What changed in this filing

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Item 1. Financial Statements

2022-05-10 compared with 2021-11-09 · 211 added, 397 removed, 710 unchanged (46% of the section changed)

3 unchanged sentences

(In Thousands, Except Share Data)

September 30,

Cash and cash equivalents

Available-for-sale investment securities (cost of $ 4,406,878 and $ 3,427,779 , respectively)

Available-for-sale investment securities, includes pledged securities that can be sold or repledged of $ 436,813 and $ 485,414 , respectively (cost of $ 6,191,809 and $ 4,980,102 , respectively)

Equity and other securities (cost of $ 43,494 and $ 43,917 , respectively)

Loans held for sale, at fair value

Allowance for credit losses

Goodwill, net

Core deposit intangibles, net

9 unchanged sentences

Subordinated notes payable

Subordinated debt held by unconsolidated subsidiary trusts

Accrued interest and other liabilities

7 unchanged sentences

Retained earnings

Accumulated other comprehensive (loss) income

Treasury stock, at cost ( 146,002 shares, including 145,987 shares held by deferred compensation arrangements at September 30, 2021 and 161,472 shares including 161,457 shares held by deferred compensation arrangements at December 31, 2020, respectively)

Accumulated other comprehensive loss

Treasury stock, at cost ( 250,275 shares, including 132,759 shares held by deferred compensation arrangements at March 31, 2022 and 214,374 shares including 146,860 shares held by deferred compensation arrangements at December 31, 2021)

Deferred compensation arrangements ( 132,759 and 146,860 shares, respectively)

1 unchanged sentence

Total liabilities and shareholders’ equity

The accompanying notes are an integral part of the consolidated financial statements.

See accompanying notes to consolidated financial statements (unaudited).

COMMUNITY BANK SYSTEM, INC.

2 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Interest income:

19 unchanged sentences

Wealth management services

Unrealized (loss) gain on equity securities

Unrealized gain on equity securities

Total noninterest revenues

6 unchanged sentences

Business development and marketing

Litigation accrual

Acquisition expenses

4 unchanged sentences

Diluted earnings per share

The accompanying notes are an integral part of the consolidated financial statements.

See accompanying notes to consolidated financial statements (unaudited).

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(In Thousands)

Three Months Ended

Nine Months Ended

September 30,

Pension and other post retirement obligations:

4 unchanged sentences

Other comprehensive income related to pension and other post retirement obligations, net of taxes

Unrealized (losses) gains on available-for-sale securities:

Net unrealized holding (losses) gains arising during period, gross

Net unrealized holding (losses) gains arising during period, net

Other comprehensive (loss) income related to unrealized gains (losses) on available-for-sale securities, net of taxes

Other comprehensive (loss) income, net of tax

Comprehensive income

September 30,

Accumulated Other Comprehensive (Loss) Income By Component:

Unrealized losses on available-for-sale securities:

Net unrealized losses arising during period, gross

Net unrealized losses arising during period, net

Other comprehensive loss related to unrealized losses on available-for-sale securities, net of taxes

Other comprehensive loss, net of tax

Comprehensive loss

Accumulated Other Comprehensive Loss By Component:

Unrealized loss for pension and other post-retirement obligations

Net unrealized loss for pension and other post-retirement obligations

Unrealized (loss) gain on available-for-sale securities

Net unrealized (loss) gain on available-for-sale securities

Accumulated other comprehensive (loss) income

The accompanying notes are an integral part of the consolidated financial statements.

Unrealized loss on available-for-sale securities

Net unrealized loss on available-for-sale securities

Accumulated other comprehensive loss

See accompanying notes to consolidated financial statements (unaudited).

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Three months ended September 30, 2021 and 2020

Three months ended March 31, 2022 and 2021

(In Thousands, Except Share Data)

1 unchanged sentence

(Loss) Income

Balance at June 30, 2021

Balance at December 31, 2021

Other comprehensive loss, net of tax

3 unchanged sentences

Stock-based compensation

Treasury stock issued to benefit plans, net

Balance at September 30, 2021

Balance at June 30, 2020

Other comprehensive loss, net of tax

Cash dividends declared:

Common, $ 0.42 per share

Common stock activity under employee stock plans

Stock-based compensation

Distribution of stock under deferred compensation arrangements

Treasury stock purchased

Treasury stock issued to benefit plans, net

Balance at September 30, 2020

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Nine months ended September 30, 2021 and 2020

(In Thousands, Except Share Data)

Comprehensive

Income (Loss)

Balance at March 31, 2022

Balance at December 31, 2020

Other comprehensive loss, net of tax

Cash dividends declared:

Dividends declared:

Common, $ 0.42 per share

3 unchanged sentences

Treasury stock issued to benefit plans, net

Balance at September 30, 2021

Balance at December 31, 2019

Other comprehensive income, net of tax

Cumulative effect of change in accounting Principle - Current Expected Credit Losses

Cash dividends declared:

Common, $ 1.24 per share

Common stock activity under employee stock ownership plans

Stock-based compensation

Stock issued for acquisition

Distribution of stock under deferred compensation arrangements

Treasury stock issued to benefit plans, net

Balance at September 30, 2020

The accompanying notes are an integral part of the consolidated financial statements

Balance at March 31, 2021

See accompanying notes to consolidated financial statements (unaudited).

COMMUNITY BANK SYSTEM, INC.

1 unchanged sentence

(In Thousands)

Nine Months Ended

September 30,

Three Months Ended

Operating activities:

5 unchanged sentences

Amortization of mortgage servicing rights

Unrealized (gain) loss on equity securities

Unrealized gain on equity securities

Income from bank-owned life insurance policies

8 unchanged sentences

Purchases of equity and other securities

Net decrease (increase) in loans

Cash (paid) received for acquisitions, net of cash acquired of $ 541 and $ 55,973 , respectively

Net (increase) decrease in loans

Cash paid for acquisitions, net of cash acquired of $ 0 , and $ 0 , respectively

Purchases of premises and equipment, net

1 unchanged sentence

Net cash used in investing activities

( 1,261,114 )

Financing activities:

4 unchanged sentences

Purchases of treasury stock

Sales of treasury stock

Increase in deferred compensation arrangements

11 unchanged sentences

Transfers from loans to other real estate

Acquisitions:

Common stock issued

Fair value of assets acquired, excluding acquired cash and intangibles

Fair value of liabilities assumed

The accompanying notes are an integral part of the consolidated financial statements.

See accompanying notes to consolidated financial statements (unaudited).

COMMUNITY BANK SYSTEM, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2021

MARCH 31, 2022

BASIS OF PRESENTATION

The interim financial data as of and for the three and nine months ended September 30, 2021 is unaudited;

The interim financial data as of and for the three months ended March 31, 2022 is unaudited;

however, in the opinion of Community Bank System, Inc.

(the “Company”), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and Article 10 of Regulation S-X.

(the “Company”), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results for the interim periods in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and Article 10 of Regulation S-X.

The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

The Company’s unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 1, 2022.

Subsequent Event

On October 4, 2021, the Company announced that it had entered into an agreement to acquire Elmira Savings Bank ("Elmira"), a twelve branch banking franchise headquartered in Elmira, New York, for $ 82.8 million in cash.

Pending Acquisition

On October 4, 2021, the Company announced that Community Bank, N.A.

(the “Bank”) had entered into an agreement to acquire Elmira Savings Bank (“Elmira”), a twelve branch banking franchise headquartered in Elmira, New York, for $ 82.8 million in cash.

The acquisition will enhance the Company’s presence in five counties in New York’s Southern Tier and Finger Lakes regions.

