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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 315 added, 203 removed, 375 unchanged (58% of the section changed)

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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 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 “Company” or “CBSI”) as of and for the three and six months ended June 30, 2022 and 2021, although in some circumstances the first quarter of 2022 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 32.

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 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.

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, “second quarter” refers to the three months ended June 30, 2022, “YTD” refers to the six months ended June 30, 2022, 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.

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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 page 10 of this Form 10-Q.

A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on pages 12 and 13 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” 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.

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 acquired non-purchased credit deteriorated (“PCD”) loans, acquisition expenses, acquisition-related contingent consideration adjustments 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 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.

In addition, the Company provides supplemental reporting for “adjusted pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, acquisition-related contingent consideration adjustments 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 the Current Expected Credit Losses (“CECL”) model and the economic uncertainty caused by the COVID-19 pandemic.

Earnings per share were $0.73 in the second quarter of 2022, down $0.15, or 17.0%, from the second quarter of 2021.

Diluted adjusted net earnings per share, a non-GAAP measure, were $0.89 in the second quarter of 2022, compared to $0.91 in the second quarter of 2021, a $0.02 per share, or 2.2%, decrease.

Adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, was $1.13 per share in the second quarter of 2022, up $0.07, or 6.6%, from the second quarter of 2021.

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

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and the performance of recently acquired businesses.

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.

On May 13, 2022, the Company completed its merger with Elmira Savings Bank (“Elmira”), a New York State chartered savings bank headquartered in Elmira, New York, for $82.2 million in cash.

The merger enhanced the Company’s presence in five counties in New York’s Southern Tier and Finger Lakes regions.

In connection with the merger, the Company added eight full-service offices to its branch service network and acquired approximately $576.4 million of assets, including $437.0 million of loans and $11.3 million of investment securities, as well as $522.3 million of deposits.

Preliminary goodwill of $50.7 million and an $8.0 million core deposit intangible asset were recognized as a result of the merger.

Second quarter and YTD net income decreased compared to the equivalent 2021 timeframes by $8.1 million, or 17.0%, and $13.9 million, or 13.8%, respectively.

Earnings per share of $0.73 for the second quarter of 2022 was $0.15 less than the second quarter of 2021, and 2022 YTD earnings per share of $1.60 was $0.25 lower than 2021 YTD earnings per share.

The decreases in net income and earnings per share were due to increases in operating expenses and the provision for credit losses, including the impacts from the Elmira acquisition, partially offset by increases in net interest income and noninterest revenues and decreases in income taxes and fully-diluted shares outstanding.

Second quarter and YTD net income adjusted to exclude acquisition expenses, acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses and the unrealized gain (loss) on equity securities (“operating net income”), a non-GAAP measure, decreased $1.6 million, or 3.4%, as compared to the second quarter of 2021 and decreased $7.2 million, or 7.1%, compared to June YTD 2021.

Earnings per share adjusted to exclude acquisition expenses, acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses and the unrealized gain (loss) on equity securities (“operating earnings per share”), a non-GAAP measure, of $0.85 for the second quarter decreased $0.03 compared to the second quarter of 2021.

Operating earnings per share of $1.72 for the first six months of 2022 decreased $0.13 compared to the prior year period.

2021 results were enhanced by a net benefit recorded in the provision for credit losses and higher Paycheck Protection Program (“PPP”)-related revenues than the comparable periods of 2022 which, net of tax, were responsible for a $0.13 decrease in fully-diluted operating earnings per share between the comparable quarters and a $0.30 decrease between the comparable YTD periods.

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

Net income adjusted to exclude income taxes, provision for credit losses, acquisition expenses, acquisition-related contingent consideration adjustments and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue”), a non-GAAP measure, of $61.2 million for the second quarter increased $3.2 million, or 5.5%, as compared to the second quarter of 2021.

Adjusted pre-tax, pre-provision net revenue of $122.2 million for the first six months of 2022 increased $5.0 million, or 4.2%, as compared to the first six months of 2021.

Earnings per share adjusted to exclude income taxes, provision for credit losses, acquisition expenses, acquisition-related contingent consideration adjustments and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue per share”), a non-GAAP measure, of $1.13 for the second quarter of 2022 was $0.07 higher than the second quarter of 2021, and 2022 YTD adjusted pre-tax, pre-provision net revenue per share of $2.24 was $0.09 higher than the prior YTD period as the increases in revenues outpaced the increase in operating expenses between the periods.

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

Loans and deposits increased on both an ending and average basis as compared to the prior year second quarter, reflective of large net inflows of funds from government stimulus programs and PPP lending, along with the Company’s enhanced focus on organic loan generation and the second quarter 2022 acquisition of Elmira.

