 20%, to $979 thousand for the second quarter of 2024 compared to $1.2 million for the second quarter of 2023.

For the first six months of 2024, service charges on deposits decreased $194 thousand, or 9%, to $2.1 million, compared to $2.3 million for the first six months of 2023.

Lower service charges on deposits reflected changes to the Bank’s fee policies that align with trends in community banking.

The April 1, 2024 sale of the assets of our insurance subsidiary, SDN, generated a gain of $13.5 million, after selling costs, which was included in net gain (loss) on other assets.

The decrease in insurance income for the second quarter of 2024 and the first six months of 2024 was reflective of the sale.

Income from company owned life insurance increased $407 thousand, or 43%, to $1.4 million for the second quarter of 2024 compared to $953 thousand for the second quarter of 2023.

For the first six months of 2024, income from company owned life insurance increased $711 thousand, or 37%, to $2.7 million compared to $1.9 million for the first six months of 2023.

The increase in both periods was primarily due to the higher crediting rate and associated impact to cash surrender value recorded in the linked quarter related to the previously disclosed surrender and redeploy strategy executed in the fourth quarter of 2023.

Investments in limited partnerships income increased $334 thousand, or 71%, to $803 thousand for the second quarter of 2024 compared to $469 thousand for the second quarter of 2023.

For the first six months of 2024, income from investments in limited partnerships increased $425 thousand, or 59%, to $1.1 million compared to $720 thousand for the first six months of 2023.

The income from our investments in limited partnerships fluctuates based on the maturity and performance of the underlying investments.

Income from derivative instruments, net decreased $326 thousand, or 46%, to $377 thousand for the second quarter of 2024 compared to $703 thousand for the second quarter of 2023.

For the first six months of 2024, income from derivative instruments, net decreased $648 thousand, or 54%, to $551 thousand compared to $1.2 million for the first six months of 2023.

Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed during the period combined with the impact of changes in the fair value of borrower-facing trades.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Noninterest Expense

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Three months ended

Six months ended

Salaries and employee benefits

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Amortization of intangibles

Restructuring recoveries

Deposit-related charged-off items

Total noninterest expense

MANAGEMENT'S DISCUSSION AND ANALYSIS

Salaries and employee benefits expense decreased $793 thousand, or 4%, to $17.3 million for the first quarter of 2024 compared to $18.1 million for the first quarter of 2023.

The decrease was driven in part by lower salaries and wages and lower bonuses in the current quarter, as a result of our previously disclosed leadership and organizational changes completed in the fourth quarter of 2023 and higher earnout compensation associated with a past insurance subsidiary acquisition.

Professional services expense increased $877 thousand, or 59%, to $2.4 million for the first quarter of 2024 compared to $1.5 million for the first quarter of 2023.

The increase was primarily due to higher legal and consulting expenses in the first quarter of 2024 primarily related to the fraud event.

Computer and data processing expense increased $695 thousand, or 15%, to $5.4 million for the first quarter of 2024 compared to $4.7 million for the first quarter of 2023.

The increase during the 2024 period was a result of our strategic investments in data efficiency and marketing technology.

Deposit-related charged-off items of $19.2 million for the first quarter of 2024 included the $18.4 million loss associated with the fraud event described above.

Other expense increased $564 thousand, or 18%, to $3.7 million for the first quarter of 2024 compared to $3.1 million for the first quarter of 2023.

The increase was primarily driven by an increase in New York State capital base franchise tax accrual and the timing of Community Reinvestment Act (“CRA”) grant donations.

Our efficiency ratio for the first quarter of 2024 was 105.77%, compared with 63.68% for the first quarter of 2023.

The higher efficiency ratio for the first quarter of 2024 was primarily due to the $18.4 million pre-tax loss in deposit-related charged-off items and approximately $660 thousand of legal and consulting expenses, recorded in professional services expense, related to the fraud event.

Salaries and employee benefits expense decreased $2.0 million, or 11%, to $15.7 million for the second quarter of 2024 compared to $17.8 million for the second quarter of 2023.

For the first six months of 2024, salaries and employee benefits expense decreased $2.8 million, or 8%, to $33.1 million compared to $35.9 million for the first six months of 2023.

The decrease in both periods was driven in part by lower salaries and wages in the 2024, as a result of the sale of the assets of SDN, as well as our previously disclosed leadership and organizational changes completed in the fourth quarter of 2023.