Elmira had total assets of $ 648.7 million, total deposits of $ 551.2 million, and net loans of $ 465.3 million at June 30, 2021.

The Company expects to complete the acquisition in the first quarter of 2022, subject to customary closing conditions, including approval by the shareholders of Elmira and required regulatory approval.

The merger was approved by the shareholders of Elmira on December 14, 2021.

Regulatory approval has been received and the Company expects to complete the acquisition in the second quarter of 2022, subject to customary closing conditions.

The Company expects to incur certain one-time, transaction-related costs in connection with the Elmira acquisition.

Current and Prior Period Acquisitions

On August 2, 2021, the Company, through its subsidiary OneGroup NY, Inc.

(“OneGroup”), completed its acquisition of certain assets of the Thomas Gregory Associates Insurance Brokers, Inc.

On January 1, 2022, the Company, through its subsidiary OneGroup NY, Inc.

(“OneGroup”), completed acquisitions of certain assets of three insurance agencies for an aggregate amount of $ 2.5 million in cash.

The Company recorded a $ 2.5 million customer list intangible asset in conjunction with the acquisitions.

The effects of the acquired assets have been included in the consolidated financial statements since that date.

Revenues of approximately $ 0.3 million and direct expenses of approximately $ 0.1 million were included in the consolidated income statement for the three months ended March 31, 2022.

On August 2, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets and liabilities of the Thomas Gregory Associates Insurance Brokers, Inc.

(“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area, for $ 11.6 million in cash plus contingent consideration with a fair value at acquisition date of $ 1.5 million.

The Company recorded a $ 10.9 million customer list intangible asset and $ 2.2 million of goodwill in conjunction with the acquisition.

The effects of the acquired assets have been included in the consolidated financial statements since that date.

Revenues of approximately $ 0.3 million and direct expenses of approximately $ 0.2 million from TGA were included in the consolidated income statement for the three and nine months ended September 30, 2021.

The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date.

Revenues of approximately $ 1.5 million and direct expenses of approximately $ 0.4 million from TGA were included in the consolidated income statement for the three months ended March 31, 2022.

The acquisition of TGA includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on the future retained revenue of TGA over a three-year period.

1 unchanged sentence

The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between zero and $ 3.4 million.

The fair value of the contingent consideration recognized on the acquisition date of $ 1.5 million was estimated by applying the income approach.

That measure is based on significant Level 3 inputs not readily observable in the market.

Key assumptions include (1) a discount range of 0.82 % to 1.09 %, and (2) probability adjusted level of retained revenue between $ 2.3 million and $ 3.8 million.

On July 1, 2021, the Company, through its subsidiary Benefit Plans Administrative Services, Inc., completed its acquisition of Fringe Benefits Design of Minnesota, Inc.

("FBD") for $ 15.4 million in cash plus contingent consideration with a fair value at acquisition date of $ 1.4 million.

The fair value of the contingent consideration recognized on the acquisition date of $ 1.5 million was estimated by applying the income approach, a measure that is based on significant Level 3 inputs not readily observable in the market.

Key assumptions at the date of acquisition include (1) a discount rate range of 0.82 % to 1.09 %, and (2) probability adjusted level of retained revenue between $ 2.3 million and $ 3.8 million.

The contingent consideration related to the TGA acquisition was revalued at December 31, 2021.

The range of the undiscounted amounts the Company could pay under the agreement remained at between zero and $ 3.4 million.

Key assumptions include (1) a discount rate range of 1.38 % to 1.65 %, and (2) probability adjusted level of retained revenue between $3.0 million and $ 3.4 million.

Based on the results of the revaluation, no adjustments were made to the fair value of the contingent consideration related to the TGA acquisition at December 31, 2021 or March 31, 2022.

On July 1, 2021, the Company, through its subsidiary Benefit Plans Administrative Services, Inc.

(“BPA”), completed its acquisition of Fringe Benefits Design of Minnesota, Inc.

(“FBD”) for $ 15.4 million in cash plus contingent consideration with a fair value at acquisition date of $ 1.4 million.

The Company recorded a $14.0 million customer list intangible asset and $2.0 million of goodwill in conjunction with the acquisition.

The effects of the acquired assets have been included in the consolidated financial statements since that date.

Revenues of approximately $ 1.4 million and direct expenses of approximately $ 1.1 million from FBD were included in the consolidated income statement for the three and nine months ended September 30, 2021.

Revenues of approximately $ 1.4 million and direct expenses of approximately $ 1.1 million from FBD were included in the consolidated income statement for the three months ended March 31, 2022.

The acquisition of FBD includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on the future retained revenue of FBD over a two-year period.

2 unchanged sentences

The fair value of the contingent consideration recognized on the acquisition date of $ 1.4 million was estimated by applying the income approach;

That measure is based on significant Level 3 inputs not readily observable in the market.

a measure that is based on significant Level 3 inputs not readily observable in the market.

Key assumptions at the date of acquisition include (1) a discount rate of 1.05 %, and (2) probability adjusted level of retained revenue between $ 5.6 million and $ 5.8 million.

The contingent consideration related to the FBD acquisition was revalued at December 31, 2021.

The range of the undiscounted amounts the Company could pay under the agreement remained at between zero and $ 2.7 million.

Key assumptions include (1) a discount rate of 1.50 %, and (2) probability adjusted level of retained revenue between $ 5.6 million and $ 5.8 million.

On June 1, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of NuVantage Insurance Corp.

("NuVantage"), an insurance agency headquartered in Melbourne, Florida.

Based on the results of the revaluation, the Company recorded a $ 0.2 million acquisition-related contingent consideration adjustment in the consolidated statements of income related to the FBD acquisition, resulting in an adjusted fair value of $ 1.6 million at December 31, 2021.

No adjustment was made at March 31, 2022.

On June 1, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets and liabilities of NuVantage Insurance Corp.

(“NuVantage”), an insurance agency headquartered in Melbourne, Florida.

The Company paid $ 2.9 million in cash and recorded a $ 1.4 million customer list intangible asset and $ 1.4 million of goodwill in conjunction with the acquisition.

The effects of the acquired assets have been included in the consolidated financial statements since that date.

Revenues of approximately $ 0.3 million and $ 0.4 million and direct expenses of approximately $ 0.3 million from NuVantage were included in the consolidated income statement for the three and nine months ended September 30, 2021, respectively.

On June 12, 2020, the Company completed its merger with Steuben Trust Corporation (“Steuben”), parent company of Steuben Trust Company, a New York State chartered bank headquartered in Hornell, New York, for $ 98.6 million in Company stock and cash, comprised of $ 21.6 million in cash and the issuance of 1.36 million shares of common stock.

The merger extended the Company’s footprint into two new counties in Western New York State, and enhanced the Company’s presence in four Western New York State counties in which it had already operated.

In connection with the merger, the Company added 11 full-service offices to its branch service network and acquired $ 607.8 million of assets, including $ 339.7 million of loans and $ 180.5 million of investment securities, as well as $ 516.3 million of deposits.

Goodwill of $ 20.0 million was recognized as a result of the merger.

The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date.

Revenues, excluding interest income on acquired investments, interest income on acquired consumer indirect loans, and revenues associated with acquired loans and deposits consolidated into the legacy branch network, of approximately $ 3.3 million and $ 9.8 million, and direct expenses, which may not include certain shared expenses, of approximately $ 1.4 million and $ 3.9 million from Steuben were included in the consolidated income statement for the three and nine months ended September 30, 2021.

The Company incurred certain one-time, transaction-related costs in 2020 in connection with the Steuben acquisition.

