What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-09 · 231 added, 411 removed, 347 unchanged (65% of the section changed)

1 unchanged sentence

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Bank System, Inc.

(the “Company” or “CBSI”) as of and for the three and nine months ended September 30, 2021 and 2020, although in some circumstances the second and first quarters of 2021 are also discussed in order to more fully explain recent trends.

(the “Company” or “CBSI”) as of and for the three months ended March 31, 2022 and 2021, although in some circumstances the fourth quarter of 2021 is also discussed in order to more fully explain recent trends.

The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that appear on pages 3 through 29.

All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole.

Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2021, “last year” and equivalent terms refer to calendar year 2020, “third quarter” refers to the three months ended September 30, 2021, “YTD” refers to the nine months ended September 30, 2021, and earnings per share (“EPS”) figures refer to diluted EPS.

Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2022, “last year” and equivalent terms refer to calendar year 2021, “first quarter” refers to the three months ended March 31, and earnings per share (“EPS”) figures refer to diluted EPS.

This MD&A contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company.

9 unchanged sentences

A summary of the accounting policies used by management is disclosed in Note A, “Summary of Significant Accounting Policies” on pages 76-88 of the most recent Form 10-K (fiscal year ended December 31, 2021) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2022.

A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on pages 13-14 of this Form 10-Q.

A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on page 10 of this Form 10-Q.

Supplemental Reporting of Non-GAAP Results of Operations

The Company also provides supplemental reporting of its results on an “operating,” “adjusted” and “tangible” basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), accretion on non-impaired purchased loans, expenses associated with acquisitions,litigation accrual expenses and the unrealized gain (loss) on equity securities.

The Company also provides supplemental reporting of its results on an “operating,” “adjusted” or “tangible” basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), accretion on acquired non-purchased credit deteriorated (“PCD”) loans, acquisition expenses and the unrealized gain (loss) on equity securities.

Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions.

In addition, the Company provides supplemental reporting for “adjusted pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual expenses and the unrealized gain (loss) on equity securities from income before income taxes.

Although adjusted pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the adoption of CECL and the economic uncertainty caused by the COVID-19 pandemic.

Earnings per share were $0.83 in the third quarter of 2021, up $0.04, or 5.1%, from the third quarter of 2020.

Diluted adjusted net earnings per share, a non-GAAP measure, were $0.87 in the third quarter of 2021, compared to $0.88 in the third quarter of 2020, a $0.01 per share, or 1.1%, decrease.

Adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, was $1.04 per share in the third quarter of 2021, down $0.06, or 5.5%, from the third quarter of 2020.

In addition, the Company provides supplemental reporting for “adjusted pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses and the unrealized gain (loss) on equity securities from income before income taxes.

Although adjusted pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the impact of CECL and the economic uncertainty caused by the COVID-19 pandemic.

Diluted adjusted net earnings per share, a non-GAAP measure, were $0.91 in the first quarter of 2022, compared to $1.00 in the first quarter of 2021, a decrease of $0.09, or 9.0%.

Adjusted pre-tax, pre-provision net revenue per share, a non-GAAP measure, was $1.12 in the first quarter of 2022, up $0.03, or 2.8%, from the first quarter of 2021.

Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 10.

8 unchanged sentences

The Company’s core operating objectives are:

(i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies and divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and optimize interest rate risk, yield and liquidity, (iv) increase the noninterest component of total revenues through development of banking-related fee income, growth in existing financial services business units, and the acquisition of additional financial services and banking businesses, and (v) utilize technology to deliver customer-responsive products and services and improve efficiencies.

(i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies and divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and optimize interest rate risk, yield and liquidity, (iv) increase the noninterest component of total revenues through growth in existing financial services business units, and the acquisition of additional financial services and banking businesses, and (v) utilize technology to deliver customer-responsive products and services and improve efficiencies.

Significant factors reviewed by management to evaluate achievement of the Company’s operating objectives and its operating results and financial condition include, but are not limited to:

15 unchanged sentences

and the performance of recently acquired businesses.

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

(“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area for $13.1 million, including $11.6 million in cash and contingent consideration valued at $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.

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”), a provider of retirement plan administration and benefit consulting services with offices in Minnesota and South Dakota, for $16.7 million, including $15.3 million in cash and contingent consideration valued at $1.4 million.

The Company recorded a $14.0 million customer list intangible asset and $2.1 million of goodwill in conjunction with the acquisition.

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.

The Company paid $2.9 million in cash and recorded a $1.4 million customer list intangible asset and $1.5 million of goodwill in conjunction with the acquisition.

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, a $2.9 million core deposit intangible asset and a $1.2 million customer list intangible asset were recognized as a result of the merger.

Third quarter and YTD net income increased compared to the equivalent 2020 timeframes by $2.5 million, or 5.9%, and $27.9 million, or 23.6%, respectively.

Earnings per share of $0.83 for the third quarter of 2021 was $0.04 more than the third quarter of 2020, and 2021 YTD earnings per share of $2.68 was $0.46 higher than 2020 YTD earnings per share.

The increases in net income and earnings per share were driven by a significant decrease in the provision for credit losses, reflective of a more favorable economic outlook, improvements in asset quality metrics and a significant increase in noninterest revenues.

Third quarter and YTD net income adjusted to exclude expenses associated with acquisitions, acquisition-related provision for credit losses, litigation accrual expenses and the unrealized gain (loss) on equity securities (“operating net income”), a non-GAAP measure, decreased $0.5 million, or 1.0%, as compared to the third quarter of 2020 and increased $19.4 million, or 15.3%, compared to September YTD 2020.

Earnings per share adjusted to exclude expenses associated with acquisitions, acquisition-related provision for credit losses, litigation accrual expenses and the unrealized gain (loss) on equity securities (“operating earnings per share”), a non-GAAP measure, of $0.83 for the third quarter decreased $0.02 compared to the third quarter of 2020.

Operating earnings per share of $2.68 for the first nine months of 2021 increased $0.30 compared to the prior year period.

Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 11.

Net income adjusted to exclude income taxes, provision for credit losses, expenses associated with acquisitions, litigation accrual expenses and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue”), a non-GAAP measure, of $56.5 million for the third quarter decreased $2.9 million, or 4.9%, as compared to the third quarter of 2020.

Adjusted pre-tax, pre-provision net revenue of $173.8 million for the first nine months of 2021 increased $1.6 million, or 0.9%, as compared to the first nine months of 2020.

Earnings per share adjusted to exclude income taxes, provision for credit losses, expenses associated with acquisitions, litigation accrual expenses and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue per share”), a non-GAAP measure, of $1.04 for the third quarter of 2021 was $0.06 lower than the third quarter of 2020, and 2021 YTD adjusted pre-tax, pre-provision net revenue per share of $3.19 was $0.04 lower than the prior YTD period.

The decrease in adjusted pre-tax, pre-provision net revenue per share compared to the third quarter of 2020 was driven by an increase in operating expenses, an increase in diluted weighted average common shares and a decrease in net interest income, partially offset by an increase in noninterest revenues.

Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 11.

Loans decreased on an ending and average basis as compared to the prior year third quarter, primarily due to decreases in U.S.

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan balances driven by forgiveness granted by the SBA, while deposits increased on an ending and average basis as compared to the prior year third quarter primarily due to large inflows of funds from government stimulus and PPP lending programs.

Interest rates on loans, investments and deposits have decreased over the past year primarily due to low short-term market interest rates as well as medium and longer-term market interest rates being below the average levels that existed over the past several years.

In connection with these lower rates, coupled with a higher proportion of earnings assets held in cash equivalents, the Company’s interest-earning asset yield for the first nine months of 2021 decreased 62 basis points from the year-earlier period.

The Company’s total cost of funds for the first nine months of 2021 decreased 11 basis points from the year earlier period, as the Company’s deposit funding cost and the rate on borrowings both decreased from the prior year period.

First quarter net income decreased $5.8 million as compared to the first quarter of 2021.

Earnings per share of $0.86 for the first quarter of 2022 decreased $0.11 from the first quarter of 2021.

The decrease in net income and earnings per share for the quarter are primarily the result of increases in the provision for credit losses, operating expenses, income taxes and fully-diluted shares outstanding, partially offset by increases in noninterest revenues and net interest income.

First quarter net income adjusted to exclude acquisition expenses and unrealized gains on equity securities (“operating net income”), a non-GAAP measure, decreased $5.6 million as compared to the first quarter of 2021.

Earnings per share adjusted to exclude acquisition expenses and unrealized gains on equity securities (“operating earnings per share”), a non-GAAP measure, of $0.87 for the first quarter decreased $0.10 compared to the first quarter of 2021.

First quarter 2021 results were complemented by a net benefit recorded in the provision for credit losses and higher Paycheck Protection Program (“PPP”)-related revenues than the first quarter of 2022 which, net of tax, were responsible for a $0.17 decrease in fully-diluted operating earnings per share year-over-year.

Loans and deposits increased on both an average and ending basis as compared to the prior year first quarter, reflective of large net inflows of funds from government stimulus programs and PPP lending, along with improving economic conditions and the Company’s enhanced focus on organic loan generation.

The average yield on interest earning assets decreased 34 basis points compared to the prior year first quarter as the average yield on loans declined while the average yield on investments increased.

The average yield on loans for the first quarter decreased by 41 basis points compared to the first quarter of 2021, driven by a decrease in market interest rates on new loan originations and a decrease in PPP-related interest income between the periods.

During the first quarter of 2022, the Company recorded $1.7 million of PPP-related interest income, including the recognition of $1.5 million of deferred loan fees.

This compares to $6.9 million of PPP-related interest income recorded in the prior year’s first quarter, including the recognition of $5.9 million of deferred loan fees.

The average yield on investments, including cash equivalents, increased 11 basis points compared to the prior year, as the Company meaningfully shifted the composition of earning assets away from low-yield cash equivalents to higher yielding investment securities between the periods.

The Company’s total cost of funds decreased four basis points from the year earlier period, as the rate paid on interest-bearing deposits decreased five basis points, the rate paid on borrowings decreased 38 basis points and noninterest-bearing demand deposit balances increased from the prior year first quarter.

The majority of borrowings are customer repurchase agreements, rather than wholesale borrowings obtained through capital markets and correspondent banks.

Customer repurchase agreements have deposit-like features and typically bear lower rates of interest than other types of wholesale borrowings.

The net benefit recognized in the provision for credit losses of $0.9 million for the third quarter and $11.0 million for YTD 2021 resulted in a $2.9 million and $28.3 million lower provision for credit losses than comparable prior year periods, respectively.

These decreases are reflective of an improving economic outlook given the state of the post-vaccine economic recovery, elevated real estate and vehicle collateral values, a decrease in individually assessed reserves and solid asset quality metrics, including continued low levels of net charge-offs and declining delinquent loan balances.

Additionally, $3.2 million of provision for credit losses was recorded in the second quarter of 2020 related to acquired non-purchased credit deteriorated loans associated with the Steuben acquisition.

Net charge-offs were $1.4 million for the third quarter and $1.1 million for the first nine months of 2021, compared to net charge-offs of $1.3 million for the prior year third quarter and $3.7 million for the first nine months of 2020.

Third quarter 2021 nonperforming loan ratios increased in comparison to the third quarter of 2020 largely attributable to the Company’s decision to reclassify certain loans under extended pandemic-related forbearance to nonperforming status in the fourth quarter of 2020.

Third quarter 2021 nonperforming loan ratios generally improved in comparison to their levels at the end of the fourth quarter of 2020.