Professional services expense increased $521 thousand, or 41%, to $1.8 million for the second quarter of 2024 compared to $1.3 million for the second quarter of 2023.

For the first six months of 2024, professional services expense increased $1.4 million, or 51%, to $4.2 million compared to $2.8 million for the first six months of 2023.

The increases in both periods were primarily due to higher legal expenses in 2024 related to the deposit-related fraud event, including $660 thousand and $371 thousand for the first and second quarters of 2024, respectively.

The second quarter of 2024 expenses also included professional expense associated with the engagement of a third party to support the Company’s internal review and advise on best practices for fraud prevention and detection.

Computer and data processing expense increased $592 thousand, or 12%, to $5.3 million for the second quarter of 2024 compared to $4.8 million for the second quarter of 2023.

For the first six months of 2024, computer and data processing expense increased $1.3 million, or 14%, to $10.7 million compared to $9.4 million for the first six months of 2023.

The increase during the 2024 periods was a result of our strategic investments in data efficiency and marketing technology.

Deposit-related charged-off items expense for the first six months of 2024 included an $18.2 million loss associated with the deposit-related fraud event, including the $18.4 million recorded in the first quarter of 2024, partially offset by $143 thousand of recoveries recorded in the second quarter of 2024.

Other expense increased $374 thousand, or 10%, to $4.0 million for the second quarter of 2024 compared to $3.6 million for the second quarter of 2023.

For the first six months of 2024, other expense increased $938 thousand, or 14%, to $7.7 million compared to $6.7 million for the first six months of 2023.

The increase for both periods was primarily driven by an increase in New York State capital base franchise tax accrual.

Our efficiency ratio for the second quarter of 2024 and the first six months of 2024 was 50.58% and 74.80%, respectively, compared with 62.66% and 63.17% for the second quarter of 2023 and the first six months of 2023, respectively.

The lower efficiency ratio for the second quarter of 2024 was primarily due to the $13.5 million pre-tax gain on sale of the assets of our insurance subsidiary.

The higher efficiency ratio for the first six months of 2024 was primarily due to the $18.2 million pre-tax loss in deposit-related charged-off items and approximately $1.0 million of legal and consulting expenses, recorded in professional services expense, related to the deposit-related fraud event.

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.

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Management also believes such information is useful to investors in evaluating Company performance.

For the three months ended March 31, 2024, we recorded income tax expense of $356 thousand, versus $2.8 million for the same period in the prior year.

The lower level of income tax expense incurred during the first quarter of 2024 was due to a lower level of pre-tax income, reflecting the impact of the fraud event.

In the first quarter of 2024, we recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the period resulting in a reduction in income tax expense of $785 thousand, versus $584 thousand for the same period in the prior year.

Our effective tax rate for the three months ended March 31, 2024 was 14.7%, versus 18.7%, for the same period in the prior year.

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three and six months ended June 30, 2024, we recorded income tax expense of $4.5 million and $4.9 million, versus $2.4 million and $5.2 million for the same periods in the prior year.

The increase in income tax expense for the second quarter of 2024 compared to the second quarter of 2023 is reflective of higher net income, due in part to the gain on the sale of the assets of SDN.

In the second quarter of 2024, we recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the period resulting in a reduction in income tax expense of $1.3 million, versus $761 thousand for the same period in the prior year.

The six months ended June 30, 2024 and 2023 also included related benefits of $2.1 million and $1.3 million, respectively.

Our effective tax rate for both the three and six months ended June 30, 2024 was 15.0%, versus 14.4% and 16.4%, respectively, for the same periods in the prior year.

Effective tax rates are typically impacted by items of income and expense that are not subject to federal or state taxation.

Our effective tax rates reflect the impact of these items, which include, but are not limited to, interest income from tax-exempt securities, earnings on company owned life insurance and the impact of tax credit investments.

In addition, our effective tax rate for 2024 and 2023 reflects the New York State tax benefit generated by our real estate investment trust.

MANAGEMENT'S DISCUSSION AND ANALYSIS

In addition, our effective tax rates for 2024 and 2023 reflect the New York State tax benefit generated by our real estate investment trust.

ANALYSIS OF FINANCIAL CONDITION

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Investment Securities Portfolio Composition

March 31, 2024

June 30, 2024

December 31, 2023

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Government agency and government-sponsored enterprise securities

Treasury bills

Mortgage-backed securities:

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Non-Agency mortgage-backed securities

Other debt securities

Total available for sale securities

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Total investment securities

Our available for sale (“AFS”) investment securities portfolio increased $45.7 million from December 31, 2023 to March 31, 2024.