The assets and liabilities assumed in the acquisitions were recorded at their estimated fair values based on management’s best estimates using information available at the dates of the acquisitions, and are subject to adjustment based on updated information not available at the time of the acquisitions.

Through the third quarter of 2021, the carrying amount of other liabilities associated with the Steuben acquisition decreased by $ 0.3 million as a result of an adjustment to accrued income taxes and deferred income taxes.

Goodwill associated with the Steuben acquisition decreased $ 0.3 million as a result of this adjustment.

The acquisitions expanded the Company’s geographical presence in New York, Florida, Massachusetts, and Minnesota, and management expects that the Company will benefit from greater geographic diversity and the advantages of other synergistic business development opportunities.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed after considering the measurement period adjustments described above:

Revenues of approximately $ 0.3 million and direct expenses of approximately $ 0.3 million from NuVantage were included in the consolidated income statement for the three months ended March 31, 2022.

The assets and liabilities assumed in the acquisitions were recorded at their estimated fair values based on management’s best estimates using information available at the dates of the acquisitions, and were subject to adjustment based on updated information not available at the time of the acquisitions.

Through the first quarter of 2022, the carrying amount of other liabilities associated with the FBD acquisition was adjusted as a result of an adjustment to working capital based on the purchase agreement.

The acquisitions generally expanded the Company’s geographic presence in New York, Florida, Massachusetts, and Minnesota, and management expects that the Company will benefit from greater geographic diversity and the advantages of other synergistic business development opportunities.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed:

(000s omitted)

Consideration:

Community Bank System, Inc.

Contingent consideration

2 unchanged sentences

Cash and cash equivalents

Investment securities

Loans, net of allowance for credit losses on PCD loans

Premises and equipment, net

Accrued interest and fees receivable

Core deposit intangibles

Other intangibles

Other liabilities

Other Federal Home Loan Bank borrowings

Subordinated debt held by unconsolidated subsidiary trusts

Total identifiable assets, net

The Company acquired loans from Steuben for which there was evidence of a more-than-insignificant deterioration in credit quality since origination (purchased credit deteriorated (“PCD”) loans).

PCD loans are initially recorded at the amount paid.

An allowance for credit losses is determined using the same methodology as other loans.

The initial allowance for credit losses determined on a collective basis is allocated to individual loans.

The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis.

The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan.

Subsequent changes to the allowance for credit losses are recorded as provision for (or reversal of) credit losses.

There were no investment securities acquired from Steuben for which there was evidence of a more-than-insignificant deterioration in credit quality since origination.

The carrying amount of those loans is as follows at the date of acquisition:

(000s omitted)

Par value of PCD loans at acquisition

Allowance for credit losses at acquisition

Non-credit premium at acquisition

Fair value of PCD loans at acquisition

Acquired loans that are deemed to not have experienced a more-than-insignificant credit deterioration since origination are considered non-PCD.

At the acquisition date, a fair value adjustment is recorded that includes both credit and interest rate considerations.

Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to interest income over the loan’s remaining life.

Fair value adjustments for revolving loans are accreted (or amortized) using a straight line method.

Term loans are accreted (or amortized) using the constant effective yield method.

A provision for credit losses is also recorded at acquisition for the credit considerations on non-PCD loans.

Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans are the same as originated loans and subsequent changes to the allowance for credit losses are recorded as provision for (or reversal of) credit losses.

The following is a summary of the remaining loans acquired from Steuben for which there was no evidence of a more-than-insignificant deterioration in credit quality since origination at the date of acquisition:

(000s omitted)

Non-PCD Loans

Contractually required principal and interest at acquisition

Contractual cash flows not expected to be collected

Expected cash flows at acquisition

Interest component of expected cash flows

Fair value of non-PCD loans at acquisition

The fair value of the Company’s common stock issued for the Steuben acquisition was determined using the market close price of the stock on June 12, 2020.

The fair value of checking, savings, and money market deposit accounts acquired were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.

Certificate of deposit accounts were valued at the present value of the certificates’ expected contractual payments discounted at market rates for similar certificates.

The core deposit intangibles and other intangibles related to the Steuben and NuVantage acquisitions are being amortized using an accelerated method over their estimated useful life of eight years .

(1) Includes amounts for all OneGroup acquisitions completed in 2022.

The other intangibles related to the NuVantage acquisition and the OneGroup asset acquisitions completed in 2022 are being amortized using an accelerated method over their estimated useful of life of eight years for NuVantage and two of the 2022 OneGroup asset acquisitions, and ten years for the third 2022 OneGroup asset acquisition.

The other intangibles related to the TGA and FBD acquisitions are being amortized using an accelerated method over their estimated useful life of 13 years and 15 years , respectively.

The goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the Steuben acquisition, the All Other segment for the NuVantage and TGA acquisitions, and the Employee Benefit Services segment for the FBD acquisition.

Goodwill arising from the Steuben and FBD acquisitions is not deductible for tax purposes.

The goodwill, which is not amortized for book purposes, was assigned to the All Other segment for the NuVantage and TGA acquisitions, and the Employee Benefit Services segment for the FBD acquisition.

Goodwill arising from the FBD acquisition is not deductible for tax purposes.

Goodwill arising from the NuVantage and TGA acquisitions is deductible for tax purposes.

Direct costs related to the acquisitions were expensed as incurred.

Merger and acquisition integration-related expenses were $ 0.1 million during the three and nine months ended September 30, 2021 and amounted to $ 0.8 million and $ 4.5 million during the three and nine months ended September 30, 2020, respectively, and have been separately stated in the consolidated statements of income.

Supplemental Pro Forma Financial Information

The following unaudited condensed pro forma information assumes the Steuben acquisition had been completed as of January 1, 2019 for the three and nine months ended September 30, 2020 and September 30, 2019.

The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the year presented, nor is it indicative of the Company’s future results.

Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of the acquisitions.

The pro forma information set forth below reflects the historical results of Steuben combined with the Company’s consolidated statements of income with adjustments related to (a) certain purchase accounting fair value adjustments and (b) amortization of customer lists and core deposit intangibles.

Acquisition-related expenses totaling $ 0.8 million and $ 4.4 million for the three and nine months ended September 30, 2020 related to Steuben were included in the pro forma information as if they were incurred in the first quarter of 2019.

Pro Forma (Unaudited)

Three Months Ended

Nine Months Ended

(000’s omitted)

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Total revenue, net of interest expense

Merger and acquisition integration-related expenses were $ 0.3 million during the three months ended March 31, 2022, and have been separately stated in the consolidated statements of income.

Merger and acquisition integration-related expenses were immaterial for the three months ended March 31, 2021.

ACCOUNTING POLICIES

1 unchanged sentence

The extent to which the novel coronavirus (“COVID-19”) impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to:

the magnitude and duration of COVID-19, the extent to which it will impact national and international macroeconomic conditions including interest rates, unemployment rates, the speed of the anticipated recovery, and governmental and business reactions to the pandemic.

The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of September 30, 2021 and through the date of this Quarterly Report on Form 10-Q.

the magnitude and duration of COVID-19, the extent to which it will impact national and international macroeconomic conditions including interest rates, inflation, unemployment rates, the speed of the anticipated recovery, and governmental and business reactions to the pandemic.

The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of March 31, 2022 and through the date of this Quarterly Report on Form 10-Q.

The accounting matters assessed included, but were not limited to, the Company’s allowance for credit losses, decrease in fee and interest income, and the carrying value of the goodwill and other long-lived assets.

While there was not a material impact to the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2021, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.

While there was not a material impact to the Company’s consolidated financial statements as of and for the three months ended March 31, 2022, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.

Contract Balances

4 unchanged sentences

The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances.