The first quarter 2022 provision for credit losses of $0.9 million was $6.6 million higher than the net benefit recognized in the provision for credit losses of $5.7 million during the first quarter of 2021, reflective of a stable economic outlook, low levels of net charge-offs and delinquent loans, an increase in loans outstanding and a decrease in nonperforming loans.

Comparatively, in the first quarter of 2021, economic forecasts had improved considerably, resulting in a release of reserves in that quarter.

Net charge-offs were $0.5 million for the first quarter of 2022, compared to $0.4 million of net charge-offs for the first quarter of 2021.

First quarter 2022 nonperforming loan ratios decreased in comparison to the first quarter of 2021 largely attributable to the upgrade of several large business loans from nonaccrual status to accruing status during the fourth quarter of 2021 and first quarter of 2022.

Net Income and Profitability

As shown in Table 1, net income for the third quarter and September YTD of $45.3 million and $146.1 million, respectively, increased $2.5 million, or 5.9%, as compared to the third quarter of 2020 and increased $27.9 million, or 23.6%, compared to September YTD 2020.

Earnings per share of $0.83 for the third quarter was $0.04 higher than the third quarter of 2020, while earnings per share for the first nine months of 2021 of $2.68 was $0.46 higher than the first nine months of 2020.

The increase in net income and earnings per share for the quarter was primarily the result of higher noninterest revenues, lower litigation accrual expenses, a lower provision for credit losses and lower acquisition expenses, partially offset by higher core noninterest expenses, a higher effective tax rate, lower net interest income and an increase in diluted shares outstanding.

The increase in net income and earnings per share for the YTD period was primarily the result of a lower provision for credit losses, higher noninterest revenues, lower acquisition expenses, higher net interest income and lower litigation accrual expenses, partially offset by higher noninterest expenses, a higher effective tax rate and an increase in diluted shares outstanding.

Operating net income, a non-GAAP measure, of $45.3 million and $146.1 million for the third quarter and September YTD, respectively, decreased $0.5 million, or 1.0%, as compared to the third quarter of 2020 and increased $19.4 million, or 15.3%, compared to September YTD 2020.

Operating earnings per share, a non-GAAP measure, of $0.83 for the third quarter was down $0.02 compared to the third quarter of 2020, while operating earnings per share of $2.68 for the first nine months of 2021 was up $0.30 compared to the first nine months of 2020.

The decreases in operating net income and earnings per share for the quarter are primarily due to an increase in operating expenses, partially offset by higher noninterest revenues and a lower provision for credit losses recorded in the current quarter.

The increases in operating net income and earnings per share for the YTD period are primarily due to the lower provision for credit losses and higher noninterest revenues recorded in the current YTD period.

As shown in Table 1, net income for the first quarter of $47.1 million decreased $5.8 million, or 11.0%, as compared to the first quarter of 2021.

Earnings per share of $0.86 for the first quarter decreased $0.11 compared to the first quarter of 2021.

Operating net income, a non-GAAP measure, of $47.3 million for the first quarter decreased $5.6 million, or 10.5%, as compared to the first quarter of 2021.

Operating earnings per share, a non-GAAP measure, of $0.87 for the first quarter was down $0.10 compared to the first quarter of 2021.

See Table 10 for Reconciliation of GAAP to Non-GAAP Measures.

As reflected in Table 1, third quarter net interest income of $92.6 million was down $0.4 million, or 0.4%, from the comparable prior year period.

Net interest income for the first nine months of 2021 increased $3.7 million, or 1.3%, versus the first nine months of 2020.

The quarterly decrease resulted from a decrease in yield on interest-earning assets and an increase in interest-bearing liabilities that was only partially offset by an increase in interest-earning asset balances and a decrease in the average rate paid on interest-bearing liabilities.

The YTD year-over-year improvement resulted from an increase in interest-earning asset balances and a decrease in the average rate paid on interest-bearing liabilities, partially offset by a decrease in the yield on interest-earning assets and an increase in interest-bearing liability balances.

The provision for credit losses for the third quarter and September YTD decreased $2.9 million and $28.3 million as compared to the third quarter and first nine months of 2020, respectively.

These decreases are reflective of an improving economic outlook given the state of the post-vaccine economic recovery, elevated real estate and vehicle collateral values, a decrease in individually assessed reserves and solid asset quality metrics, including low levels of net charge-offs and stable delinquent loan balances.

Additionally, there was $3.2 million of provision for credit losses recorded in the second quarter of 2020 related to acquired non-purchased credit deteriorated loans associated with the Steuben acquisition.

Third quarter and year-to-date noninterest revenues were $64.3 million and $182.3 million, respectively, up $4.6 million, or 7.8%, from the third quarter of 2020 and up $11.1 million, or 6.5%, from the first nine months of 2020.

The increase compared to the prior year’s third quarter was primarily a result of increases in employee benefit services revenue, wealth management services revenue, deposit service charges and fees, insurance services revenue, debit interchange and ATM fees, other banking revenue and unrealized gains and losses on equity securities, partially offset by a decrease in mortgage banking revenue.

The YTD increase was due to increases in employee benefit services revenue, wealth management services revenue, debit interchange and ATM fees, insurance services revenue, other banking revenue and unrealized gains and losses on equity securities, partially offset by decreases in mortgage banking revenue and deposit service charges and fees.

Noninterest expenses of $100.4 million and $287.2 million for the third quarter and September YTD periods, respectively, reflected an increase of $3.5 million, or 3.6%, from the third quarter of 2020 and an increase of $5.7 million, or 2.0%, from the first nine months of 2020.

The increase in noninterest expenses for the quarter was due to increases in salaries and benefits, legal and professional fees, data processing and communications expenses, other expenses and amortization of intangible assets, partially offset by decreases in litigation accrual expenses, business development and marketing expenses, acquisition-related expenses and occupancy and equipment expenses.

The YTD increase in noninterest expenses was due to increases in salaries and benefits, data processing and communications expenses, occupancy and equipment expenses and legal and professional fees, partially offset by decreases in acquisition-related expenses, litigation accrual expenses, amortization of intangible assets, other expenses and business development and marketing expenses.

Excluding acquisition-related expenses and litigation accrual expenses, 2021 operating expenses were $7.2 million, or 7.7%, higher for the third quarter and $13.1 million, or 4.8%, higher for the year-to-date timeframe.

The effective income tax rates were 21.1% and 20.9% for the third quarter and YTD 2021, respectively, as compared to 20.3% and 19.8% for the comparable prior year periods.

The increase in effective tax rates compared to the prior year periods was primarily attributable to an increase in certain state income tax rates that were enacted in the second quarter of 2021.

As reflected in Table 1, first quarter net interest income of $94.9 million was up $0.9 million, or 1.0%, from the comparable prior year period.

The improvement resulted from an increase in interest-earning assets and a decrease in the rate paid on interest-bearing liabilities, partially offset by a decrease in the yield on interest-earning assets and an increase in interest-bearing liabilities.

The provision for credit losses of $0.9 million for the first quarter increased $6.6 million as compared to the $5.7 million net benefit recorded in the provision for credit losses in the first quarter of 2021, reflective of a stable economic outlook, low levels of net charge-offs and delinquent loans, an increase in loans outstanding and a decrease in nonperforming loans.

First quarter noninterest revenues were $65.7 million, up $7.1 million, or 12.2%, from the first quarter of 2021.

The increase was a result of increases in employee benefit services revenue, insurance services revenue, deposit services charges and fees, debit interchange and ATM fees and wealth management services revenue, partially offset by decreases in mortgage banking revenue, other banking services revenue and unrealized gains on equity securities.

Noninterest expenses of $99.8 million for the first quarter reflected an increase of $6.6 million, or 7.0%, from the first quarter of 2021.

Excluding acquisition-related expenses, first quarter 2022 operating expenses were $6.3 million, or 6.7%, higher as compared to the prior year first quarter.

The increase in noninterest expenses for the quarter was due to increases in salaries and benefits, business development and marketing, other expenses, legal and professional fees, amortization of intangible assets, acquisition expenses and data processing and communications, partially offset by a decrease in occupancy and equipment expenses.

Income tax expense increased $0.7 million between comparable quarters due to lower levels of tax benefits related to stock-based compensation activity, an increase in certain state income taxes that were enacted between the periods and a decrease in the proportion of tax-exempt revenues in relation to total revenues, partially offset by a lower amount of pretax income.

A condensed income statement is as follows:

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(000’s omitted, except per share data)

8 unchanged sentences

Net interest income is the amount by which interest and fees on earning assets (loans, investments, and cash equivalents) exceeds the cost of funds, which consists primarily of interest paid to the Company’s depositors and on borrowings.

Net interest margin is the difference between the yield on earning assets and the cost of interest-bearing funds as a percentage of earning assets.

As shown in Table 2a, net interest income (with nontaxable income converted to a fully tax-equivalent basis) for the third quarter was $93.4 million, $0.5 million, or 0.5%, less than the same period last year.

This was driven by a 45 basis point decrease in the average yield on interest-earning assets and a $987.1 million increase in average interest-bearing liabilities, partially offset by a $1.57 billion increase in average interest-earning assets and a nine basis point decrease in the average rate paid on interest-bearing liabilities in comparison to the third quarter of 2020.

As reflected in Table 3, net interest income was unfavorably impacted by $14.1 million due to the decrease in the average yield on interest-earning assets and $0.5 million due to the volume increase in interest-bearing liabilities, partially offset by favorable impacts on net interest income of $12.1 million due to the volume increase in interest-earning assets and $2.0 million due to a decrease in the average rate paid on interest-bearing liabilities.

September YTD net interest income (with nontaxable income converted to a fully tax-equivalent basis), as reflected in Table 2b, of $281.2 million, increased $3.3 million, or 1.2%, from the year-earlier period.

The September YTD increase resulted from a $2.17 billion increase in average interest-earning assets and a 15 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a 62 basis point decrease in the average yield on interest-earning assets and a $1.28 billion increase in average interest-bearing liabilities.

As reflected in Table 3, for September YTD, the volume increase in interest-earning assets and the decrease in the average rate paid on interest-bearing liabilities had favorable impacts on net interest income of $52.5 million and $9.2 million, respectively, partially offset by the decrease in the average yield on interest-earning assets having an unfavorable impact on net interest income of $55.9 million and the volume increase in interest-bearing liabilities having a negative impact of $2.5 million.

The net interest margin of 2.74% for the third quarter of 2021 was 38 basis points lower than the third quarter of 2020.

The decrease was the result of a 45 basis point decrease in the interest-earning asset yield, partially offset by a nine basis point decrease in the average rate on interest-bearing liabilities.

The net interest margin of 2.85% for the first nine months of 2021 was 51 basis points lower than the comparable period of 2020.

The yield on interest-earning assets decreased 62 basis points, while the rate on interest-bearing liabilities decreased by 15 basis points for the first nine months of 2021 as compared to the prior year period.

The 45 basis point decrease in the average yield on interest-earning assets for the quarter was the result of a decrease in the average yield on loans and investments.

For the third quarter, the average yield on loans decreased by eight basis points and the average yield on investments, including cash equivalents, decreased 37 basis points compared to the prior year.

The 62 basis point decrease in the yield on interest-earning assets for the first nine months of 2021 was the result of an 18 basis point decrease in the average yield on loans and a 64 basis point decrease in the average yield on investments, including cash equivalents, compared to the prior year.