The average yield on interest-earning assets increased eight basis points compared to the prior year second quarter, while on a YTD basis the average yield on interest-earning assets decreased 12 basis points, as the average yield on investments increased while the average yield on loans decreased.

The average yield on investments, including cash equivalents, increased 39 basis points compared to the prior year’s second quarter and increased 25 basis points compared to the prior YTD, 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 average yield on loans for the second quarter decreased by 11 basis points compared to the second quarter of 2021 and decreased 26 basis points on a YTD basis driven by a decline in PPP-related interest income between the periods, which declined $2.8 million on a quarterly basis and $8.0 million on a YTD basis.

The Company’s total cost of funds for the first six months of 2022 decreased two 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.

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 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.

The provision for credit losses of $6.0 million for the second quarter and $6.9 million for YTD 2022 resulted in a $10.4 million and $17.0 million higher provision for credit losses than comparable prior year periods, respectively.

The second quarter and YTD 2022 provision for credit losses was reflective of a moderate deterioration in the economic outlook, continued low levels of net charge-offs, delinquent loans and nonperforming loans, an increase in loans outstanding and included $3.9 million of acquisition-related provision for credit losses due to the Elmira acquisition.

Comparatively, at the end of the second quarter of 2021, economic forecasts reflected a post-vaccine economic recovery and loans outstanding remaining on pandemic-related payment deferral decreased significantly, resulting in a release of reserves in that period.

Net charge-offs were $0.4 million for the second quarter and $0.9 million for the first six months of 2022, compared to net recoveries of $0.6 million for the prior year second quarter and $0.2 million for the first six months of 2021.

Second quarter 2022 nonperforming and delinquent loan ratios improved in comparison to the second quarter of 2021 largely attributable to the upgrade of several large business loans primarily operating in the hospitality industry from nonaccrual status to accruing status during the fourth quarter of 2021 and first quarter of 2022 whose operations were temporarily negatively impacted by the pandemic .

Net Income and Profitability

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.

As shown in Table 1, net income for the second quarter and June YTD of $39.8 million and $86.9 million, respectively, decreased $8.1 million, or 17.0%, as compared to the second quarter of 2021 and decreased $13.9 million, or 13.8%, compared to June YTD 2021.

Earnings per share of $0.73 for the second quarter was $0.15 lower than the second quarter of 2021, while earnings per share for the first six months of 2022 of $1.60 was $0.25 lower than the first six months of 2021.

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

Operating net income, a non-GAAP measure, of $46.3 million and $93.6 million for the second quarter and June YTD, respectively, decreased $1.6 million, or 3.4%, as compared to the second quarter of 2021 and decreased $7.2 million, or 7.1%, compared to June YTD 2021.

Operating earnings per share, a non-GAAP measure, of $0.85 for the second quarter was down $0.03 compared to the second quarter of 2021, while operating earnings per share of $1.72 for the first six months of 2022 was down $0.13 compared to the first six months of 2021.

2021 results were enhanced by a net benefit recorded in the provision for credit losses and higher PPP-related revenues than the comparable periods of 2022 which, net of tax, were responsible for a $0.13 decrease in fully-diluted operating earnings per share between the comparable quarters and a $0.30 decrease between the comparable YTD periods.

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

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.

As reflected in Table 1, second quarter net interest income of $103.1 million was up $11.0 million, or 12.0%, from the comparable prior year period.

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

Net interest income for the first six months of 2022 increased $12.0 million, or 6.4%, versus the first six months of 2021.

The 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 second quarter and June YTD increased $10.4 million and $17.0 million as compared to the second quarter and first six months of 2021, respectively.

The second quarter and YTD 2022 provision for credit losses was reflective of a moderated economic outlook, continued low levels of net charge-offs, delinquent loans and nonperforming loans, an increase in loans outstanding and included $3.9 million of acquisition-related provision for credit losses due to the Elmira acquisition.

Second quarter and year-to-date noninterest revenues were $64.1 million and $129.8 million, respectively, up $4.6 million, or 7.8%, from the second quarter of 2021 and up $11.8 million, or 10.0%, from the first six months of 2021.

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

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

Noninterest expenses of $110.4 million and $210.2 million for the second quarter and June YTD periods, respectively, reflected an increase of $16.9 million, or 18.0%, from the second quarter of 2021 and an increase of $23.4 million, or 12.5%, from the first six months of 2021.

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

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

Excluding acquisition expenses and acquisition-related contingent consideration adjustments, 2022 operating expenses were $12.5 million, or 13.4%, higher for the second quarter and $18.8 million, or 10.1%, higher for the year-to-date timeframe.

The effective income tax rates were 21.6% and 21.5% for the second quarter and YTD 2022, respectively, as compared to 23.1% and 20.8% for the comparable prior year periods.

The effective tax rate in the second quarter of 2021 was driven up by an increase in certain state income tax rates that were enacted during that period.