As of September 30, 2021, $ 33.9 million of accounts receivable, including $ 8.5 million of unbilled fee revenue, and $ 3.1 million of unearned revenue was recorded in the consolidated statements of condition.

As of March 31, 2022, $ 29.0 million of accounts receivable, including $ 10.0 million of unbilled fee revenue, and $ 3.0 million of unearned revenue, was recorded in the consolidated statements of condition.

As of December 31, 2021, $ 31.6 million of accounts receivable, including $ 9.1 million of unbilled fee revenue, and $ 2.2 million of unearned revenue, was recorded in the consolidated statements of condition.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No.

2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20) .

The updated guidance removed the requirements to identify amounts that are expected to be reclassified out of accumulated other comprehensive income and recognized as components of net periodic benefit cost in the next fiscal year, as well as the effects of a one-percentage-point change in assumed health care cost trend rates on service and interest cost and on the postretirement benefit obligation.

The updated guidance added annual disclosure requirements for the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates, and explanations for significant gains and losses related to changes in the benefit obligation for the period.

This new guidance is effective retrospectively for fiscal years beginning after December 15, 2020 with early adoption permitted.

The Company adopted this guidance on January 1, 2021 and determined the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU No.

2019-12, Simplifying the Accounting for Income Taxes (Topic 740) .

The updated guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, and clarifying and amending existing guidance to improve consistent application.

This new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

Early adoption is permitted in any interim periods for which financial statements have not been issued.

The Company adopted this guidance on January 1, 2021 and determined the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

New Accounting Pronouncements

In March 2020, the FASB issued ASU No.

4 unchanged sentences

Adoption is permitted in any interim periods for which financial statements have not been issued.

While not expected to be material to the Company due to its insignificant exposure to LIBOR-based loans and financial instruments, the Company is currently evaluating the impact the adoption of this guidance will have on the Company’s consolidated financial statements.

The Company has established a working group that includes multiple functions to guide the transition from LIBOR to alternative reference rates.

The Company has identified all known LIBOR exposures, created a preliminary plan to address the exposures, and new originations either do not utilize LIBOR or replacement rate language, provisions, and conventions have been specified.

The Company continues to evaluate its exposure to LIBOR and communicate with all stakeholders in order to facilitate the transition.

The Company adopted this guidance on January 1, 2022 and determined that this guidance does not have a material impact on the Company’s consolidated financial statements as the Company's exposure to LIBOR-based loans and financial instruments is insignificant.

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services-Depository and Lending (Topic 942), and Financial Services-Investment Companies (Topic 946):

6 unchanged sentences

The amendments in this update are effective upon addition to the FASB Codification and the Company determined that this guidance does not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures, which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the current expected credit losses (“CECL”) model.

The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty.

In addition, the amendments require disclosure of current-period gross charge-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures.

ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities that have adopted the CECL accounting standard.

Early adoption, however, is permitted if an entity has adopted the CECL accounting standard.

While the guidance will result in expanded disclosures, the Company does not expect the adoption of this standard will have a material impact on the Company’s consolidated financial statements.

INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities as of September 30, 2021 and December 31, 2020 are as follows:

September 30, 2021

The amortized cost and estimated fair value of investment securities as of March 31, 2022 and December 31, 2021 are as follows:

March 31, 2022

December 31, 2021

14 unchanged sentences

A summary of investment securities that have been in a continuous unrealized loss position is as follows:

As of September 30, 2021

As of March 31, 2022

Less than 12 Months

21 unchanged sentences

government and its sponsored entities, include treasuries, agencies, and mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, which are currently rated AAA by Moody’s Investor Services, AA+ by Standard & Poor’s and are guaranteed by the U.S.

The majority of the obligations of state and political subdivisions and corporations carry a credit rating of A or better.

Additionally, a portion of the obligations of state and political subdivisions carry a secondary level of credit enhancement.

The majority of the obligations of state and political subdivisions carry a credit rating of A or better.

Additionally, a majority of the obligations of state and political subdivisions carry a secondary level of credit enhancement.

The Company holds two corporate debt securities in an unrealized loss position, which are currently rated A- or better, and the issuer of the securities both show a low risk of default.

The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to recovery of the amortized cost.

1 unchanged sentence

The unrealized losses in the portfolios are primarily attributable to changes in interest rates.

As such, management does not believe any individual unrealized loss as of September 30, 2021 represents credit losses and no unrealized losses have been recognized into credit loss expense.

Accordingly, there is no allowance for credit losses on the Company’s available-for-sale portfolio as of September 30, 2021.

Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 12.5 million at September 30, 2021 and is excluded from the estimate of credit losses.

The amortized cost and estimated fair value of debt securities at September 30, 2021, by contractual maturity, are shown below.

As such, management does not believe any individual unrealized loss as of March 31, 2022 represents credit losses and no unrealized losses have been recognized in the provision for credit losses.

Accordingly, there is no allowance for credit losses on the Company’s available-for-sale portfolio as of March 31, 2022.

Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 17.2 million at March 31, 2022 and is excluded from the estimate of credit losses.

The amortized cost and estimated fair value of debt securities at March 31, 2022, by contractual maturity, are shown below.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities not due at a single maturity date are shown separately.

Securities not due at a single maturity date, including government agency mortgage-backed securities and government agency collateralized mortgage obligations, are shown separately.

Available-for-Sale

6 unchanged sentences

Government agency collateralized mortgage obligations

Investment securities with a carrying value of $ 2.48 billion and $ 2.03 billion at September 30, 2021 and December 31, 2020, respectively, were pledged to collateralize certain deposits and borrowings.

Investment securities with a carrying value of $ 2.51 billion and $ 2.32 billion at March 31, 2022 and December 31, 2021, respectively, were pledged to collateralize certain deposits and borrowings.

Securities pledged to collateralize certain deposits and borrowings included $ 436.8 million and $ 485.4 million of U.S.

Treasury securities that were pledged as collateral for securities sold under agreement to repurchase at September 30, 2021 and December 31, 2020, respectively.

All securities sold under agreement to repurchase as of September 30, 2021 and December 31, 2020 have an overnight and continuous maturity.

Treasury securities that were pledged as collateral for securities sold under agreement to repurchase at March 31, 2022 and December 31, 2021, respectively.

All securities sold under agreement to repurchase as of March 31, 2022 and December 31, 2021 have an overnight and continuous maturity.

LOANS AND ALLOWANCE FOR CREDIT LOSSES

The segments of the Company’s loan portfolio are summarized as follows:

September 30,

(000’s omitted)

6 unchanged sentences

Loans, net of allowance for credit losses

The following table presents the aging of the amortized cost basis of the Company’s past due loans, including PCD loans, by segment as of September 30, 2021:

The following table presents the aging of the amortized cost basis of the Company’s past due loans by segment as of March 31, 2022:

90+ Days Past

5 unchanged sentences

Consumer direct

The following table presents the aging of the amortized cost basis of the Company’s past due loans, including PCD loans, by segment as of December 31, 2020:

The following table presents the aging of the amortized cost basis of the Company’s past due loans by segment as of December 31, 2021:

90+ Days Past

5 unchanged sentences

Consumer direct

The delinquency status for loans on payment deferment due to COVID-19 financial hardship were reported at September 30, 2021 based on their delinquency status at the execution date of the payment deferment, unless subsequent to the execution date of the payment deferment, the borrower made all required past due payments to bring the loan to current status.

The delinquency status for loans on payment deferment due to COVID-19 financial hardship were reported at March 31, 2022 based on their delinquency status at the execution date of the payment deferment, unless subsequent to the execution date of the payment deferment, the borrower made all required past due payments to bring the loan to current status.