The AFS portfolio had a net unrealized loss of $159.9 million at March 31, 2024 and $150.3 million at December 31, 2023, respectively.

The increase in the AFS portfolio balance was primarily the result of the purchase of securities for collateral for municipal deposits in the first quarter of 2024.

Our available for sale (“AFS”) investment securities portfolio decreased $7.1 million from December 31, 2023 to June 30, 2024.

The AFS portfolio had a net unrealized loss of $159.2 million at June 30, 2024 and $150.3 million at December 31, 2023, respectively.

The decrease in the AFS portfolio balance was primarily the result of the purchase of securities for collateral for municipal deposits in the first six months of 2024.

Security Yields and Maturities Schedule

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 March 31, 2024.

In this table, Yield is defined as the book yield weighted against the ending book value.

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No tax-equivalent adjustments were made to the weighted average yields (dollars in thousands).

MANAGEMENT'S DISCUSSION AND ANALYSIS

Due in one year or less

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Government agencies and government-sponsored enterprises

Treasury bills

Mortgage-backed securities

Other debt securities

Held to maturity debt securities:

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Total investment securities

MANAGEMENT'S DISCUSSION AND ANALYSIS

Impairment Assessment

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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 three months ended March 31, 2024 and 2023, no allowance for credit losses was recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.

For the three and six months ended June 30, 2024 and 2023, no allowance for credit losses was 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.

LENDING ACTIVITIES

Total loans were $4.44 billion at March 31, 2024, a decrease of $20.1 million from $4.46 billion at December 31, 2023.

Commercial loans and consumer loans represented 62% and 38% of total loans as of March 31, 2024, respectively.

Total loans were $4.461 billion at June 30, 2024, a decrease of $671 thousand from $4.462 billion at December 31, 2023.

Commercial loans and consumer loans represented 63% and 37% of total loans as of June 30, 2024, respectively.

The composition of our loan portfolio, excluding loans held for sale and including net unearned income and net deferred fees and costs, is summarized as follows (dollars in thousands):

Loan Portfolio Composition

March 31, 2024

June 30, 2024

December 31, 2023

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Total loans, net

Total commercial loans of $2.75 billion, or 62% of total loans at March 31, 2024, were comprised of commercial business loans of $707.6 million, or 16% of total loans, down $28.1 million, or 4%, from December 31, 2023, and commercial mortgage loans of $2.05 billion, or 46% of total loans, up $39.7 million, or 2%, from December 31, 2023.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Total commercial loans of $2.80 billion, or 63% of total loans at June 30, 2024, were comprised of commercial business loans of $713.9 million, or 16% of total loans, down $21.8 million, or 3%, from December 31, 2023, and commercial mortgage loans of $2.09 billion, or 47% of total loans, up $80.6 million, or 4%, from December 31, 2023.

Commercial loans include both owner-occupied and non-owner occupied commercial real estate loans.

As of March 31, 2024, commercial real estate (“CRE”) loans make up approximately 66% of total commercial loans, and 41% of total loans, commercial and industrial loans approximated 30% of total commercial loans, and 19% of total loans, and business banking unit loans were approximately 4% of total commercial loans and 3% of total loans.

Our CRE committed credit exposure at March 31, 2024 related to approximately 42% multi-family, 17% office, 8% retail, 7% hospitality, 7% home builder, and 7% industrial property.

Approximately 70% of our office exposure at March 31, 2024, or 12% of our total CRE exposure, related to Class B or medical office space.

As of June 30, 2024, commercial real estate (“CRE”) loans made up approximately 65% of total commercial loans, and 41% of total loans, commercial and industrial loans approximated 31% of total commercial loans, and 20% of total loans, and business banking unit loans were approximately 4% of total commercial loans and 3% of total loans.

Our CRE committed credit exposure at June 30, 2024 related to approximately 41% multi-family, 18% office, 7% retail, 7% hospitality, 7% industrial property, and 6% home builder.

Approximately 70% of our office exposure at June 30, 2024, or 12% of our total CRE exposure, related to Class B or medical office space.

More than 90% of our CRE loans have full or limited personal or corporate recourse.