The decrease in the loan and investment yields were driven by the comparatively low market rates over the past 12 months, a significant increase in the proportion of lower yielding cash equivalents and included the impact of a $9.2 million YTD increase in loan income recognized on PPP loans.

The average rate on interest-bearing liabilities decreased by nine basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits decreased six basis points and the average rate paid on external borrowings decreased 80 basis points from the prior year quarter.

For the first nine months of 2021, the average rate on interest-bearing liabilities decreased by 15 basis points from the comparable prior year period as the average rate on interest-bearing deposits decreased 11 basis points and the average rate on external borrowings decreased 89 basis points.

The decrease in the average rate paid on interest-bearing deposits was driven by a decrease in the market rates for deposits.

The decrease in the average cost of borrowings was primarily the result of a decrease in the variable rates paid on external borrowings due to decreases in market interest rates and the redemption of the Community Capital Trust IV (“CCT IV”) debentures and associated preferred securities during the first quarter of 2021.

The third quarter and YTD average balance of investments, including cash equivalents, increased $1.81 billion and $2.05 billion, respectively, as compared to the corresponding prior year periods.

Investment securities purchases outpaced maturities, calls and principal payments during third quarter and YTD.

The cash equivalents component of average earning assets increased $777.1 million and $1.19 billion for the third quarter and YTD periods, respectively, compared to the prior year periods.

The increase in cash equivalents was primarily due to large inflows related to government stimulus-related deposit funding and PPP lending.

Average loan balances decreased $240.2 million for the quarter primarily driven by decreases in the average balances of PPP loans and increased $119.8 million YTD as compared to the prior year primarily driven by the Steuben acquisition in June 2020 and an increase in the average balance of PPP loans.

Average interest-bearing deposits increased $1.04 billion compared to the prior year quarter and $1.31 billion compared to the prior YTD period.

The increase in average interest-bearing deposits for the quarterly period was due to increases in interest checking, savings and money market deposits due primarily to large inflows of government stimulus-related deposit funding, partially offset by a decrease in time deposits.

The increase in average interest-bearing deposits for the YTD period was due to increases in interest checking, savings, money market, and time deposits due primarily to large inflows of government stimulus-related deposit funding and the Steuben acquisition in June 2020.

The decreases from the prior year quarter and YTD periods was primarily due to the redemption of $77.3 million of trust preferred subordinated debt held by CCT IV, an unconsolidated subsidiary trust, during the first quarter of 2021 and a decrease in average FHLB borrowings, partially offset by an increase in average customer repurchase agreements.

Tables 2a and 2b below sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated.

Net interest margin is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities as a percentage of earning assets.

As shown in Table 2, net interest income (with nontaxable income converted to a fully tax-equivalent basis) for the first quarter was $95.7 million, a $0.8 million, or 0.9%, increase from the same period last year.

The increase resulted from a $1.54 billion increase in average interest-earnings assets and a six basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a 34 basis point decrease in the average yield on interest-earning assets and a $1.01 billion increase in average interest-bearing liabilities from the first quarter of 2021.

As reflected in Table 3, the favorable impacts of the volume increase in interest-earning assets of $11.3 million and the decrease in the average rate paid on interest-bearing liabilities of $1.3 million were partially offset by the unfavorable impacts of the decrease in the average yield on earning assets of $11.4 million and the volume increase in interest-bearing liabilities of $0.4 million.

The net interest margin of 2.73% for the first quarter of 2022 was 30 basis points lower than the comparable period of 2021.

The lower average yield on interest earning assets for the quarter was the result of a decrease in the average yield on loans, partially offset by an increase in the average yield on investments, including cash equivalents.

The average yield on loans for the first quarter decreased by 41 basis points compared to the first quarter of 2021, reflective of lower market interest rates on new loan originations and a decrease in PPP-related interest income between the periods.

During the first quarter of 2022, the Company recorded $1.7 million of PPP-related interest income, including the recognition of $1.5 million of deferred loan fees.

This compares to $6.9 million of PPP-related interest income recorded in the prior year’s first quarter, including the recognition of $5.9 million of deferred loan fees.

The average yield on cash equivalents increased nine basis points compared to the first quarter of 2021, while the average yield on investments, excluding cash equivalents, decreased 28 basis points.

The average rate on interest-bearing liabilities decreased six basis points compared to the prior year quarter due to a five basis point decrease in the average rate paid on interest-bearing deposits, primarily driven by a decrease in the interest rate paid on time deposits and a 38 basis point decrease in the average rate paid on borrowings.

The decrease in the average cost of borrowings was primarily the result of the redemption of certain higher rate subordinated debt instruments in the first quarter of 2021, as well as the decrease in the rates paid on customer repurchase agreements in response to market conditions.

The first quarter average balance of investments, including cash equivalents, increased $1.51 billion as compared to the corresponding prior year period primarily due to the continued net inflows of deposits.

Investment purchases outpaced maturities, calls and principal payments during the first quarter of 2022 as the Company meaningfully shifted the composition of earning assets away from low-yield cash equivalents to higher yielding investment securities.

Average loan balances were $30.4 million greater than the prior year’s first quarter balances with growth in the consumer indirect, consumer mortgage, home equity and consumer direct portfolios, partially offset by a decrease in the business lending portfolio due to high levels of PPP loan forgiveness.

Excluding PPP loans, average loan balances were $378.1 million greater than the prior year’s first quarter balances with growth in all loan portfolios.

Average interest-bearing deposits increased $1.04 billion between the first quarter of 2021 and the first quarter of 2022 with growth in interest checking, savings and money market deposits due to large inflows of government stimulus-related deposit funding, partially offset by a decrease in time deposits.

The average borrowing balance, including borrowings at the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), subordinated notes payable, subordinated debt held by unconsolidated subsidiary trusts and securities sold under agreement to repurchase (customer repurchase agreements), decreased $26.6 million compared to the prior year quarter primarily due to decreases in subordinated debt held by unconsolidated subsidiary trusts associated with the redemption of $77.3 million of trust preferred subordinated debt held by Community Capital Trust IV during the first quarter of 2021 and FHLB borrowings, partially offset by an increase in customer repurchase agreements.

Table 2 below sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated.

Interest income and yields are on a fully tax-equivalent basis (“FTE”) using marginal income tax rates of 24.3% and 24.1% in 2022 and 2021, respectively.

Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period.

Loan interest income and yields include amortization of deferred loan income and costs, loan origination, prepayment and other fees and the accretion of acquired loan marks.

Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment fees and the accretion of acquired loan marks.

Average loan balances include nonaccrual loans and loans held for sale.

2 unchanged sentences

Three Months Ended

September 30, 2021

September 30, 2020

(000's omitted except yields and rates)

Interest-earning assets:

Cash equivalents

Taxable investment securities (1)

Nontaxable investment securities (1)

Loans (net of unearned discount) (2)

Total interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities:

Interest checking, savings, and money market deposits

Time deposits

Customer repurchase agreements

FHLB borrowings

Subordinated notes payable

Subordinated debt held by unconsolidated subsidiary trusts

Total interest-bearing liabilities

Noninterest-bearing liabilities:

Noninterest checking deposits

Other liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Net interest earnings

Net interest spread

Net interest margin on interest-earning assets

Fully tax-equivalent adjustment (3)

(1) Averages for investment securities are based on historical cost basis and the yields do not give effect to changes in fair value that is reflected as a component of noninterest-earning assets, shareholders’ equity, and deferred taxes.

(2) Includes nonaccrual loans.

The impact of interest and fees not recognized on nonaccrual loans was immaterial.

(3) The fully-tax equivalent adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable.

The adjustment attempts to enhance the comparability of the performance of assets that have different tax liabilities.

Year-to-Date Average Balance Sheet

Nine Months Ended

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

(000's omitted except yields and rates)

26 unchanged sentences

The impact of interest and fees not recognized on nonaccrual loans was immaterial.

(3) The fully-tax equivalent adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable.

The adjustment attempts to enhance the comparability of the performance of assets that have different tax liabilities.

As discussed above and disclosed in Table 3 below, the change in net interest income (fully tax-equivalent basis) may be analyzed by segregating the volume and rate components of the changes in interest income and interest expense for each underlying category.

Three months ended September 30, 2021

Nine months ended September 30, 2021

versus September 30, 2020

Increase (Decrease) Due to Change in (1)

Three months ended March 31, 2022

versus March 31, 2021

Increase (Decrease) Due to Change in (1)

17 unchanged sentences

they are not a summation of the changes of the components.

Exclusive of the impact of PPP loans, the Company expects its fourth quarter 2021 net interest margin to remain below results in the comparable prior year quarter due to the significant and precipitous drop in the overnight Federal Funds and Prime interest rates in early 2020 that have remained into 2021.

In the near term, expected decreases in average earning asset yields are unlikely to be fully offset by expected decreases in the average cost of funds.

Although the stated interest rate on PPP loans is fixed at 1.00%, the Company’s recognition of the interest income on origination fees, net of deferred origination costs, on PPP loans will likely cause earning asset yield volatility as loans are forgiven by the SBA.

While the Company expects to recognize the majority of its remaining first draw net deferred PPP fees totaling $0.1 million through interest income during the fourth quarter of 2021 and the majority of its second draw net deferred PPP fees totaling $6.2 million over the next few quarters, the eligibility of the borrowers’ forgiveness requests and the SBA’s ability to provide loan forgiveness in a timely manner remains uncertain at this time.

Noninterest Revenues

6 unchanged sentences

and 4) insurance and risk management products and services (performed by OneGroup).

Additionally, the Company periodically generates noninterest revenues from investment and borrowing activities, including unrealized gains or losses on equity securities.

Additionally, the Company has other transactions, including unrealized gains or losses on equity securities.

Noninterest Revenues

Three Months Ended

Nine Months Ended

September 30,

(000's omitted)

6 unchanged sentences

Other banking revenues

Unrealized (loss) gain on equity securities

Unrealized gain on equity securities

Total noninterest revenues

Noninterest revenues/operating revenues (FTE basis) (1)

(1) For purposes of this ratio noninterest revenues excludes unrealized gains and losses on equity securities.

Operating revenues, a non-GAAP measure, is defined as net interest income on a fully-tax equivalent basis excluding acquired non-impaired loan accretion plus noninterest revenues excluding unrealized gains and losses on equity securities.

(1) For purposes of this ratio noninterest revenues excludes unrealized gain on equity securities.

Operating revenues, a non-GAAP measure, is defined as net interest income on a fully-tax equivalent basis plus noninterest revenues, excluding unrealized gain on equity securities and acquired non-PCD loan accretion.

See Table 10 for Reconciliation of GAAP to Non-GAAP Measures.

As displayed in Table 4, noninterest revenues, excluding unrealized (loss) gain on equity securities, were $64.3 million for the third quarter of 2021 and $182.3 million for the first nine months of 2021.

This represents an increase of $4.6 million, or 7.8%, for the quarter and an increase of $11.0 million, or 6.4%, for the YTD period in comparison to the equivalent 2020 periods.

The increase for the quarterly and YTD periods were driven by increases in employee benefit services revenue, wealth management services revenue and insurance services revenue, partially offset by a decrease in banking noninterest revenue.

Banking noninterest revenue of $16.9 million for the third quarter and $48.1 million for the first nine months of 2021 decreased $2.2 million, or 11.5%, and decreased $3.4 million, or 6.7%, respectively, as compared to the corresponding prior year periods.