Certain loans under extended pandemic-related forbearance were reclassified to nonaccrual status.

No interest income on nonaccrual loans was recognized during the three and nine months ended September 30, 2021 and 2020.

An immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income in both periods.

No interest income on nonaccrual loans was recognized during the three months ended March 31, 2022.

An immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income.

The Company uses several credit quality indicators to assess credit risk in an ongoing manner.

1 unchanged sentence

Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation.

Loans that were granted COVID-19 related financial hardship payment deferrals were reviewed on a case-by-case basis for credit risk ratings.

Loans that were granted COVID-19 related financial hardship payment deferrals were reviewed on a case-by-case basis for downgrades into lower credit risk ratings.

Loans on payment deferral will continue to be monitored for indications of deterioration that could result in future downgrades.

6 unchanged sentences

The condition of the borrower has deteriorated to the point that collection of the balance is improbable based on current facts and conditions and loss is likely.

The following tables show the amount of business lending loans by credit quality category at September 30, 2021 and December 31, 2020:

(000’s omitted)

The following tables show the amount of business lending loans by credit quality category at March 31, 2022 and December 31, 2021:

Term Loans Amortized Cost Basis by Origination Year

September 30, 2021

(000’s omitted)

March 31, 2022

Business lending:

1 unchanged sentence

Total business lending

(000’s omitted)

Term Loans Amortized Cost Basis by Origination Year

(000’s omitted)

December 31, 2021

2 unchanged sentences

Total business lending

All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis.

All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are monitored collectively on a monthly basis.

These are typically loans to individuals in the consumer categories and are delineated as either performing or nonperforming.

1 unchanged sentence

Nonperforming loans include 90+ days past due and still accruing and nonaccrual loans.

The following table details the balances in all other loan categories at September 30, 2021:

(000’s omitted)

The following table details the balances in all other loan categories at March 31, 2022:

Term Loans Amortized Cost Basis by Origination Year

September 30, 2021

(000’s omitted)

March 31, 2022

Consumer mortgage:

12 unchanged sentences

Total home equity

(1) FICO AB refers to higher tiered loans with FICO scores greater than or equal to 720.

(2) FICO CDE refers to loans with FICO scores less than 720 and potentially higher risk.

(1) FICO AB refers to higher tiered loans with FICO scores greater than or equal to 720 at origination.

(2) FICO CDE refers to loans with FICO scores less than 720 at origination and potentially higher risk.

The following table details the balances in all other loan categories at December 31, 2021:

(000’s omitted)

Term Loans Amortized Cost Basis by Origination Year

(000’s omitted)

December 31, 2021

13 unchanged sentences

Total home equity

(1) FICO AB refers to higher tiered loans with FICO scores greater than or equal to 720.

(2) FICO CDE refers to loans with FICO scores less than 720 and potentially higher risk.

All loan classes are collectively evaluated for credit losses except business lending.

A summary of individually assessed business loans as of September 30, 2021 and December 31, 2020 follows:

September 30,

(1) FICO AB refers to higher tiered loans with FICO scores greater than or equal to 720 at origination.

(2) FICO CDE refers to loans with FICO scores less than 720 at origination and potentially higher risk.

All loan classes are collectively assessed for impairment except business lending.

A summary of individually assessed business loans as of March 31, 2022 and December 31, 2021 follows:

(000’s omitted)

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Specifically allocated allowance

The average carrying balance of individually assessed loans was $ 31.5 million and $ 8.8 million for the three months ended September 30, 2021 and September 30, 2020, respectively.

The average carrying balance of individually assessed loans was $ 34.1 million and $ 4.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.

No interest income was recognized on individually assessed loans for the three or nine months ended September 30, 2021 and September 30, 2020.

The average carrying balance of individually assessed loans was $ 12.3 million and $ 34.9 million for the three months ended March 31, 2022 and 2021, respectively.

No interest income was recognized on individually assessed loans for the three months ended March 31, 2022 and 2021.

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans.

5 unchanged sentences

Pursuant to that guidance, the Company records a charge-off equal to any portion of the carrying value that exceeds the net realizable value of the collateral.

The amount of loss incurred in the three and nine months ended September 30, 2021 and 2020 was immaterial.

The amount of loss incurred in the three months ended March 31, 2022 and 2021 was immaterial.

TDRs less than $ 0.5 million are collectively included in the allowance for credit loss estimate.

2 unchanged sentences

As a result, the determination of the amount of allowance for credit losses related to impaired loans for each portfolio segment within TDRs is the same as detailed previously.

With respect to the Company’s lending activities, the Company implemented a customer forbearance program allowing for loan payment deferrals up to three months per request during 2020 to assist both consumer and business borrowers that were experiencing financial hardship due to COVID-19 related challenges.

Business lending, consumer direct, and consumer indirect loans in deferment status continued to accrue interest on the deferred principal during the deferment period unless otherwise classified as nonaccrual.

Consumer mortgage and home equity loans did not accrue interest on the deferred payments during the deferment period.

Consistent with the Coronavirus Aid, Relief and Economic Security Act ( “CARES Act”), the Consolidated Appropriations Act of 2021 (“CAA”), and industry regulatory guidance, borrowers that were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period and were not classified as TDRs.

Borrowers that were delinquent in their payments to the Company prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case-by-case basis for TDR classification and non-performing loan status.

As of September 30, 2021, the Company had 4 borrowers in forbearance due to COVID-19 related financial hardship, representing $ 3.9 million in outstanding loan balances, or 0.1 % of total loans outstanding.

These forbearances were comprised of 3 business borrowers representing $ 3.8 million in outstanding loan balances and 1 consumer borrower representing approximately $ 0.1 million in outstanding loan balances.

As of December 31, 2020, the Company had 74 borrowers in forbearance due to COVID-19 related financial hardship, representing $ 66.5 million in outstanding loan balances, or 0.9 % of total loans outstanding.

These forbearances were comprised of 63 business borrowers representing $ 65.7 million in outstanding loan balances and 11 consumer borrowers representing approximately $ 0.8 million in outstanding loan balances.

Information regarding TDRs as of September 30, 2021 and December 31, 2020 is as follows:

September 30, 2021

Information regarding TDRs as of March 31, 2022 and December 31, 2021 is as follows:

March 31, 2022

December 31, 2021

4 unchanged sentences

Consumer direct

The following table presents information related to loans modified in a TDR during the three months and nine months ended September 30, 2021 and 2020.

Of the loans noted in the table below, all consumer mortgage loans for the three months and nine months ended September 30, 2021 and 2020 were modified due to a Chapter 7 bankruptcy as described previously.

The following table presents information related to loans modified in a TDR during the three months ended March 31, 2022 and 2021.

Of the loans noted in the table below, all consumer mortgage loans for the three months ended March 31, 2022 and 2021 were modified due to a Chapter 7 bankruptcy as described previously.

The financial effects of these restructurings were immaterial.