Total consumer loans of $1.69 billion, or 38% of total loans at March 31, 2024, decreased $31.7 million from December 31, 2023.

Consumer loans at March 31, 2024 were comprised of residential real estate loans and lines of credit of $723.8 million, or 16.3% of total loans, consumer indirect loans of $920.4 million, or 21% of total loans, and other consumer loans of $45.2 million, or 1% of total loans.

During the three months ended March 31, 2024, we originated $57.9 million in indirect automobile loans with a mix of approximately 18% new automobile and 82% used automobile loans.

This compares with the $97.7 million in indirect automobile loans with a mix of approximately 25% new automobile and 75% used automobile loans for the three months ended March 31, 2023.

Total consumer loans of $1.66 billion, or 37% of total loans at June 30, 2024, decreased $59.5 million from December 31, 2023.

Consumer loans at June 30, 2024 were comprised of residential real estate loans and lines of credit of $723.2 million, or 16% of total loans, consumer indirect loans of $894.6 million, or 20% of total loans, and other consumer loans of $43.9 million, or 1% of total loans.

During the six months ended June 30, 2024, we originated $114.7 million in indirect automobile loans with a mix of approximately 22% new automobile and 78% used automobile loans.

This compares with the $169.0 million in indirect automobile loans with a mix of approximately 26% new automobile and 74% used automobile loans for the six months ended June 30, 2023.

Origination volumes and the mix of new and used vehicles financed fluctuate depending on general market conditions.

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Loans Held for Sale and Loan Servicing Rights

Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled $504 thousand and $1.4 million as of March 31, 2024 and December 31, 2023, respectively.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled $2.1 million and $1.4 million as of June 30, 2024 and December 31, 2023, 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 $268.7 million and $269.4 million as of March 31, 2024 and December 31, 2023, respectively.

Residential real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $273.5 million and $269.4 million as of June 30, 2024 and December 31, 2023, respectively.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Allowance for Credit Losses – Loans

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Allowance for credit losses – loans, beginning of period

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Total net charge-offs

(Benefit) provision for credit losses – loans

Provision (benefit) for credit losses – loans

Allowance for credit losses – loans, end of period

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These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans, and other loans deemed appropriate by management, collectively referred to as collateral dependent loans.

Loans of the notes to the consolidated financial statements for further details on collateral dependent loans.

See Note 4., 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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Net charge-offs of $3.1 million in the first quarter of 2024 represented 0.28% of average loans on an annualized basis compared to net charge-offs of $2.1 million, or 0.21% of average loans for the first quarter of 2023.

The allowance for credit losses – loans was $43.1 million at March 31, 2024, compared with $47.5 million at March 31, 2023.

The ratio of the allowance for credit losses – loans to total loans was 0.97% at March 31, 2024 and 1.12% at March 31, 2023.

The ratio of allowance for credit losses – loans to non-performing loans was 161% at March 31, 2024, reflecting one large commercial loan relationship totaling $13.6 million that was placed on nonaccrual status during the fourth quarter of 2023, compared with 540% at March 31, 2023.

Net charge-offs of $1.1 million for the second quarter of 2024 represented 0.10% of average loans on an annualized basis compared to net charge-offs of $636 thousand, or 0.06% of average loans for the second quarter of 2023.

The allowance for credit losses – loans was $44.0 million at June 30, 2024, compared with $49.8 million at June 30, 2023.

The ratio of the allowance for credit losses – loans to total loans was 0.99% at June 30, 2024 and 1.13% at June 30, 2023.

The ratio of allowance for credit losses – loans to non-performing loans was 174% at June 30, 2024, reflecting one large commercial loan relationship totaling $13.6 million that was placed on nonaccrual status during the fourth quarter of 2023, compared with 503% at June 30, 2023.

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).

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Allowance for Credit Losses – Loans by Loan Category

March 31, 2024

June 30, 2024

December 31, 2023

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Non-performing assets include non-performing loans and foreclosed assets.

Non-performing assets at March 31, 2024 were $26.9 million, an increase of $68 thousand from the $26.8 million balance at December 31, 2023.

The primary component of non-performing assets is non-performing loans, which were $26.7 million or 0.60% of total loans at March 31, 2024 and December 31, 2023.

Approximately $6.4 million, or 24%, of the $26.7 million in non-performing loans as of March 31, 2024 were current with respect to payment of principal and interest but were classified as non-accruing because repayment in full of principal and/or interest was uncertain.