The quarterly decrease was primarily driven by a decrease in mortgage banking revenues as the Company is currently holding almost all of its new consumer mortgage production in portfolio due to a change in its strategy, partially offset by increases in deposit service charges and fees, debit interchange and ATM fees and other banking revenues, reflective of increased transaction activity.

The YTD decline was primarily driven by decreases in mortgage banking revenues due to the aforementioned change in strategy and deposit service charges and fees including decreases in overdraft fees in part due to the higher average deposit balances resulting from government stimulus program inflows, partially offset by increases in debit interchange and ATM fees, reflective of increased transaction activity including the impact from the addition of new deposit relationships from the Steuben acquisition and higher other banking revenues.

Employee benefit services revenue increased $4.8 million, or 18.9%, and $9.3 million, or 12.5%, for the three and nine months ended September 30, 2021, respectively, as compared to the equivalent prior year periods.

This growth primarily related to increases in employee benefit trust and custodial fees, as well as incremental revenues from the acquisition of FBD during the third quarter.

Insurance services revenue was up $0.6 million, or 7.6%, and up $0.8 million, or 3.1%, for the third quarter and YTD periods, respectively.

These increases were primarily driven by incremental revenues from the acquisitions of TGA during the third quarter and NuVantage during the second quarter.

Wealth management services revenue was up $1.4 million, or 20.8%, for the third quarter of 2021 and was up $4.4 million, or 21.4%, for September 2021 YTD as compared to the same time periods of 2020, primarily driven by increases in investment management and trust services revenues due to the addition of new relationships and higher equity market valuations.

The ratio of noninterest revenues to operating revenues (FTE basis), as defined in footnote 1 of Table 4 above, was 41.0% for the quarter and 39.6% for the nine months ended September 30, 2021, respectively, versus 39.2% and 38.5% for the comparable periods of 2020.

The increase for the year-to-date period is a function of a 6.4% increase in adjusted noninterest revenues while adjusted net interest income (FTE basis) increased at a slower 1.2% pace.

The Company expects its full-year mortgage banking revenues in 2021 to continue to be below 2020 as the Company reduced the amount of sales of secondary market eligible residential mortgage loans beginning in the fourth quarter of 2020.

As displayed in Table 4, noninterest revenues were $65.7 million for the first quarter of 2022.

This represents an increase of $7.1 million, or 12.2%, for the quarter in comparison to the same 2021 timeframe.

The increase was a result of increases in banking noninterest revenue, employee benefit services revenue, wealth management services revenue and insurance services revenue, partially offset by a decrease in unrealized gain on equity securities.

Banking noninterest revenue of $17.1 million for the first quarter of 2022 increased $1.4 million, or 9.1% as compared to the corresponding prior year period.

This year-over-year increase was primarily driven by increases in deposit service charges and fees, including an increase in overdraft fees, and debit interchange and ATM fees, reflective of increased transaction activity, partially offset by decreases in mortgage banking revenue and other banking revenues.

Employee benefit services revenue increased $3.1 million, or 11.5%, as compared to the prior year first quarter primarily related to increases in employee benefit trust and custodial fees, as well as incremental revenues from the acquisition of Fringe Benefits Design of Minnesota, Inc.

(“FBD”) during the third quarter of 2021.

Wealth management services revenue was up $0.4 million, or 5.3%, as compared to the prior year first quarter primarily driven by increases in investment management and trust services revenues.

Insurance services revenue was up $2.3 million, or 27.7%, for the first quarter of 2022 as compared to the first quarter of 2021, driven by organic expansion, as well as the second quarter 2021 acquisition of a Florida-based personal lines insurance agency and third quarter 2021 acquisition of a Boston-based specialty-lines insurance practice.

The ratio of noninterest revenues to operating revenues (FTE basis) was 40.9% for the quarter ended March 31, 2022 versus 38.4% for the equivalent period of 2021.

The decrease is due to a 12.2% increase in adjusted noninterest revenues driven by the factors noted above, while adjusted net interest income (FTE basis) increased 0.9% driven by significant earning asset growth partially offset by net interest margin contraction.

The Company is continuing to evaluate its deposit offerings and associated deposit services charges and fees, but is presently uncertain to whether any resulting modifications will have a material impact to banking noninterest revenues.

The pending Elmira acquisition is expected to provide incremental deposit service charges and fees revenue and debit interchange and ATM fees revenue once completed.

Noninterest Expenses

2 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(000's omitted)

5 unchanged sentences

Business development and marketing

Litigation accrual

Acquisition expenses

2 unchanged sentences

Efficiency ratio (2)

(1) Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less litigation accrual expenses,acquisition expenses and amortization of intangibles.

(1) Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses and amortization of intangibles.

See Table 10 for Reconciliation of GAAP to Non-GAAP Measures.

(2) Efficiency ratio, a non-GAAP measure, is calculated as operating expenses as defined in (1) above divided by net interest income on a fully tax-equivalent basis excluding acquired non-impaired loan accretion plus noninterest revenues excluding unrealized gains and losses on equity securities.

(2) Efficiency ratio, a non-GAAP measure, is calculated as operating expenses as defined in (1) above divided by net interest income on a fully tax-equivalent basis excluding acquired non-PCD loan accretion plus noninterest revenues excluding unrealized gain on equity securities.

See Table 10 for Reconciliation of GAAP to Non-GAAP Measures.

As shown in Table 5, the Company recorded noninterest expenses of $100.4 million and $287.2 million for the third quarter and YTD periods of 2021, respectively, representing an increase of $3.5 million, or 3.6%, and an increase of $5.7 million, or 2.0%, from the respective prior year periods.

Combined acquisition-related expenses and litigation accrual expenses of $3.7 million and $7.5 million are included in third quarter 2020 and YTD 2020 noninterest expenses, respectively.

Salaries and employee benefits increased $5.6 million, or 9.8%, and $8.2 million, or 4.8%, for the third quarter and YTD periods of 2021, respectively, as compared to the corresponding periods of 2020.

The increase in salaries and benefits was driven by increases in merit and incentive-related employee wages, higher payroll taxes, including increases in state-related unemployment taxes, higher employee benefit-related expenses and staffing increases due to recent acquisitions.

The remaining change to noninterest expenses can be attributed to occupancy and equipment (down $0.3 million for the quarter driven by branch consolidation activities between the periods and up $0.8 million YTD driven by the Steuben acquisition), data processing and communications (up $0.9 million for the quarter and $4.8 million YTD driven by the Steuben acquisition and the Company’s implementation of new customer-facing digital technologies and back office systems), amortization of intangible assets (up $0.1 million for the quarter due to recent acquisitions and down $0.5 million YTD), legal and professional fees (up $1.0 million for the quarter and $0.3 million YTD due to the general increase in the level of business activities), business development and marketing (down $0.8 million for the quarter and $0.1 million YTD) and other expenses (up $0.7 million for the quarter due to the general increase in the level of business activities and down $0.3 million YTD).

Included in other expenses was an increase in non-service related components of the net periodic pension benefit credit (up $0.6 million for the quarter and $2.0 million YTD).

The Company’s efficiency ratio (as defined in Table 5 above) was 61.7% for the third quarter, 2.8% unfavorable to the comparable quarter of 2020.

This resulted from operating expenses (as described in footnote 1 of Table 5 above) increasing 7.9%, while operating revenues (as described in footnote 2 of Table 5 above) increased a lesser 3.0%.

The efficiency ratio of 60.1% for the first nine months of 2021 was 0.9% unfavorable compared to the first nine months of 2020 due to 5.2% higher operating expenses (as described in footnote 1 of Table 5 above), while operating revenues (as described footnote 2 of Table 5 above) increased by 3.4%.

Current year operating expenses, excluding intangible amortization, litigation accrual expenses and acquisition expenses, as a percentage of average assets decreased eight basis points versus the prior year quarter and was 27 basis points lower than the prior year-to-date period as operating expenses (as defined above) increased at a slower pace than average assets.

Operating expenses (as defined above) increased 7.9% for the quarter and increased 5.2% for the year-to-date period, while average assets increased 11.0% for the quarter and increased 16.5% for the year-to-date period.

The third quarter and YTD 2021 effective income tax rates were 21.1% and 20.9%, respectively, as compared to the 20.3% and 19.8% for the comparable periods of 2020.

The increase in the third quarter and YTD 2021 effective income tax rates is primarily attributable to an increase in certain state income tax rates that were enacted in the second quarter of 2021.

Partially offsetting this was a higher level of benefit derived from stock based compensation activity for YTD 2021.

The Company recorded a $2.0 million and $1.3 million reduction in income tax expense associated with stock-based compensation tax benefits for YTD 2021 and YTD 2020, respectively.

The effective tax rates adjusted to exclude stock-based compensation tax benefits for the third quarter and YTD 2021 were 21.1% and 22.0%, respectively, as compared to 20.4% and 20.7% for the comparable periods of 2020.

Investment Securities

The carrying value of investment securities (including unrealized gains and losses) was $4.40 billion at the end of the third quarter, an increase of $808.1 million from December 31, 2020 and $1.13 billion higher than September 30, 2020.

The balance of cash equivalents was $2.10 billion at the end of the third quarter, an increase of $629.4 million from December 31, 2020 and $461.7 million higher than September 30, 2020.

The book value of investment securities (excluding unrealized gains and losses) of $4.45 billion at the end of the third quarter increased $976.7 million from December 31, 2020 and increased $1.34 billion from September 30, 2020.

During the first nine months of 2021, the Company purchased $1.16 billion of U.S.

Treasury and agency securities with an average yield of 1.28%, $102.4 million of government agency mortgage-backed securities with an average yield of 1.77%, $13.8 million of obligations of state and political subdivisions with an average yield of 2.44% and $5.0 million of corporate debt securities with an average yield of 3.25%.

These additions were partially offset by $313.9 million of investment maturities, calls and principal payments during the first nine months of 2021.

Additionally, there was $8.5 million of net accretion on investment securities during the first nine months of 2021.

The effective duration of the investment securities portfolio was 7.6 years at the end of the third quarter of 2021, as compared to 7.7 years at the end of 2020 and 3.2 years at the end of the third quarter of 2020.

As shown in Table 5, the Company recorded noninterest expenses of $99.8 million for the first quarter of 2022, representing an increase of $6.6 million, or 7.0%, from the prior year first quarter.

The increase in operating expenses was attributable to a $4.0 million, or 7.0%, increase in salaries and employee benefits, a $0.7 million, or 35.1%, increase in business development and marketing, a $0.6 million, or 19.2%, increase in legal and professional fees, a $0.6 million, or 19.4%, increase in other expenses, a $0.4 million, or 11.4%, increase in the amortization of intangible assets, a $0.3 million, or 2.2%, increase in data processing and communications expenses and a $0.3 million increase in acquisition-related expenses.

The increases in these expenses were partially offset by a $0.3 million, or 3.1% decrease in occupancy and equipment expense.

The increase in salaries and benefits expense was driven by increases in merit and incentive-related employee wages, higher payroll taxes, and higher employee benefit-related expenses, offset, in part, by a decrease in full-time equivalent staff between the periods.

Other expenses were up due to the general increase in the level of business activities, including increases in business development and marketing expenses, insurance, professional fees and travel-related expenses.

The increase in data processing and communications expenses was due to the Company’s implementation of new customer-facing digital technologies and back office systems between the comparable periods.

The decrease in occupancy and equipment expense was largely driven by branch office consolidations undertaken between the periods.

The Company’s efficiency ratio (as defined in the table above) was 59.6% for the first quarter of 2022, 0.6 percentage points unfavorable to the comparable quarter of 2021.