1 unchanged sentence

Three Months Ended

September 30, 2021

September 30, 2020

(000’s omitted)

loans modified

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

Nine Months Ended

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

(000’s omitted)

6 unchanged sentences

Allowance for Credit Losses

The following presents by segment the activity in the allowance for credit losses during the three months and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30, 2021

(000’s omitted)

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

Purchased credit deteriorated

Allowance for credit losses – loans

Liabilities for off-balance-sheet credit exposures

Total allowance for credit losses

Three Months Ended September 30, 2020

(000’s omitted)

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

Purchased credit deteriorated

Allowance for credit losses – loans

Liabilities for off-balance-sheet credit exposures

Total allowance for credit losses

Nine Months Ended September 30, 2021

The following presents by segment the activity in the allowance for credit losses during the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, 2022

(000’s omitted)

7 unchanged sentences

Total allowance for credit losses

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

(000’s omitted)

4 unchanged sentences

Purchased credit deteriorated

Purchased credit impaired

Allowance for credit losses – loans

1 unchanged sentence

Total allowance for credit losses

Improvements in economic forecasts have resulted in an allowance for credit losses to total loans ratio of 0.68 % at September 30, 2021, 19 basis points lower than the level at September 30, 2020 and 14 basis points lower than the level at December 31, 2020.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 18.2 million at September 30, 2021 and is excluded from the estimate of credit losses and amortized cost basis of loans.

A stable economic forecast as well as improvements in non-economic qualitative adjustments resulting from lower levels of delinquencies, deferrals, and charge-offs, have resulted in an allowance for credit losses to total loans ratio of 0.68 % at March 31, 2022, seven basis points lower than the level at March 31, 2021 and consistent with the level at December 31, 2021.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 18.1 million at March 31, 2022, and is excluded from the estimate of credit losses and amortized cost basis of loans.

Under ASU No.

3 unchanged sentences

Under CECL, the Company is required to consider future economic conditions to determine current expected credit losses.

Management selected an eight quarter reasonable and supportable forecast period using a two quarter lag adjustment with a four quarter reversion to the historical mean to use as part of the economic forecast.

Management selected an eight-quarter reasonable and supportable forecast period using a two-quarter lag adjustment for economic factors that are not dependent on collateral values, and no lag for factors that do utilize collateral values, with a four-quarter reversion to the historical mean, to use as part of the economic forecast.

Management determined that these qualitative adjustments were needed to adjust historical information for expected losses and to reflect changes as a result of current conditions.

For qualitative macroeconomic adjustments, the Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that were weighted based on guidance from the third party provider, with forecasts available as of September 30, 2021.

These forecasts were factored into the qualitative portion of the calculation of the estimated credit losses and included the impact of COVID-19, including forecasted vaccine distribution progress and current and future Federal stimulus packages.

The scenarios utilized outline a significant improvement in economic conditions with peak unemployment ranging from 2.9 % to 9.1 % in the third quarter of 2022, a general improvement in unemployment levels over the subsequent three quarters, and an improvement in real estate and vehicle collateral values.

In addition to the economic forecast, the Company also considered additional qualitative adjustments as a result of COVID-19 and the impact on all industries, loan deferrals, delinquencies and downgrades, and the risk that Paycheck Protection Program (“PPP”) loans will not be forgiven.

These forecasts were factored into the qualitative portion of the calculation of the estimated credit losses and included the continued impact of COVID-19, such as supply chain pressures and their impact on collateral values and economic growth.

The scenarios utilized forecast a generally positive outlook on the economy, with low unemployment figures and high collateral values for housing, commercial real estate, and vehicles.

Management developed expected loss estimates considering factors for segments as outlined below:

● Business lending – non real estate:

The Company considered and selected projected unemployment and GDP as possible indicators of forecasted losses related to business lending.

The Company selected projected unemployment and GDP as indicators of forecasted losses related to business lending, and utilize both factors in an even weight for the calculation.

The Company also considered delinquencies, the level of loan deferrals, risk rating changes, recent charge-off history and acquired loans as part of the review of estimated losses.

● Business lending – real estate:

The Company considered and selected projected unemployment and commercial and multi-family real estate values as possible indicators of forecasted losses related to commercial real estate loans.

The Company selected projected unemployment and commercial real estate values as indicators of forecasted losses related to commercial real estate loans, and utilize both factors in an even weight for the calculation.

The Company also considered the factors noted in business lending – non real estate.

● Consumer mortgages and home equity:

The Company considered and selected projected unemployment and residential real estate values as possible indicators of forecasted losses related to mortgage lending.

The Company selected projected unemployment and residential real estate values as indicators of forecasted losses related to mortgage lending, and utilize both factors in an even weight for the calculation.

In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered.

● Consumer indirect:

The Company considered and selected projected unemployment and vehicle valuation indices as possible indicators of forecasted losses related to indirect lending.

The Company selected projected unemployment and vehicle valuation indices as indicators of forecasted losses related to indirect lending, and utilize both factors in an even weight for the calculation.

In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered.

● Consumer direct:

The Company considered and selected projected unemployment and median household income as possible indicator of forecasted losses related to direct lending.

The Company selected projected unemployment and inflation-adjusted household income as indicators of forecasted losses related to consumer direct lending, and utilize both factors in an even weight for the calculation.

In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered.

The following table presents the carrying amounts of loans purchased and sold during the nine months ended September 30, 2021 by portfolio segment:

The following table presents the carrying amounts of loans purchased and sold during the three months ended March 31, 2022 by portfolio segment:

(000’s omitted)

All the sales of consumer mortgages during the nine months ended September 30, 2021 were sales of secondary market eligible residential mortgage loans.

The sales of business loans during the nine months ended September 30, 2021 includes two business lending loans under one relationship.

All the sales during the three months ended March 31, 2022 were sales of secondary market eligible residential mortgage loans.

GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as follows:

September 30, 2021

March 31, 2022

December 31, 2021

6 unchanged sentences

(000's omitted)

Oct - Dec 2021

Shown below are the components of the Company’s goodwill at December 31, 2020 and September 30, 2021:

Apr - Dec 2022

Shown below are the components of the Company’s goodwill at December 31, 2021 and March 31, 2022:

(000’s omitted)

December 31, 2021

September 30, 2021

Goodwill, net

March 31, 2022

MANDATORILY REDEEMABLE PREFERRED SECURITIES

As of September 30, 2021, the Company does not sponsor any business trusts.

As of March 31, 2022, the Company does not sponsor any business trusts.

The Company previously sponsored Community Capital Trust IV (“CCT IV”) until March 15, 2021 when the Company exercised its right to redeem all of the CCT IV debentures and associated preferred securities for a total of $ 77.3 million.

The Company previously sponsored Steuben Statutory Trust II (“SST II”) until September 15, 2020 when the Company exercised its right to redeem all of the SST II debentures and associated preferred securities for a total of $ 2.1 million.

The common stock of SST II was acquired in the Steuben acquisition.

The trusts were formed for the purpose of issuing company-obligated mandatorily redeemable preferred securities to third-party investors and investing the proceeds from the sale of such preferred securities solely in junior subordinated debt securities of the Company.

The trust was formed for the purpose of issuing company-obligated mandatorily redeemable preferred securities to third-party investors and investing the proceeds from the sale of such preferred securities solely in junior subordinated debt securities of the Company.

BENEFIT PLANS

3 unchanged sentences

The Company made a $ 0.1 million contribution to its defined benefit pension plan in the first quarter of 2022.

The Company made a $ 3.9 million contribution to its defined benefit pension plan in the third quarter of 2020.

The net periodic benefit cost for the three and nine months ended September 30, 2021 and 2020 is as follows:

The Company made a $ 2.9 million contribution to its defined benefit pension plan and a $ 0.09 million contribution to the Steuben Trust Company Pension Plan in the first quarter of 2021.

The net periodic benefit cost for the three months ended March 31, 2022 and 2021 is as follows:

Pension Benefits

1 unchanged sentence

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30,

(000’s omitted)

7 unchanged sentences

Under the two class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared and participation rights in undistributed earnings.

The Company has determined that all of its outstanding non-vested stock awards are participating securities as of September 30, 2021.

The Company has determined that all of its outstanding non-vested stock awards are participating securities as of March 31, 2022.