Non-performing assets at June 30, 2024 were $25.3 million, a decrease of $1.5 million from the $26.8 million balance at December 31, 2023.

The primary component of non-performing assets is non-performing loans, which were $25.2 million or 0.57% of total loans at June 30, 2024 and $26.7 million or 0.60% of total loans at December 31, 2023.

Approximately $1.1 million, or 4%, of the $25.2 million in non-performing loans as of June 30, 2024 were current with respect to payment of principal and interest but were classified as non-accruing because repayment in full of principal and/or interest was uncertain.

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 $140 thousand and $142 thousand of properties representing foreclosed asset holdings at March 31, 2024 and December 31, 2023, respectively.

We had $63 thousand and $142 thousand of properties representing foreclosed asset holdings at June 30, 2024 and December 31, 2023, respectively.

MANAGEMENT'S DISCUSSION AND ANALYSIS

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We consider loans classified as substandard, which continue to accrue interest, to be potential problem loans.

We identified $21.7 million and $29.9 million in loans that continued to accrue interest which were classified as substandard as of March 31, 2024 and December 31, 2023, respectively.

We identified $21.3 million and $29.9 million in loans that continued to accrue interest which were classified as substandard as of June 30, 2024 and December 31, 2023, respectively.

Contractual Loan Maturity Schedule

The following table summarizes the contractual maturities of our loan portfolio at March 31, 2024.

The following table summarizes the contractual maturities of our loan portfolio at June 30, 2024.

Loans, net of deferred loan origination costs, include principal amortization and non-accruing loans.

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Deposit Composition

March 31, 2024

June 30, 2024

December 31, 2023

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MANAGEMENT'S DISCUSSION AND ANALYSIS

As of March 31, 2024 and December 31, 2023, the aggregate amount of uninsured deposits (deposits in amounts greater than $250 thousand, which is the maximum amount for federal deposit insurance) was $1.91 billion, or 35% of total deposits, and $1.82 billion, or 35% of total deposits, respectively.

The portion of our time deposits by account that were in excess of the FDIC insurance limit was $315.9 million and $302.6 million at March 31, 2024 and December 31, 2023, respectively.

The maturities of our uninsured time deposits at March 31, 2024 were as follows:

As of June 30, 2024 and December 31, 2023, the aggregate amount of estimated uninsured deposits (deposits in amounts greater than $250 thousand, which is the maximum amount for federal deposit insurance) was $1.83 billion, or 36% of total deposits, and $1.82 billion, or 35% of total deposits, respectively.

The portion of our time deposits by account that were in excess of the FDIC insurance limit was $296.3 million and $302.6 million at June 30, 2024 and December 31, 2023, respectively.

The maturities of our uninsured time deposits at June 30, 2024 were as follows:

$115.1 million in three months or less;

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and $77.8 million over one year.

Approximately $1.14 billion and $956.3 million of reciprocal and public deposits, characterized as preferred deposits for FDIC call report purposes, were collateralized by government-backed securities as of March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, uninsured nonpublic deposits were approximately 14% of total deposits.

Approximately $980.4 million and $956.3 million of reciprocal and public deposits, characterized as preferred deposits for FDIC call report purposes, were collateralized by government-backed securities as of June 30, 2024 and December 31, 2023, respectively.

As of June 30, 2024, estimated uninsured nonpublic deposits were approximately 16% of total deposits.

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 March 31, 2024, total deposits were $5.40 billion, representing an increase of $183.8 million from December 31, 2023.

The increase was primarily due to growth in public, reciprocal, and non-public deposits.

Time deposits were approximately 29% and 27% of total deposits at March 31, 2024 and December 31, 2023, respectively.

Non-public deposits, the largest component of our funding sources, totaled $3.13 billion and $3.12 billion at March 31, 2024 and December 31, 2023, respectively, and represented 58% and 60% of total deposits as of each date, respectively.

At June 30, 2024, total deposits were $5.13 billion, representing a decrease of $79.6 million from December 31, 2023.

The decrease was primarily due to a decrease in brokered deposits, partially offset by growth in reciprocal, public, and non-public deposits.

Time deposits were approximately 29% and 27% of total deposits at June 30, 2024 and December 31, 2023, respectively.

Non-public deposits, the largest component of our funding sources, totaled $3.14 billion and $3.12 billion at June 30, 2024 and December 31, 2023, respectively, and represented 61% and 60% of total deposits as of each 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 deposit account.