This resulted from operating expenses (as described above) increasing 6.6%, while operating revenue (as described above) increased by a lesser 5.5%.

Current year operating expenses, excluding intangible amortization and acquisition expenses, as a percentage of average assets decreased eight basis points versus the prior year first quarter.

First quarter operating expenses (as defined above) increased 6.6% year-over-year, while average assets increased 10.2% primarily due to large inflows of government stimulus-related deposit funding.

The first quarter 2022 effective income tax rate was 21.4%, compared to 18.6% for the first quarter of 2021.

The increase in the rate is primarily attributable to a lower level of benefit derived from stock based compensation activity in the first quarter of 2022.

The Company recorded a $0.6 million and $1.8 million reduction in income tax expense associated with stock-based compensation tax benefits for the first quarter of 2022 and 2021, respectively.

The effective tax rates excluding the stock-based compensation tax benefits were 22.3% for the first quarter of 2022 and 21.4% for the first quarter of 2021, reflective of an increase in certain state income taxes that were enacted between the periods and a decrease in the proportion of tax-exempt revenues in relation to total revenues in the first quarter of 2022 as compared to the prior year’s first quarter.

The carrying value of investment securities (including unrealized gains and losses on available-for-sale securities) was $5.83 billion at the end of the first quarter, an increase of $852.5 million, or 17.1%, from December 31, 2021 and $2.00 billion, or 52.0%, higher than March 31, 2021.

The carrying value of cash equivalents was $840.6 million at the end of the first quarter, a decrease of $877.9 million, or 51.1%, from December 31, 2021 and $1.16 billion, or 57.9%, lower than March 31, 2021, as the Company meaningfully shifted the composition of earning assets away from low-yield cash equivalents to higher yielding investment securities between the periods.

The book value (excluding unrealized gains and losses) of investment securities increased $1.21 billion from December 31, 2021 and increased $2.29 billion from March 31, 2021.

During the first quarter of 2022, the Company purchased $1.14 billion of U.S.

Treasury and agency securities with an average yield of 1.62%, $25.8 million of government agency mortgage-backed securities with an average yield of 2.42%, and $95.7 million of obligations of state and political subdivisions with an average yield of 3.31%.

These additions were offset by proceeds of $50.0 million from investment maturities, calls, and principal payments during the first three months of 2022.

Additionally, there was $4.7 million of net accretion on investment securities during the first quarter of 2022.

The effective duration of the investment securities portfolio was 6.9 years at the end of the first quarter of 2022, as compared to 7.5 years at the end of 2021 and 7.8 years at the end of the first quarter of 2021.

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses.

At September 30, 2021, the portfolio had a $47.5 million net unrealized loss, a decrease of $168.6 million from the net unrealized gain at December 31, 2020 and a $202.8 million decrease from the net unrealized gain at September 30, 2020.

At March 31, 2022, the portfolio had a $403.7 million net unrealized loss, a decrease of $358.8 million from the $44.9 million net unrealized loss at December 31, 2021 and a $297.4 million decrease from the $106.3 million net unrealized loss at March 31, 2021.

These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases and maturities that have occurred over the past 12 months.

The following table sets forth the fair value for the Company’s investment securities portfolio:

Investment Securities

September 30, 2021

December 31, 2020

September 30, 2020

(000's omitted)

13 unchanged sentences

Total investments

As shown in Table 7, loans ended the third quarter at $7.28 billion, down $176.1 million, or 2.4%, from one year earlier and down $133.4 million, or 1.8%, from the end of 2020.

The decline during the last twelve months occurred primarily in the business lending portfolio, reflective of a net decrease in PPP loans, along with lesser declines in the home equity and consumer direct portfolios, partially offset by increases in the consumer indirect and consumer mortgage portfolios.

The decline from the end of 2020 was also primarily in the business lending portfolio, reflective of a net decrease in PPP loans, along with a lesser decline in the home equity portfolio, partially offset by increases in the consumer indirect, consumer mortgage and consumer direct portfolios.

(000's omitted)

September 30, 2021

December 31, 2020

September 30, 2020

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

The business lending portfolio consists of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and vehicle dealer floor plan financing.

The business lending portfolio decreased $341.4 million, or 9.9%, from September 30, 2020, primarily driven by a $336.8 million net decrease in PPP loans as a result of forgiveness granted by the SBA.

The portfolio decreased $347.9 million from December 31, 2020, primarily attributable to a $302.6 million net decrease in PPP loans.

Loans ended the first quarter at $7.42 billion, $48.6 million, or 0.7%, higher than the fourth quarter of 2021 ending loans of $7.37 billion and $53.9 million, or 0.7%, higher than March 31, 2021.

The business lending portfolio decreased $289.3 million, or 8.5%, from March 31, 2021, primarily driven by a $356.4 million net decrease in PPP loans due to loan forgiveness activities.

The portfolio increased $26.6 million, or 0.9%, from December 31, 2021, despite a $42.1 million net decrease in PPP loans between the periods due to loan forgiveness activities.

Highly competitive conditions for business lending continue to prevail in both the digital marketplace and geographic regions in which the Company operates.

4 unchanged sentences

In addition, the Company participated in the 2021 Consolidated Appropriations Act’s (“CAA”) PPP loan program, now known as second draw loans.

As of September 30, 2021, the Company’s business lending portfolio included 45 first draw PPP loans with a total balance of $14.4 million and 1,341 second draw PPP loans with a total balance of $151.0 million.

This compares to 3,417 first draw PPP loans with a total balance of $470.7 million at December 31, 2020 and 3,473 first draw PPP loans with a total balance of $507.2 million at September 30, 2020.

Consumer mortgages increased $60.7 million, or 2.5%, from one year ago and increased $69.5 million, or 2.9%, from December 31, 2020 driven by strong housing demand.

As of March 31, 2022, the Company’s business lending portfolio included 23 first draw PPP loans with a total balance of $1.8 million and 400 second draw PPP loans with a total balance of $42.6 million.

This compares to 32 first draw PPP loans with a total balance of $10.7 million and 690 second draw PPP loans with a total balance of $77.2 million at the end of the fourth quarter of 2021, and 874 first draw PPP loans with a total balance of $219.4 million and 1,819 second draw PPP loans with a total balance of $191.5 million at March 31, 2021.

Consumer mortgages increased $183.2 million, or 7.6%, from one year ago, and increased $36.5 million, or 1.4%, from December 31, 2021, driven by continued strong housing demand and the Company’s competitive product offerings and business development efforts.

Interest rate levels, secondary market premiums, expected duration and ALCO strategies continue to be the most significant factors in determining whether the Company chooses to retain, versus sell and service, portions of its new mortgage production.

During the fourth quarter of 2020, the Company sold $42.3 million of its secondary market eligible consumer mortgages, which offset a portion of the increase in outstanding balances between the comparable annual periods.

The Company changed its strategy to hold the majority of its secondary market eligible consumer mortgages during the fourth quarter of 2020 and is currently holding almost all of its new consumer mortgage production in portfolio, with only $17.0 million of consumer mortgages sold in the first nine months of 2021.

Home equity loans decreased $17.8 million, or 4.3%, from one year ago and decreased $4.4 million, or 1.1%, from December 31, 2020.

The Company continues to experience paydowns in its home equity portfolio due in part to some consumers using stimulus funds to reduce debt levels and balances being rolled into re-financed first lien consumer mortgages that offer attractive attributes to customers.

Consumer installment loans, both those originated directly in the branches (referred to as “consumer direct”) and indirectly in automobile, marine, and recreational vehicle dealerships (referred to as “consumer indirect”), increased $122.4 million, or 10.2%, from one year ago and increased $149.4 million, or 12.7%, from December 31, 2020 due in large part to high demand driven by low market interest rates and added personal liquidity to fund larger down payments.

Strained supplies in all categories, while not impactful enough thus far to substantially stunt growth opportunities, will continue to prop up pricing in all indirect collateral categories.

The Company is currently holding almost all of its new consumer mortgage production in portfolio.

Home equity loans increased $2.9 million, or 0.7%, from one year ago, and increased $0.3 million, or 0.1%, from December 31, 2021.

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine, and recreational vehicle dealerships (referred to as “consumer indirect”), increased $157.1 million, or 13.4%, from one year ago, and decreased $14.7 million, or 1.1%, from December 31, 2021.

Strained supplies in all categories have had some impact on growth opportunities and continue to cause elevated collateral values in all indirect collateral categories.

Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable, in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network.

3 unchanged sentences

The Company’s business lending balances will be unfavorably impacted as first draw and second draw PPP loans continue to be forgiven by the SBA.

The Company anticipates assisting the remainder of the Company’s first draw PPP borrowers with forgiveness requests during the fourth quarter of 2021 and the majority of the Company’s second draw PPP borrowers with forgiveness requests over the next few quarters.

The longer-term implications that COVID-19 and the repayment of PPP loans will have on business lending loan demand are presently difficult to predict.

The Company anticipates assisting the majority of its PPP borrowers with forgiveness requests during the remainder of 2022.

The longer-term implications that COVID-19 and the repayment of PPP loans will have on business lending loan demand continue to be difficult to predict.

Asset Quality

Table 8 below exhibits the major components of nonperforming loans and assets and key asset quality metrics for the periods ending September 30, 2021 and 2020 and December 31, 2020.

Nonperforming Assets

September 30,

(000’s omitted)

Nonaccrual loans

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

Total nonaccrual loans

Accruing loans 90+ days delinquent

The following table sets forth the allocation of the allowance for credit losses by loan category as well as the proportional share of each category’s loan balance to total loans.

This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes when the risk factors of each component part change.

The allocation is not indicative of either the specific amounts of the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends.

The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.

As shown in Table 7, total allowance for credit losses at the end of the first quarter was $50.1 million, down $4.9 million, or 8.9%, from one year earlier and up $0.3 million, or 0.6%, from the end of 2021.

Allowance for Credit Losses by Loan Type

March 31, 2022

December 31, 2021

March 31, 2021

(000's omitted except for ratios)

Business lending

2 unchanged sentences

Consumer direct

Total accruing loans 90+ days delinquent

Nonperforming loans

As demonstrated in Table 7 and discussed previously, business lending and consumer installment carry higher credit risk than residential real estate, and as a result, these loans carry allowance for credit losses that cover a higher percentage of their total portfolio balances.

The unallocated allowance is maintained for potential inherent losses in the specific portfolios that are not captured due to model imprecision.

The unallocated allowance of $1.0 million at March 31, 2022 was consistent with December 31, 2021 and March 31, 2021.

The changes in allowance allocations reflect management’s continued refinement of its loss estimation techniques.

However, given the inherent imprecision in the many estimates used in the determination of the allocated portion of the allowance, management remained conservative in the approaches used to establish the overall allowance for credit losses.

Management considers the allocated and unallocated portions of the allowance for credit losses to be prudent and reasonable.

Furthermore, the Company’s allowance for credit losses is general in nature and is available to absorb losses from any loan category.

Allowance for credit losses and loan net charge-off ratios are as follows:

Allowance for credit losses/total loans

Allowance for credit losses/nonperforming loans

Nonaccrual loans/total loans

Allowance for credit losses/nonaccrual loans

Net charge-offs (annualized) to average loans outstanding (quarterly):

Business lending

2 unchanged sentences

Consumer direct

Total nonperforming loans

Other real estate owned (OREO)

Total nonperforming assets

Nonperforming loans / total loans

Nonperforming assets / total loans and other real estate

Delinquent loans (30 days old to nonaccruing) to total loans

Net charge-offs to average loans outstanding (quarterly)

Provision for credit losses to net charge-offs (quarterly)

As displayed in Table 8, nonperforming assets at September 30, 2021 were $68.7 million, a $9.0 million decrease versus the level at the end of 2020 and a $35.3 million increase as compared to one year earlier.