Basic earnings per share are computed based on the weighted-average of the common shares outstanding for the period.

2 unchanged sentences

The treasury stock method determines the number of common shares that would be outstanding if all the dilutive options were exercised and the proceeds were used to repurchase common shares in the open market at the average market price for the applicable time period.

There were approximately 0.2 million and 0.1 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30, 2021, respectively, compared to 0.5 million and 0.7 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30, 2020, respectively, that were not included in the computation below.

The following is a reconciliation of basic to diluted earnings per share for the three and nine months ended September 30, 2021 and 2020:

There were approximately 0.2 million weighted-average anti-dilutive stock options outstanding for the three months ended March 31, 2022, compared to approximately 0.03 million weighted-average anti-dilutive stock options outstanding for the three months ended March 31, 2021 that were not included in the computation below.

The following is a reconciliation of basic to diluted earnings per share for the three months ended March 31, 2022 and 2021:

Three Months Ended

Nine Months Ended

September 30,

(000’s omitted, except per share data)

11 unchanged sentences

At its December 2020 meeting, the Company’s Board of Directors (the “Board”) approved a stock repurchase program authorizing the repurchase of up to 2.68 million shares of the Company’s common stock, in accordance with securities laws and regulations, through December 31, 2021.

At its December 2020 meeting, the Board approved a similar program for 2021, authorizing the repurchase of up to 2.68 million shares of the Company’s common stock through December 31, 2021.

At its December 2021 meeting, the Board approved a new stock repurchase program for 2022, authorizing the repurchase of up to 2.70 million shares of the Company’s common stock, in accordance with securities and banking laws and regulations, through December 31, 2022.

Any repurchased shares will be used for general corporate purposes, including those related to stock plan activities.

The timing and extent of repurchases will depend on market conditions and other corporate considerations as determined at the Company’s discretion.

The Company did no t repurchase any shares under the authorized plan during the first nine months of 2021 or 2020.

The Company repurchased 50,000 shares under the authorized plan during the first three months of 2022 and did not repurchase any shares under the authorized plan during the first three months of 2021.

COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS

8 unchanged sentences

The contract amounts of commitments and contingencies are as follows:

September 30,

(000’s omitted)

2 unchanged sentences

The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted.

As of September 30, 2021, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position.

As of March 31, 2022, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position.

On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings.

2 unchanged sentences

The range of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is believed to be between $ 0 and $ 1 million in the aggregate.

Although the Company does not believe that the outcome of pending litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

The Company recorded $ 3.0 million in litigation accrual in 2020 related to a settlement of a purported class action lawsuit regarding the Bank’s deposit account terms and overdraft disclosures.

The Company executed a settlement agreement with respect to the lawsuit in the fourth quarter of 2020 providing for a release of all claims asserted by class members in the action, and the Company does not anticipate that additional amounts will be accrued for this matter in future periods.

Notice of the settlement terms was provided to all class members and no objections to the settlement were received prior to expiration of the notice period.

The hearing for final Court approval of the settlement took place on August 25, 2021 and the settlement was approved for $ 2.9 million which was paid in the third quarter of 2021, resulting in a $ 0.1 million adjustment to the Company’s litigation accrual.

This estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties.

The Company does not believe that the outcome of pending or threatened litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

Accounting standards establish a framework for measuring fair value and require certain disclosures about such fair value instruments.

7 unchanged sentences

There were no transfers between any of the levels for the periods presented.

September 30, 2021

March 31, 2022

(000’s omitted)

7 unchanged sentences

Equity securities

Mortgage loans held for sale

Commitments to originate real estate loans for sale

1 unchanged sentence

Interest rate swap agreements asset

Interest rate swap agreements liability

December 31, 2021

8 unchanged sentences

Equity securities

Mortgage loans held for sale

Commitments to originate real estate loans for sale

10 unchanged sentences

See Note D for further disclosure of the fair value of investment securities.

● Mortgage loans held for sale – The Company has elected to value loans held for sale at fair value in order to more closely match the gains and losses associated with loans held for sale with the gains and losses on forward sales contracts.

Accordingly, the impact on the valuation will be recognized in the Company’s consolidated statements of income.

All mortgage loans held for sale are current and in performing status.

The fair value of mortgage loans held for sale is determined using quoted secondary-market prices of loans with similar characteristics and, as such, has been classified as a Level 2 valuation.

The unpaid principal value of mortgage loans held for sale was approximately $ 0.1 million at September 30, 2021.

The unpaid principal value of mortgage loans held for sale was approximately $ 1.6 million at December 31, 2020.

The unrealized gain on mortgage loans held for sale was recognized in mortgage banking revenues in the consolidated statements of income and is immaterial.

● Forward sales commitments – The Company enters into forward sales commitments to sell certain residential real estate loans.

Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated statements of condition.

The fair value of these forward sales commitments is primarily measured by obtaining pricing from certain government-sponsored entities and reflects the underlying price the entity would pay the Company for an immediate sale on these mortgages.

14 unchanged sentences

The fair value information of assets and liabilities measured on a non-recurring basis presented below is not as of the period-end, but rather as of the date the fair value adjustment was recorded closest to the date presented.

September 30, 2021

March 31, 2022

December 31, 2021

6 unchanged sentences

Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans.

Nonrecurring adjustments also include certain adjustments for collateral-dependent loans calculated when establishing the allowance for credit losses.

Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses.

Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan.

5 unchanged sentences

The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the customer and customer’s business.

Such discounts are significant, ranging from 9.0 % to 46.7 % at September 30, 2021 and result in a Level 3 classification of the inputs for determining fair value.

Such discounts are significant, ranging from 9.0 % to 73.5 % at March 31, 2022 and result in a Level 3 classification of the inputs for determining fair value.

OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

6 unchanged sentences

Impairment is recognized through a valuation allowance.

There was no valuation allowance at September 30, 2021.

There was a valuation allowance of approximately $ 0.2 million at December 31, 2020.

There was no valuation allowance at March 31, 2022 and December 31, 2021.

The Company has recorded contingent consideration liabilities that arise from acquisition activity.

9 unchanged sentences

(000's omitted, except per loan data)

September 30, 2021

March 31, 2022

Valuation Technique

1 unchanged sentence

(Weighted Average)

Individually assessed loans

Fair value of collateral

Estimated cost of disposal/market adjustment

9.0 % - 78.7 % ( 53.5 %)

Other real estate owned

5 unchanged sentences

Embedded servicing value

Mortgage servicing rights

Discounted cash flow

Weighted average constant prepayment rate

15.2 % - 24.9 % ( 16.6 %)

Weighted average discount rate

2.3 % - 2.8 % ( 2.7 %)

Adequate compensation

Contingent consideration

2 unchanged sentences

1.4 % - 1.7 % ( 1.5 %)

Probability adjusted level of retained

$ 2.3 million - $ 5.8

Probability adjusted level of retained revenue

$ 3.0 million - $ 5.8 million

Unobservable Input

23 unchanged sentences

Adequate compensation

Contingent consideration

Discounted cash flow

Discount rate

1.4 % - 1.7 % ( 1.5 %)

Probability adjusted level of retained revenue

$ 3.0 million - $ 5.8 million

The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that, if changed, could result in higher or lower fair value measurements of these assets as of the reporting date.

The weighted average of the estimated cost of disposal/market adjustment for individually assessed loans was calculated by dividing the total of the book value of the collateral of the individually assessed loans classified as Level 3 by the total of the fair value of the collateral of the individually assessed loans classified as Level 3.