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We maintain the necessary levels of short-term liquidity to accommodate the seasonality associated with public deposits.

Total public deposits were $1.21 billion and $1.02 billion at March 31, 2024 and December 31, 2023, respectively, and represented 22% and 20% of total deposits as of each date, respectively.

The increase in public deposits as of March 31, 2024 in comparison to December 31, 2023 was due largely to seasonality.

Total public deposits were $1.04 billion and $1.02 billion at June 30, 2024 and December 31, 2023, respectively, and represented 20% of total deposits as of each date.

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.

Reciprocal deposits totaled $872.7 million at March 31, 2024, compared to $817.6 million at December 31, 2023, as this product has been an attractive option for customers with more than $250 thousand on deposit desiring FDIC insurance.

Reciprocal deposits represented 16% of total deposits as of each date.

Brokered deposits totaled $176.7 million and $256.8 million at March 31, 2024 and December 31, 2023, respectively, and represented 3% and 5% of total deposits as of each date.

As of March 31, 2024 and December 31, 2023, respectively, $26.7 million and $206.8 million of interest-bearing demand deposits and $150.0 million and $50.0 million of time deposits are brokered deposit accounts.

Reciprocal deposits totaled $878.3 million at June 30, 2024, compared to $817.6 million at December 31, 2023, as this product has been an attractive option for customers with more than $250 thousand on deposit desiring FDIC insurance.

Reciprocal deposits represented 17% and 16% of total deposits as of each date, respectively.

Brokered deposits totaled $75.8 million and $256.8 million at June 30, 2024 and December 31, 2023, respectively, and represented 2% and 5% of total deposits as of each date.

As of June 30, 2024 and December 31, 2023, $25.8 million and $206.8 million of interest-bearing demand deposits and $50.0 million of time deposits were brokered deposit accounts.

The Bank reduced the outstanding balance of the brokered sweep deposit portfolio by $180 million in April 2024 through the utilization of more cost effective funding sources.

The Company classifies borrowings as short-term or long-term in accordance with the original terms of the applicable agreement.

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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 March 31, 2024 and December 31, 2023 totaled $55.0 million and $107.0 million, respectively.

Short-term FHLB borrowings at June 30, 2024 and December 31, 2023 totaled $139.0 million and $107.0 million, respectively.

The FHLB borrowings are collateralized by securities from the Company’s investment portfolio and certain qualifying loans.

In May 2023, we borrowed $15.0 million under the Federal Reserve Bank (“FRB”) Bank Term funding program at a rate of 4.80%, which matures on May 8, 2024.

In May 2023, we borrowed $15.0 million under the Federal Reserve Bank (“FRB”) Bank Term funding program at a rate of 4.80%, which matured on May 8, 2024.

In December 2023, we borrowed an additional $50 million under the program at an interest rate of 4.89%, which matures on December 13, 2024, and $13.0 million at an interest rate of 4.88%, which matures on December 20, 2024.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

As of March 31, 2024, $50.0 million of the short-term borrowings balance is designated as a cash-flow hedge, which became effective in April 2022, at a fixed rate of 0.787%, $30.0 million is designated as a cash-flow hedge, which became effective in January 2023, at a fixed rate of 3.669%, and $25.0 million is designated as a cash-flow hedge, which became effective in May 2023, at a fixed rate of 3.4615%.

As of June 30, 2024, $50.0 million of the short-term borrowings balance was designated as a cash-flow hedge, which became effective in April 2022, at a fixed rate of 0.787%, $30.0 million was designated as a cash-flow hedge, which became effective in January 2023, at a fixed rate of 3.669%, and $25.0 million was designated as a cash-flow hedge, which became effective in May 2023, at a fixed rate of 3.4615%.

We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements.

We had approximately $364.6 million of immediate credit capacity with the FHLB, and approximately $906.4 million in secured borrowing capacity at the FRB discount window as of March 31, 2024.

We had approximately $259.0 million of immediate credit capacity with the FHLB, and approximately $890.7 million in secured borrowing capacity at the FRB discount window as of June 30, 2024.

The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans.

We had $155.0 million of credit available under unsecured federal funds purchased lines with various banks as of March 31, 2024, with no amounts outstanding.

Additionally, we had approximately $29.5 million of unencumbered liquid securities available for pledging at March 31, 2024.