Nonperforming loans decreased $9.0 million from year-end 2020 and increased $35.6 million from September 30, 2020.

Nonperforming loans were 0.93% of total loans outstanding at the end of the third quarter, 11 basis points lower than the level at December 31, 2020 and 50 basis points higher than the level at September 30, 2020.

With respect to the Company’s lending activities, the Company continues to consider customer forbearance requests to assist borrowers that may be experiencing financial hardship due to COVID-19 related challenges, but such requests diminished significantly in the first nine months of 2021.

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 0.01% of total loans outstanding.

This compares to 74 borrowers and $66.5 million in loans outstanding in forbearance at December 31, 2020 and 216 borrowers and $192.7 million in loans outstanding in forbearance at September 30, 2020.

Consistent with 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.

Borrowers that were delinquent in their payments to the Bank prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case-by-case basis for troubled debt restructure classification and nonperforming loan status.

The increase in nonperforming assets and loans over the prior year was primarily driven by the Company’s decision to reclassify loans under extended pandemic-related forbearance to nonperforming status.

More specifically, during the fourth quarter of 2020, several commercial borrowers, which primarily operate in the hospitality, travel and entertainment industries, requested extended loan repayment forbearance due to the continued pandemic-related financial hardship they were experiencing.

Although the Company’s management granted these forbearance requests, it also reclassified the majority of these loan relationships from accruing to nonaccrual status, unless the borrower clearly demonstrated current repayment capacity or sufficient cash reserves to service their pre-forbearance payment obligations.

Other real estate owned (“OREO”) at September 30, 2021 of $0.9 million was consistent with December 31, 2020 and decreased $0.3 million from September 30, 2020.

At September 30, 2021, OREO consisted of five residential properties with a total value of $0.3 million and one commercial property with a value of $0.6 million.

This compares to five residential properties with a total value of $0.3 million and one commercial property with a value of $0.6 million at December 31, 2020, and nine residential properties with a total value of $0.6 million and one commercial property with a value of $0.6 million at September 30, 2020.

Approximately 71% of the nonperforming loans at September 30, 2021 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type.

The level of nonperforming business loans increased from the prior year due to the continued pandemic-related financial hardship experienced by certain borrowers as described previously.

Approximately 25% of nonperforming loans at September 30, 2021 were comprised of consumer mortgages.

The net charge-offs during the first quarter of 2022 were $0.5 million, $0.1 million higher than the first quarter of 2021.

The business lending, home equity, and consumer mortgage portfolios experienced lower net charge-offs during the first quarter of 2022, as compared to the first quarter of 2021, while the consumer indirect and consumer direct portfolios experienced higher net charge-offs than the equivalent prior year period.

The total net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the first quarter of 2022 was 0.03%, one basis point higher than the first quarter of 2021.

Net charge-off ratios for the first quarter of 2022 for the home equity, consumer direct, business lending, and consumer mortgage portfolios were below the Company’s average for the trailing eight quarters, while the net charge-off ratio for the consumer indirect portfolio was above the Company’s average for the trailing eight quarters.

The Company believes the continued very low amount of net charge-offs recorded in the first quarter is reflective of general economic conditions, including low levels of unemployment.

This is coupled with the residual effect of the extraordinary Federal and State Government financial support provided to consumers throughout the COVID-19 pandemic along with financial support provided to businesses in the form of PPP loans and forbearance programs.

Other real estate owned (“OREO”) at March 31, 2022 was $0.4 million.

This compares to $0.7 million at December 31, 2021 and $0.8 million as of March 31, 2021.

At March 31, 2022, OREO consisted of five residential properties with a total value of $0.4 million.

This compares to two residential properties with a total value of $0.1 million and one commercial property with a total value of $0.6 million at December 31, 2021, and four residential properties with a total value of $0.2 million and one commercial property with a value of $0.6 million at March 31, 2021.

Approximately 38% of the nonperforming loans at March 31, 2022 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type.

The level of nonperforming loans decreased significantly from the prior year as the economic environment improved and businesses resumed normal operations.

The Company upgraded several large business loans that had previously requested extended loan repayment forbearance due to pandemic-related hardship from nonaccrual to accruing status during the first quarter of 2022 and fourth quarter of 2021.

These borrowers had successfully restored all past due payments to current status, resumed their pre-forbearance payment obligations for a period of at least six months, and demonstrated sufficient repayment capacity and cash reserves to be reclassified to accruing status during the fourth quarter of 2021 and first quarter of 2022.

Approximately 54% of nonperforming loans at March 31, 2022 were comprised of consumer mortgages.

Collateral values of residential properties within the Company’s market area have generally remained stable or have increased over the past several years.

Additionally, strong economic conditions prior to COVID-19, including lower unemployment levels, positively impacted consumers and had resulted in more favorable nonperforming consumer mortgage ratios.

Economic conditions impacted by COVID-19, including increased unemployment rates, travel restrictions and state government shutdowns of certain business activities, as well as COVID-19 related delays in foreclosure processes have improved over the past few quarters, contributing to a modest decrease in nonperforming loans in the consumer mortgage portfolio as compared to one year earlier.

Additionally, strong economic conditions prior to COVID-19 and the recent economic recovery, including lower unemployment levels, has positively impacted consumers and had resulted in more favorable nonperforming consumer mortgage ratios.

The Company will continue to closely monitor the impact that economic conditions associated with the COVID-19 pandemic could have on its level of delinquent loans, nonperforming assets and ultimately credit-related losses and proactively engage with our customers to strive to limit the potential losses.

The remaining 8% of nonperforming loans relate to consumer installment and home equity loans, with home equity nonperforming loan levels being driven by the same factors that were identified for consumer mortgages.

The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 73% at the end of the third quarter, as compared to 79% at year-end 2020 and 201% at September 30, 2020.

The decrease in this ratio between the annual quarterly periods was primarily driven by the increase in nonperforming business loans as mentioned previously.

The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 139% at the end of the first quarter, as compared to 110% at year-end 2021 and 73% at March 31, 2021.

The increase in this ratio between the annual quarterly periods was primarily driven by a continued decrease in nonperforming business loans noted above.

The Company’s senior management, special asset officers and lenders review all delinquent and nonaccrual loans and OREO regularly in order to identify deteriorating situations, monitor known problem credits and discuss any needed changes to collection efforts, if warranted.

3 unchanged sentences

Commercial lending management reviews the criticized business loan portfolio on a monthly basis.

Delinquent loans (30 days past due through nonaccruing) as a percent of total loans was 1.28% at the end of the third quarter, 22 basis points below the 1.50% at year-end 2020 and 49 basis points above the 0.79% at September 30, 2020.

The business lending delinquency ratio at the end of the third quarter was four basis points below the level at December 31, 2020 and 128 basis points above the level at September 30, 2020, largely attributable to the aforementioned pandemic-related hardship experienced by certain loan customers.

The delinquency rates for the consumer mortgage, consumer indirect and consumer direct portfolios all decreased as compared to the levels at December 31, 2020 and September 30, 2020, while the delinquency rate for the home equity portfolio decreased as compared to the level at December 31, 2020 and increased as compared to the level at September 30, 2020.

The Company believes the decreases in consumer delinquent loan levels was supported by the extraordinary Federal and State Government financial assistance that has been provided to consumers throughout the pandemic.

Prediction of future delinquency and credit loss performance is extremely difficult given the uncertainties centering around the evolution of the virus, the efficacy of vaccination programs, the related pace of the full resumption of business activities, and the trajectory of the economic recovery as government assistance programs are phased out.

Delinquent loans (30 days past due through nonaccruing) as a percent of total loans was 0.84% at the end of the first quarter, 16 basis points below the 1.00% at year-end 2021 and 45 basis points below the 1.29% at March 31, 2021.

The business lending delinquency ratio at the end of the first quarter was 30 basis points below the level at December 31, 2021 and 106 basis points below the level at March 31, 2021, largely attributable to the reclassification of certain business loans’ status from nonaccrual to accruing during the fourth quarter of 2021 and first quarter of 2022.

The delinquency rates for the consumer mortgage, consumer indirect, consumer direct and home equity portfolios all increased as compared to the levels at March 31, 2021, however, all decreased as compared to their levels at December 31, 2021.

The Company believes that its credit-related losses and delinquent loan levels have recently been below longer-term historical levels in part due to the extraordinary Federal and Statement Government financial assistance provided to consumers throughout the pandemic, as well as the funding support to business customers who participated in PPP lending.

Prediction of future delinquency and credit loss performance is difficult, because although recent economic growth has been above average and the majority of the restrictions that were put in place during the pandemic have been lifted, there remains uncertainty surrounding the future evolution of the virus, as well as the economic fallout created by supply chain constraints and inflationary pressures.

Due to the Company’s continued focus on maintaining strict underwriting standards and the effective utilization of its collection capabilities, the Company expects that its credit performance will eventually return to levels consistent with its average long-term historical results once public health, government intervention and economic conditions return to a more normalized state.

Allowance for Credit Losses Activity

Three Months Ended

Nine Months Ended

September 30,

(000’s omitted)

Allowance for credit losses at beginning of period

Impact of adopting ASC 326

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

Total charge-offs

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

Total recoveries

Net charge-offs

Allowance for credit losses on acquired PCD loans

Provision for credit losses related to loans

Provision for credit losses related to acquisition

Allowance for credit losses at end of period

Liabilities for off-balance-sheet credit exposures at beginning of period

Impact of adopting ASC 326

Provision for credit losses related to off-balance-sheet credit exposures from acquisition

Provision for credit losses related to off-balance-sheet credit

Liabilities for off-balance-sheet credit exposures at end of period

Allowance for credit losses / total loans

Allowance for credit losses / nonperforming loans

Net charge-offs (annualized) to average loans outstanding:

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

As displayed in Table 9, net charge-offs during the third quarter of 2021 were $1.4 million, $0.1 million higher than third quarter of 2020 net charge-offs of $1.3 million.

Net charge-offs for the nine months ended September 30, 2021 were $1.1 million, $2.6 million below the $3.7 million of net charge-offs during the first nine months of 2020.

All portfolios experienced lower levels of net charge-offs for the YTD periods of 2021 as compared to the corresponding period of 2020.

The consumer indirect, consumer direct and home equity portfolio experienced slightly higher levels of net charge-offs during the third quarter as compared to the corresponding period of 2020, while the consumer mortgage and business lending portfolios experienced slightly lower levels of net charge-offs as compared to the same period.

The annualized net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the third quarter of 2021 was 0.07%, consistent with the third quarter of 2020.

Net charge-off ratios for the third quarter of 2021 for the consumer direct, consumer indirect, home equity and consumer mortgage portfolios were below the Company’s average for the trailing eight quarters, while the net charge-off ratio for the business lending portfolio was above the Company’s average for the trailing eight quarters.

The September YTD annualized net charge-off ratio of 0.02% for total loans was five basis points lower than it was for the equivalent prior year period.

The Company recorded a $0.9 million net benefit in the provision for credit losses in the third quarter and an $11.0 million net benefit in the provision for credit losses for the YTD period.

The third quarter provision for credit losses was $2.9 million less than the $2.0 million provision for credit losses recorded in the prior year’s third quarter.