The weighted average of the estimated cost of disposal/market adjustment for OREO was calculated by dividing the total of the differences between the appraisal values of the real estate and the book values of the real estate divided by the totals of the appraisal values of the real estate.

The weighted average of the estimated cost of disposal/market adjustment for other real estate owned was calculated by dividing the total of the differences between the appraisal values of the real estate and the book values of the real estate divided by the totals of the appraisal values of the real estate.

The weighted average of the constant prepayment rate for mortgage servicing rights was calculated by adding the constant prepayment rates used in each loan pool weighted by the balance in each loan pool.

3 unchanged sentences

Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at September 30, 2021 and December 31, 2020 are as follows:

September 30, 2021

The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at March 31, 2022 and December 31, 2021 are as follows:

March 31, 2022

December 31, 2021

5 unchanged sentences

Subordinated notes payable

Subordinated debt held by unconsolidated subsidiary trusts

The following is a further description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments.

Loans have been classified as a Level 3 valuation.

Fair values for loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Fair values for variable rate loans that reprice frequently are based on carrying values.

Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposits have been classified as a Level 2 valuation.

1 unchanged sentence

The fair value of time deposit obligations are based on current market rates for similar products.

Borrowings and subordinated debt held by unconsolidated subsidiary trusts have been classified as a Level 2 valuation.

Borrowings have been classified as a Level 2 valuation.

The fair value of short-term borrowings and securities sold under agreement to repurchase, short-term, is the amount payable on demand at the reporting date.

Fair values for long-term debt and subordinated debt held by unconsolidated subsidiary trusts are estimated using discounted cash flows and interest rates currently being offered on similar securities.

The difference between the carrying values of long-term borrowings and subordinated debt held by unconsolidated subsidiary trusts, and their fair values, are not material as of the reporting dates.

Fair values for long-term debt are estimated using discounted cash flows and interest rates currently being offered on similar securities.

The difference between the carrying values of long-term borrowings and their fair values, are not material as of the reporting dates.

Other financial assets and liabilities – Cash and cash equivalents have been classified as a Level 1 valuation, while accrued interest receivable and accrued interest payable have been classified as a Level 2 valuation.

8 unchanged sentences

At inception and during the life of the interest rate lock commitment, the Company includes the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of the interest rate lock commitments.

These derivatives are recorded at fair value, which were immaterial at September 30, 2021 and December 31, 2020.

The effect of the changes to these derivatives for the three and nine months then ended was also immaterial.

The Company acquired interest rate swaps in 2017 with notional amounts with certain commercial customers which totaled $ 0.6 million at September 30, 2021 and $ 14.4 million at December 31, 2020.

In order to minimize the Company’s risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps (pay fixed/receive floating swaps) with the Company’s counterparty totaling $ 0.6 million at September 30, 2021 and $ 14.4 million at December 31, 2020.

At September 30, 2021, the weighted average receive rate of these interest rate swaps was 2.33 %, the weighted average pay rate was 3.54 % and the weighted average maturity was 1.5 years.

These derivatives are recorded at fair value, which were immaterial at March 31, 2022 and December 31, 2021.

The effect of the changes to these derivatives for the three months ended March 31, 2022 and March 31, 2021 was also immaterial.

The Company acquired interest rate swaps in 2017 with notional amounts with certain commercial customers which totaled $ 0.4 million at March 31, 2022 and $ 0.5 million at December 31, 2021.

In order to minimize the Company’s risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps (pay fixed/receive floating swaps) with the Company’s counterparty totaling $ 0.4 million at March 31, 2022 and $ 0.5 million at December 31, 2021.

At March 31, 2022, the weighted average receive rate of these interest rate swaps was 2.65 %, the weighted average pay rate was 3.54 % and the weighted average maturity was 1.0 years.

At December 31, 2021, the weighted average receive rate of these interest rate swaps was 2.35 %, the weighted average pay rate was 3.54 % and the weighted average maturity was 1.3 years.

1 unchanged sentence

Since the terms of the swaps with the Company’s customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s results of operations.

The Company also acquired interest rate swaps in 2017 with notional amounts totaling $ 5.3 million at September 30, 2021, and $ 5.7 million at December 31, 2020, that were designated as fair value hedges of certain fixed rate loans with municipalities which are recorded in loans in the consolidated statements of condition.

At September 30, 2021, the weighted average receive rate of these interest rate swaps was 1.38 %, the weighted average pay rate was 3.11 % and the weighted average maturity was 11.8 years.

The Company also acquired interest rate swaps in 2017 with notional amounts totaling $ 5.3 million at March 31, 2022 and $ 5.3 million at December 31, 2021, that were designated as fair value hedges of certain fixed rate loans with municipalities which are recorded in loans in the consolidated statements of condition.

At March 31, 2022, the weighted average receive rate of these interest rate swaps was 1.58 %, the weighted average pay rate was 3.11 % and the weighted average maturity was 11.3 years.

At December 31, 2021, the weighted average receive rate of these interest rate swaps was 1.39 %, the weighted average pay rate was 3.11 % and the weighted average maturity was 11.5 years.

The Company includes the gain or loss on the hedged items in interest and fees on loans, the same line item as the offsetting gain or loss on the related interest rate swaps.

The effects of fair value accounting in the consolidated statements of income for the three and nine months ended September 30, 2021 are immaterial.

As of September 30, 2021 and December 31, 2020, the following amounts were recorded in the consolidated statement of condition related to cumulative basis adjustments for fair value hedges:

The effects of fair value accounting in the consolidated statements of income for the three months ended March 31, 2022 and March 31, 2021 are immaterial.

As of March 31, 2022 and December 31, 2021, the following amounts were recorded in the consolidated statement of condition related to cumulative basis adjustments for fair value hedges:

(000’s omitted)

5 unchanged sentences

Statement of Condition in Which

September 30,

the Hedged Item Is Included

Fair values of derivative instruments as of September 30, 2021 and December 31, 2020 are as follows:

Fair values of derivative instruments as of March 31, 2022 and December 31, 2021 are as follows:

(000’s omitted)

September 30, 2021

March 31, 2022

Derivative Assets

Derivative Liabilities

Consolidated Statement

Consolidated Statement of

of Condition Location

Consolidated Statement of

Condition Location

Derivatives designated as hedging instruments under Subtopic 815-20

1 unchanged sentence

Derivatives not designated as hedging instruments under Subtopic 815-20

Interest rate swaps

Accrued interest and other liabilities

Commitments to originate real estate loans for sale

17 unchanged sentences

Total derivatives

The Company assessed its counterparty risk at September 30, 2021 and December 31, 2020 and determined any credit risk inherent in our derivative contracts was not material.

The Company assessed its counterparty risk at March 31, 2022 and December 31, 2021 and determined any credit risk inherent in our derivative contracts was not material.

Further information about the fair value of derivative financial instruments can be found in Note K to these consolidated financial statements.

16 unchanged sentences

Benefit Services

Three Months Ended September 30, 2021

Three Months Ended March 31, 2022

Net interest income

6 unchanged sentences

Core deposit intangibles & Other intangibles

Three Months Ended September 30, 2020

Three Months Ended March 31, 2021

Net interest income

6 unchanged sentences

Core deposit intangibles & Other intangibles

(000's omitted)

Benefit Services

Nine Months Ended September 30, 2021

Net interest income

Provision for credit losses

Noninterest revenues

Amortization of intangible assets

Acquisition expenses

Other operating expenses

Income before income taxes

Nine Months Ended September 30, 2020

Net interest income

Provision for credit losses

Noninterest revenues

Amortization of intangible assets

Acquisition expenses

Other operating expenses

Income before income taxes

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 1. Financial Statements