We had $155.0 million of credit available under unsecured federal funds purchased lines with various banks as of June 30, 2024, with no amounts outstanding.

Additionally, we had approximately $92.7 million of unencumbered liquid securities available for pledging at June 30, 2024.

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 March 31, 2024, no amounts have been drawn on the line of credit.

At June 30, 2024, no amounts have been drawn on the line of credit.

Long-term Borrowings

As of March 31, 2024 we had a long-term advance payable to FHLB of $50.0 million.

As of June 30, 2024 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%.

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Management is actively monitoring customer activity by way of commercial and consumer line of credit utilization, as well as deposit flows.

As of March 31, 2024, 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.

As of June 30, 2024, 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.

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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, the Bank Term Funding Program, and brokered deposit relationships.

The primary source of our non-deposit short-term borrowings is FHLB advances, of which $55.0 million were outstanding at March 31, 2024.

In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately $1.43 billion as of March 31, 2024 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.

These core deposits are supplemented by wholesale funding sources that include credit lines with other banking institutions, the FHLB, the FRB Discount Window, and brokered deposit relationships.

The primary source of our non-deposit short-term borrowings is FHLB advances, of which $139.0 million were outstanding at June 30, 2024.

In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately $1.30 billion as of June 30, 2024 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 March 31, 2024.

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, 2024.

The line of credit has a one-year term and matures in May 2025.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Cash and cash equivalents were $237.0 million as of March 31, 2024, up $112.6 million from $124.4 million as of December 31, 2023.

During the three months ended March 31, 2024, net cash provided by operating activities totaled $12.3 million and the principal source of operating activity cash flow was net income adjusted for noncash income and expense items.

Net cash used in investing activities totaled $26.2 million, which primarily included outflows of $41.9 million for net purchases of investment securities, and $1.2 million of purchases of premises and equipment, partially offset by net loan proceeds of $17.0 million.

Net cash provided by financing activities of $126.5 million was primarily attributed to a $183.9 million net increase in deposits, partially offset by a $52.0 million net increase in long-term borrowings, and $5.4 million in dividend payments.

Cash and cash equivalents were $146.3 million as of June 30, 2024, up $21.9 million from $124.4 million as of December 31, 2023.

During the six months ended June 30, 2024, net cash provided by operating activities totaled $48.0 million and the principal source of operating activity cash flow was net income adjusted for noncash income and expense items.

Net cash provided by investing activities totaled $46.9 million, which primarily included inflows of $27.0 million for the proceeds from the sale of the assets of SDN, $25.6 million for net proceeds from investment securities, partially offset by outflows of net loan originations of $3.6 million, and $2.1 million of purchases of premises and equipment.

Net cash used in financing activities of $73.0 million was primarily attributed to a $79.6 million net decrease in deposits, and $10.4 million in dividend payments, partially offset by a $17.0 million net increase in short-term borrowings.

Capital Management

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Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Shareholders’ equity was $445.7 million at March 31, 2024, a decrease of $9.1 million from $454.8 million at December 31, 2023, primarily due to lower net income in the current quarter coupled with an increase in accumulated other comprehensive loss of $6.3 million during the three months ended March 31, 2024 due primarily to an increase in net unrealized losses on securities available for sale.

Shareholders’ equity was $467.7 million at June 30, 2024, an increase of $12.9 million from $454.8 million at December 31, 2023, primarily due to net income in the first six months of 2024 offset by an increase in accumulated other comprehensive loss of $5.8 million during the six months ended June 30, 2024 due primarily to an increase in net unrealized losses on securities available for sale.

The FRB and FDIC have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies on a consolidated basis.

As of March 31, 2024, the Company’s capital levels remained characterized as “well-capitalized” under the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S.

As of June 30, 2024, the Company’s capital levels remained characterized as “well-capitalized” under the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S.

See the “Basel III Capital Rules” section below for further discussion.

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Strict eligibility criteria for regulatory capital instruments were also implemented under the Basel III Capital Rules.

As of March 31, 2024, the Company and Bank’s capital levels remained characterized as “well capitalized” under the Basel III rules, including the additional capital conversion buffer.

The following table presents actual and required capital ratios as of March 31, 2024 and December 31, 2023 for the Company and the Bank under the Basel III Capital Rules.

As of June 30, 2024, the Company and Bank’s capital levels remained characterized as “well capitalized” under the Basel III rules, including the additional capital conversion buffer.