Exclusive of the $3.2 million of acquisition-related provision due to the Steuben transaction recorded in the second quarter of 2020, the YTD provision for credit losses was $25.1 million lower than the equivalent prior year period.

The allowance for credit losses of $49.5 million as of September 30, 2021 decreased $15.5 million from the level one year ago.

At the end of the third quarter of 2020, unemployment was high and economic forecasts reflected continued weakness due to the state of the COVID-19 pandemic.

Conversely, during the third quarter of 2021, economic forecasts remained comparatively favorable given the state of the post-vaccine economic recovery, which, in combination with elevated real estate and vehicle collateral values, drove down expected life of loan losses, resulting 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.

The Company recorded a $0.9 million provision for credit losses in the first quarter, including a $0.1 million credit loss expense related to off-balance sheet credit exposures.

The first quarter provision for credit losses was $6.6 million higher than the equivalent prior year period’s net benefit in the provision for credit losses of $5.7 million, which was mostly driven by a significantly more favorable economic condition and outlook and a decline in outstanding balances.

The allowance for credit losses of $50.1 million as of March 31, 2022 decreased $4.9 million from the level one year ago.

The current quarter provision for credit losses is reflective of a stable economic outlook, low levels of net charge-offs and delinquent loans, an increase in loans outstanding, and a decrease in nonperforming loans.

The allowance for credit losses to total loans ratio was 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.

Refer to Note E:

Loans of the Consolidated Financial Statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

As of September 30, 2021, the net purchase discount related to the $1.10 billion of remaining non-PCD loan balances acquired from prior period acquisitions was approximately $8.8 million, or 0.80% of that portfolio.

As shown in Table 10, average deposits of $12.50 billion in the third quarter were $1.57 billion, or 14.4%, higher than the third quarter of 2020, primarily due to the larger than anticipated net inflows and retention of funds related to government stimulus and PPP programs.

Total average deposit balances increased $1.29 billion, or 11.5%, from the fourth quarter of last year, due to continued net inflows of deposits, including those associated with additional stimulus payments and a second round of PPP lending.

Average noninterest checking deposits as a percentage of average total deposits was 30.7% in the third quarter compared to 30.3% in the third quarter of 2020 and 29.9% in the fourth quarter of last year.

Non-maturity deposits (noninterest checking, interest checking, savings and money markets) represent 92.3% of the Company’s deposit funding base (up from 91.2% one year earlier), while time deposits represent 7.7% of total average third quarter deposits (down from 8.8% one year earlier).

The quarterly average cost of deposits was 0.09% for the third quarter of 2021, compared to 0.12% for the fourth quarter of 2020 and 0.13% in the third quarter of 2020, reflective of market-driven decreases in deposit interest rates between the periods and an increase in the proportion of average noninterest checking deposits.

The Company continues to focus on expanding its core deposit relationship base through its competitive product offerings and high quality customer service.

Average nonpublic fund deposits for the third quarter of 2021 increased $1.14 billion, or 11.6%, versus the fourth quarter of 2020 and increased $1.24 billion, or 12.7%, versus the year-earlier period.

Average public fund deposits for the third quarter increased $151.1 million, or 11.4%, from the fourth quarter of 2020 and increased $328.8 million, or 28.5%, from the third quarter of 2020.

Average public fund deposits as a percentage of total average deposits increased from 10.5% in the third quarter of 2020 to 11.9% in the third quarter of 2021, impacted by federal and state stimulus program-related support to municipalities to cover COVID-19 expenditures and investments that cover multi-year timeframes.

Loans and Allowance for Credit Losses in the notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

As of March 31, 2022, the net purchase discount related to the $966.0 million of remaining non-PCD loan balances acquired from prior period acquisitions was approximately $7.3 million, or 0.75% of that portfolio.

As shown in Table 9, average deposits of $13.07 billion in the first quarter were $1.52 billion, or 13.1%, higher than the first quarter of 2021, primarily due to large inflows of government stimulus-related deposit funding.

Total average deposit balances increased $237.7 million, or 1.9%, from the fourth quarter of last year, due to continued net inflows of deposits.

The mix of average deposit balances changed as the weighting of non-time deposits (noninterest checking, interest checking, savings and money markets) to total deposits has increased slightly from the prior year levels.

The quarterly average cost of deposits was 0.08% for the first quarter of 2022, compared to 0.11% in the first quarter of 2021, reflective of the decrease in the average interest rate on interest bearing deposits primarily due to a decrease in the interest rate paid on time deposits and the impact of aforementioned change in deposit mix.

The Company continues to focus on growing its core deposit relationships through its proactive marketing efforts, competitive product offerings and high quality customer service.

Average nonpublic fund deposits for the first quarter of 2022 increased $182.4 million, or 1.6%, versus the fourth quarter of 2021 and increased $1.21 billion, or 11.9%, versus the year-earlier period.

Average public fund deposits for the first quarter increased $55.3 million, or 3.3%, from the fourth quarter of 2021 due to the seasonal receipt of taxes and increased $310.4 million, or 22.0%, from the first quarter of 2021, partially attributable to the funding received by local governments and school districts associated with federal COVID and infrastructure programs.

Average public fund deposits as a percentage of total average deposits increased from 12.2% in the first quarter of 2021 to 13.2% in the first quarter of 2022.

Quarterly Average Deposits

September 30,

(000’s omitted)

8 unchanged sentences

Total deposits

Borrowings, excluding securities sold under agreement to repurchase, at the end of the third quarter of 2021 totaled $6.2 million.

This was $81.1 million, or 92.9%, lower than borrowings at December 31, 2020 and $92.5 million, or 93.7%, below the level at the end of the third quarter of 2020.

The decrease from the prior year third quarter was primarily due to the redemption of $77.3 million of trust preferred subordinated debt held by Community Capital Trust IV (“CCT IV”), an unconsolidated subsidiary trust, during the first quarter of 2021, the redemption of $10.4 million of subordinated notes payable acquired from the Kinderhook Bank Corp.

acquisition during the fourth quarter of 2020 and a decrease in other FHLB borrowings.

The decrease from the fourth quarter of 2020 was primarily related to the aforementioned redemption of the trust preferred subordinated debt held by CCT IV and a decrease in other FHLB borrowings.

Borrowings, excluding securities sold under agreement to repurchase, at the end of the first quarter of 2022 totaled $5.1 million.

This was $0.1 million, or 0.6%, lower than borrowings at December 31, 2021 and $4.1 million, or 44.5%, below the end of the first quarter of 2021.

The decrease from the prior year first quarter was primarily due to decreases in FHLB borrowings.

The decrease from the fourth quarter of 2021 was primarily related to the slight decrease in FHLB borrowings and the amortization of premiums on certain acquired subordinated notes payable.

Securities sold under agreement to repurchase, also referred to as customer repurchase agreements, represent collateralized municipal and commercial customer accounts that price and operate similar to a deposit instrument.

Customer repurchase agreements were $316.8 million at the end of the third quarter of 2021, an increase of $32.8 million from December 31, 2020 due primarily to the seasonal characteristics of this portfolio, and were $36.0 million above their level at September 30, 2020, impacted by federal and state stimulus program-related support to municipalities to cover COVID-19 expenditures and investments that cover multi-year timeframes.

Customer repurchase agreements were $300.5 million at the end of the first quarter of 2022, $24.2 million lower than December 31, 2021 and $42.8 million higher than March 31, 2021.

Shareholders’ Equity

Total shareholders’ equity was $2.07 billion at the end of the third quarter, down $34.2 million from the balance at December 31, 2020.

The decrease was driven by $125.9 million of other comprehensive loss, net of tax, and dividends declared of $68.4 million, partially offset by net income of $146.1 million, net activity under the Company’s employee stock plan of $9.2 million, and $4.8 million recognized from employee stock options earned.

Total shareholders’ equity of $1.85 billion at the end of the first quarter of 2022 represents a decrease of $248.7 million from the balance at December 31, 2021.

The decrease was driven by $271.4 million of other comprehensive loss, net of tax, dividends declared of $23.2 million and common stock repurchased of $3.5 million, partially offset by net income of $47.1 million, net activity under the Company’s employee stock plan of $0.4 million, and $1.9 million recognized from employee stock options earned.

The other comprehensive loss, net of tax, was comprised of a $271.6 million decrease in the after-tax market value adjustment on the available-for-sale investment portfolio as market interest rates increased between the periods, partially offset by a positive $0.2 million adjustment to the funded status of the Company’s retirement plans.

Over the past 12 months, total shareholders’ equity decreased $28.7 million, as a decrease in the market value adjustment on investments and dividends declared more than offset net income, the issuance of common stock in association with the employee stock plan and the Company’s benefit plans, and the change in the funded status of the Company’s defined benefit pension and other postretirement plans.

The Company’s Tier 1 leverage ratio, a primary measure of regulatory capital for which 5% is the requirement to be “well-capitalized”, was 9.22% at the end of the third quarter, down 94 basis points from year-end 2020 and 99 basis points below its level one year earlier.

The decrease in the Tier 1 leverage ratio in comparison to December 31, 2020 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income items, decreasing 0.4%, primarily from the redemption of $75.0 million of junior subordinated debt partially offset by net earnings retention, while average assets, excluding intangibles and the market value adjustment on investments, increased 9.7%, primarily due to continued inflows of customer deposits as a result of government stimulus programs.

The Tier 1 leverage ratio decreased compared to the prior year’s third quarter as shareholders’ equity, excluding intangibles and other comprehensive income, increased 2.0% primarily due to earnings retention partially offset by the redemption of $75.0 million of junior subordinated debt, while average assets, excluding intangibles and the market value adjustment on investments, increased 12.9% primarily due to government stimulus program and PPP lending-related funding inflows.

The net tangible equity-to-assets ratio (a non-GAAP measure) of 8.59% decreased 133 basis points from both December 31, 2020 and September 30, 2020 (See Table 11 for Reconciliation of Quarterly GAAP to Non-GAAP Measures).

The decrease in the tangible equity to assets ratio over the past 12 months was primarily driven by a $1.47 billion, or 11.2%, increase in tangible assets due to the aforementioned government stimulus-related funding inflows, as well as a $154.1 million decline in the after-tax market value adjustment on the Company’s available-for-sale investment securities portfolio due to higher market interest rates and changes in the composition of the portfolio.

The dividend payout ratio (dividends declared divided by net income) for the first nine months of 2021 was 46.8%, compared to 55.8% for the nine months ended September 30, 2020.

Dividends declared for the first nine months of 2021 increased 3.7% compared to the first nine months of 2020, as the Company’s quarterly dividend per share was raised from $0.41 to $0.42 in the third quarter of 2020 and from $0.42 to $0.43 in the third quarter of 2021, while net income increased 23.6% versus the equivalent year-to-date period due in most part to a significantly lower provision for credit losses.

Over the past 12 months, total shareholders’ equity decreased $119.3 million, as a decrease in the market value adjustment on investments, dividends declared and common stock repurchase activity more than offset net income, the issuance of common stock in association with the employee stock plan and the Company’s benefit plans, and the change in the funded status of the Company’s defined benefit pension and other postretirement plans.

The Company’s Tier 1 leverage ratio, a primary measure of regulatory capital for which 5% is the requirement to be “well-capitalized”, was 9.09% at the end of the first quarter, consistent with the fourth quarter of 2021 and 0.54 percentage points below its level one year earlier.