The following table presents actual and required capital ratios as of June 30, 2024 and December 31, 2023 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):

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Required – Basel III

March 31, 2024

June 30, 2024

Tier 1 leverage:

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Portfolio Composition

There was no material change in the composition of assets, deposit liabilities or borrowings from December 31, 2023 to March 31, 2024.

There was no material change in the composition of assets, deposit liabilities or borrowings from December 31, 2023 to June 30, 2024.

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.

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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 March 31, 2025 assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):

The following table sets forth the estimated changes to net interest income over the 12-month period ending June 30, 2025, assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):

Changes in Interest Rate

Estimated change in net interest income

In the rising rate scenarios, the static model results indicate that net interest income is modeled to increase compared to the flat rate scenario over a one-year timeframe.

In the rising rate scenarios, the static model results indicate that net interest income is modeled to increase compared to the flat rate scenario over a one-year time frame.

This is a combination of an increase across the entire deposit portfolio, which has decreased wholesale borrowings and the higher cost associated with the borrowings.

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.

As intermediate and longer-term assets continue to mature and are replaced at higher yields, net interest income should improve over the longer-term time frame.

Model results in the declining rate scenario show a decreasing in net interest income due to a combination of increases in the yield curve, as well as increases in higher yield public and nonpublic deposits, which will reprice downward slower due to market deposit competition.

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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 March 31, 2024 and December 31, 2023 (dollars in thousands).

The analysis additionally presents a measurement of the interest rate sensitivity at March 31, 2024 and December 31, 2023.

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, 2024 and December 31, 2023 (dollars in thousands).

The analysis additionally presents a measurement of the interest rate sensitivity at June 30, 2024 and December 31, 2023.

EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock Scenario.

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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):

March 31, 2024

June 30, 2024

December 31, 2023

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+ 300 Basis Points

The increase in the Pre-Shock Scenario EVE at March 31, 2024 compared to December 31, 2023 is the result of a combination of increased cash at the federal reserve, a concentrated effort to grow the Bank’s deposits, which also improved the valuation of the deposits, as well as continued decreases to borrowings.

The sensitivity in the -100-basis point Rate Shock Scenario to EVE grows more negative at March 31, 2024 compared to December 31, 2023.

This is a result from the concentrated effort to grow the deposit portfolio to decrease wholesale borrowings.

As a result, the shift from wholesale funding to deposits will cause liabilities to reprice lower in comparison to December 31, 2023, driving slightly more sensitive.

The increase in the Pre-Shock Scenario EVE at June 30, 2024 compared to December 31, 2023 is the result of a combination of increased cash at the federal reserve and the continued effort to grow the Bank’s deposits, which also improved the valuation of the deposits.

The sensitivity in the -100-basis point Rate Shock Scenario to EVE grows more negative at June 30, 2024 compared to December 31, 2023.

This is a result from the continued deposit mix shift from non-maturity, non-public to time, reciprocal, and municipal deposits.

As a result, the shift in mix of deposits becomes less valuable when rates shock downward, most notably in the money market accounts and time deposits in comparison to December 31, 2023, driving slightly more sensitive.

Control s and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2024, 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”).

As of June 30, 2024, 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.

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Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

OTHE R INFORMATION

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The Superior Court also remanded the case to the lower court for further proceedings, which will include the completion of any remaining discovery and an adjudication of the open claims and defenses that have been asserted in the case.

Once the lower court has issued a final adjudication, the parties will have an opportunity to appeal adverse rulings in the case.

On April 5, 2024, the lower court conducted a Case Management Conference to discuss remaining matters and next steps, and thereafter issued a Scheduling Order setting a deadline of April 19, 2024 for the Company to re-file its motion to compel discovery and motion for re-consideration of the prior striking of its jurisdictional defense and scheduled a pre-trial conference for July 11, 2024.

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The case was also re-assigned to another member of the Court of Common Pleas to handle future proceedings.

The Court of Common Please denied our aforementioned motions to compel discovery and for re-consideration.

The parties are in the process of completing the remaining discovery.

During the July 11, 2024 pretrial conference, the Court instructed the parties to engage in further settlement of non-binding mediation discussions and set a September 11, 2024 deadline to file motions in limine and a bench trial to commence on May 5, 2025.

Once the lower court has issued a final adjudication, the parties will have an opportunity to appeal adverse rulings in the case.

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.

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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-Q

Item 2. Management’s Discussion and Analysis