The Tier 1 leverage ratio was consistent with its level at December 31, 2021 as a result of ending shareholders’ equity, excluding intangibles and other comprehensive income or loss items, increasing 1.8%, primarily from net earnings retention, while average assets, excluding intangibles and the market value adjustment on investments, increased 1.9%, primarily due to continued inflows of customer deposits.

The Tier 1 leverage ratio decreased compared to the prior year’s first quarter as shareholders’ equity, excluding intangibles and other comprehensive income or loss items, increased 5.7% primarily due to net earnings retention, while average assets excluding intangibles and the market value adjustment, increased 12.0% primarily due to the high levels of customer deposit inflows from government stimulus and PPP programs.

The net tangible equity-to-assets ratio (a non-GAAP measure) of 6.98% decreased 1.71 percentage points from December 31, 2021 and decreased 1.50 percentage points versus March 31, 2021 (See Table 10 for Reconciliation of Quarterly GAAP to Non-GAAP Measures).

The decrease in the net tangible equity to net tangible assets ratio (non-GAAP) from one year prior was primarily driven by a $139.4 million, or 11.9%, decrease in tangible equity due to the decline in the after-tax market value adjustment on available-for-sale investment securities and a $985.6 million, or 7.1%, increase in tangible assets due to the aforementioned stimulus and PPP-related funding inflows.

The decrease in the net tangible equity to net tangible assets ratio (non-GAAP) from the fourth quarter of 2021 was driven by a $247.6 million decrease in tangible equity due to the impact of higher market interest rates on the after-tax market value adjustment on available-for-sale investment securities, while tangible assets increased $74.3 million.

The dividend payout ratio (dividends declared divided by net income) for the first quarter of 2022 was 49.4%, compared to 42.6% for the first quarter of 2021.

First quarter dividends declared increased 2.4% versus one year earlier, as the Company’s quarterly dividend per share was raised from $0.42 to $0.43 in the third quarter of 2021, while net income decreased 11.0% over the prior year period, primarily due to the previously noted increase in the provision for credit losses.

The 2021 dividend increase marked the Company’s 29 th consecutive year of increased dividend payouts to common shareholders.

Additionally, the number of common shares outstanding increased 0.7% over the last twelve months, primarily related to activity in the Company’s employee stock plans.

Additionally, the number of common shares outstanding increased 0.1% over the last twelve months.

Liquidity risk is a measure of the Company’s ability to raise cash when needed at a reasonable cost and minimize any loss.

The Company maintains appropriate liquidity levels in both normal operating environments as well as stressed environments.

The Company maintains appropriate liquidity levels in both normal operating conditions as well as stressed environments.

The Company must be capable of meeting all obligations to its customers at any time and, therefore, the active management of its liquidity position remains an important management objective.

2 unchanged sentences

These risk indicators measure core liquidity and funding needs, capital at risk and change in available funding sources.

The risk indicators are monitored using such statistics as the core basic surplus ratio, unencumbered securities to average assets, free loan collateral to average assets, loans to deposits, deposits to total funding and borrowings to total funding ratios.

Given the uncertain nature of the Company’s customers' demands, as well as the Company's desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on and off-balance sheet funds available that can be utilized in time of need.

The risk indicators are monitored using such metrics as the core basic surplus ratio, unencumbered securities to average assets, free loan collateral to average assets, loans to deposits, deposits to total funding and borrowings to total funding ratios.

Given the uncertain nature of the Company’s customers’ demands, as well as the Company’s desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on and off-balance sheet funds available that can be utilized when needed.

Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity must be supplemented with additional sources such as credit lines from correspondent banks and borrowings from the FHLB and the Federal Reserve Bank of New York (“Federal Reserve”).

Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements, large certificates of deposit and the brokered CD market.

The primary source of non-deposit funds is FHLB overnight advances, of which there were no outstanding borrowings at September 30, 2021.

The primary source of non-deposit funds is FHLB overnight advances, of which there were no outstanding borrowings at March 31, 2022.

The Company’s primary sources of liquidity are its liquid assets, as well as unencumbered loans and securities that can be used to collateralize additional funding.

At September 30, 2021, the Bank had $2.32 billion of cash and cash equivalents of which $2.10 billion are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks.

The Company also had $1.66 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and maintained $248.9 million of funding availability at the Federal Reserve Bank’s discount window.

At March 31, 2022, the Bank had $1.02 billion of cash and cash equivalents of which $841 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks.

The Company also had $1.78 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and maintained $237.1 million of funding availability at the Federal Reserve’s discount window.

Additionally, the Company has $3.45 billion of unencumbered securities that could be pledged at the FHLB or Federal Reserve to obtain additional funding.

There is $25.0 million available in unsecured lines of credit with other correspondent banks at quarter-end.

There was $25.0 million available in unsecured lines of credit with other correspondent banks at quarter end.

The Company’s primary approach to measuring short-term liquidity is known as the Basic Surplus/Deficit model.

2 unchanged sentences

and second, a projection of subsequent cash availability over an additional 60 days.

As of September 30, 2021, this ratio was 24.9% for 30-days and 25.1% for 90-days, excluding the Company's capacity to borrow additional funds from the FHLB and other sources.

As of March 31, 2022, this ratio was 24.5% for 30-days and 24.7% for 90-days, excluding the Company’s capacity to borrow additional funds from the FHLB and other sources.

This is considered to be a sufficient amount of liquidity based on the Company’s internal policy requirement of 7.5%.

A sources and uses statement is used by the Company to measure intermediate liquidity risk over the next twelve months.

As of September 30, 2021, there is more than enough liquidity available during the next year to cover projected cash outflows.

As of March 31, 2022, there is more than enough liquidity available during the next year to cover projected cash outflows.

In addition, stress tests on the cash flows are performed in various scenarios ranging from high probability events with a low impact on the liquidity position to low probability events with a high impact on the liquidity position.

The results of the stress tests as of September 30, 2021 indicate the Company has sufficient sources of funds for the next year in all simulated stressed scenarios.

The results of the stress tests as of March 31, 2022 indicate the Company has sufficient sources of funds for the next year in all simulated stressed scenarios.

To measure longer-term liquidity, a baseline projection of loan and deposit growth for five years is made to reflect how liquidity levels could change over time.

6 unchanged sentences

A long-term funding crisis would most likely be the result of drastic credit deterioration at the Company.

Management believes that both potential circumstances have been fully addressed through detailed action plans and the establishment of trigger points for monitoring such events.

Management believes that both potential circumstances have been fully addressed through the establishment of trigger points for monitoring such events and detailed action plans that would be initiated if those trigger points are reached.

Forward-Looking Statements

6 unchanged sentences

(1) the macroeconomic and other challenges and uncertainties related to the COVID-19 pandemic, variants of COVID-19, and related vaccine rollout and efficacy, including the negative impacts and disruptions on public health, the Company’s corporate and consumer customers, the communities the Company serves, and the domestic and global economy, which may have an adverse effect on the Company’s business;

(2) current and future economic and market conditions, including the effects of a decline in housing or vehicle prices, higher unemployment rates, labor shortages, inability to obtain raw materials and supplies, U.S.

(2) current and future economic and market conditions, including the effects of changes in housing or vehicle prices, unemployment rates, labor shortages, supply chain disruption, inability to obtain raw materials and supplies, U.S.

fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth;

1 unchanged sentence

Small Business Administration (“SBA”) Paycheck Protection Program (the “PPP”), including to the rules under which the PPP is administered, with respect to the origination, servicing, or forgiveness of PPP loans, whether now existing or originated in the future, or the terms and conditions of any guaranteed payments due to the Company from the SBA with respect to PPP loans;

(4) the effect of, and changes in, monetary and fiscal policies and laws, including future changes in Federal or State statutory income tax rates and interest rate and other policy actions of the Board of Governors of the Federal Reserve System;

(4) the effect of, and changes in, monetary and fiscal policies and laws, including future changes in Federal and state statutory income tax rates and interest rate and other policy actions of the Board of Governors of the Federal Reserve System;

(5) the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin;

14 unchanged sentences

(19) the ability to maintain and increase market share and control expenses;

(20) the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of the Company and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, risk management, securities and other aspects of the financial services industry, specifically the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 or those emanating from COVID-19;

(20) the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of the Company and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, service fees, risk management, securities and other aspects of the financial services industry;

(21) changes in the Company’s organization, compensation and benefit plans and in the availability of, and compensation levels for, employees in its geographic markets;

(22) the outcome of pending or future litigation and government proceedings;

(23) the effects of climate change and natural disasters on the Company’s operations or the operations of its customers;

(24) other risk factors outlined in the Company’s filings with the SEC from time to time;

1 unchanged sentence

The foregoing list of important factors is not all-inclusive.

For more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to “Item 1A Risk Factors” in the Company’s Annual Report on Form 10-K filed with Securities and Exchange Commission for the year ended December 31, 2020.

For more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to the discussion under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K filed with Securities and Exchange Commission for the year ended December 31, 2021 and this Quarterly Report on Form 10-Q.

Any forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made.

3 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(000's omitted)

6 unchanged sentences

Acquisition expenses

Unrealized loss (gain) on equity securities

Litigation accrual

Unrealized gain on equity securities

Adjusted pre-tax, pre-provision net revenue (non-GAAP)

5 unchanged sentences

Acquisition expenses

Unrealized loss (gain) on equity securities

Litigation accrual

Unrealized gain on equity securities

Adjusted pre-tax, pre-provision net revenue per share (non-GAAP)

3 unchanged sentences

Subtotal (non-GAAP)

Acquisition-related provision for credit losses

Tax effect of acquisition-related provision for credit losses

Subtotal (non-GAAP)

Unrealized loss (gain) on equity securities

Tax effect of unrealized loss (gain) on equity securities

Subtotal (non-GAAP)

Litigation accrual

Tax effect of litigation accrual

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Operating net income (non-GAAP)

2 unchanged sentences

Subtotal (non-GAAP)

Acquired non-impaired loan accretion

Tax effect of acquired non-impaired loan accretion

Acquired non-PCD loan accretion

Tax effect of acquired non-PCD loan accretion

Adjusted net income (non-GAAP)

Three Months Ended

Nine Months Ended

September 30,

(000's omitted)

Return on average assets

6 unchanged sentences

Adjusted return on average equity (non-GAAP)

Three Months Ended

(000's omitted)

Income statement data (continued)

Earnings per common share

3 unchanged sentences

Subtotal (non-GAAP)

Acquisition-related provision for credit losses

Tax effect of acquisition-related provision for credit losses

Subtotal (non-GAAP)

Unrealized loss (gain) on equity securities

Tax effect of unrealized loss (gain) on equity securities

Subtotal (non-GAAP)

Litigation accrual

Tax effect of litigation accrual

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Operating earnings per share (non-GAAP)

2 unchanged sentences

Subtotal (non-GAAP)

Acquired non-impaired loan accretion

Tax effect of acquired non-impaired loan accretion

Acquired non-PCD loan accretion

Tax effect of acquired non-PCD loan accretion

Diluted adjusted net earnings per share (non-GAAP)

3 unchanged sentences

Acquisition expenses

Litigation accrual

Total adjusted noninterest expenses (non-GAAP)

3 unchanged sentences

Noninterest revenues

Acquired non-impaired loan accretion

Unrealized loss (gain) on equity securities

Acquired non-PCD loan accretion

Unrealized gain on equity securities

Operating revenues (non-GAAP) - denominator

Efficiency ratio (non-GAAP)

September 30,

(000's omitted)

14 unchanged sentences

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