The increase in the YTD effective tax rate was primarily attributable to lower levels of tax benefits related to stock-based compensation activity.

A condensed income statement is as follows:

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Three Months Ended

Six Months Ended

(000’s omitted, except per share data)

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Net Interest Income

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 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.

Net interest income is the amount by which interest and fees on interest-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 interest-earning assets and the cost of interest-bearing liabilities as a percentage of interest-earning assets.

As shown in Table 2a, net interest income (with nontaxable income converted to a fully tax-equivalent basis) for the second quarter was $104.1 million, an increase of $11.2 million, or 12.0%, compared to the same period last year.

This was driven by a $1.10 billion increase in average interest-earning assets, an eight basis point increase in the average yield on interest-earnings assets and a two basis point decrease in the average rate paid on interest-bearing liabilities, offset by a $740.9 million increase in average interest-bearing liabilities in comparison to the second quarter of 2021.

As reflected in Table 3, net interest income was favorably impacted by $8.1 million due to the volume increase in interest-earning assets, $2.9 million due to the increase in the average yield on interest-earning assets and $0.5 million due to a decrease in the average rate paid on interest-bearing liabilities, partially offset by the unfavorable impact on net interest income of $0.3 million due to the volume increase in interest-bearing liabilities.

June YTD net interest income (with nontaxable income converted to a fully tax-equivalent basis), as reflected in Table 2b, of $199.8 million, increased $12.0 million, or 6.4%, from the year-earlier period.

The June YTD increase resulted from a $1.32 billion increase in average interest-earning assets and a four basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a 12 basis point decrease in the average yield on interest-earning assets and an $876.5 million increase in average interest-bearing liabilities.

As reflected in Table 3, for June 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 $19.1 million and $1.8 million, respectively, partially offset by the decrease in the average yield on interest-earning assets having an unfavorable impact on net interest income of $8.2 million and the volume increase in interest-bearing liabilities having a negative impact of $0.7 million.

The net interest margin of 2.89% for the second quarter of 2022 was 10 basis points higher as compared to the second quarter of 2021.

The increase was the result of an eight basis point increase in the interest-earning asset yield and a two basis point decrease in the average rate on interest-bearing liabilities.

The net interest margin of 2.81% for the first six months of 2022 was 10 basis points lower than the comparable period of 2021.

The yield on interest-earning assets decreased 12 basis points, while the rate on interest-bearing liabilities decreased by four basis points for the first six months of 2022 as compared to the prior year period.

The eight basis point increase in the average yield on interest-earning assets for the quarter was the result of an increase in the average yield on investments, partially offset by a decrease in the average yield on loans.

For the second quarter, the average yield on investments, including cash equivalents, increased 39 basis points, while the average yield on loans decreased by 11 basis points compared to the prior year.

The 12 basis point decrease in the yield on interest-earning assets for the first six months of 2022 was the result of a 26 basis point decrease in the average yield on loans, partially offset by a 25 basis point increase in the average yield on investments, including cash equivalents, compared to the prior year.

The decrease in the loan yields were reflective of declines in PPP-related interest income between the periods.

During the second quarter of 2022, the Company recorded $1.1 million of PPP-related interest income, a decrease of $2.8 million from the prior year’s second quarter, while during the first six months of 2022, the Company recorded $2.8 million of PPP-related interest income, a decrease of $8.0 million from the first six months of 2021.

The increase in investment yields were primarily driven by the Company meaningfully shifting the composition of earning assets away from low-yield cash equivalents to higher yield investment securities between the periods.

The average rate on interest-bearing liabilities decreased by two basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits decreased two basis points and the average rate paid on external borrowings decreased one basis point from the comparable prior period.

For the first six months of 2022, the average rate on interest-bearing liabilities decreased by four basis points from the comparable prior year period as the average rate on interest-bearing deposits decreased three basis points and the average rate on external borrowings decreased 21 basis points.

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

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.

The second quarter and YTD average balance of investments, including cash equivalents, increased $714.9 million and $1.11 billion, respectively, as compared to the corresponding prior year periods.

Investment security purchases outpaced maturities, calls and principal payments during second quarter and YTD.

The cash equivalents component of average earning assets decreased $1.60 billion and $1.17 billion for the second quarter and YTD periods, respectively, compared to the prior year periods.

The decrease in cash equivalents was primarily due to the Company meaningfully shifting the composition of earning assets away from low-yield cash equivalents to higher yielding investment securities and loans.

Average loan balances increased $383.9 million for the quarter and $208.1 million YTD as compared to the prior year, with organic and acquired growth during both periods, including the Elmira acquisition in May 2022, despite declines in average PPP loan balances.

The change in average loan balances for the quarter and YTD periods included a $338.6 million and $343.1 million decrease in average PPP loans, respectively.

Average interest-bearing deposits increased $687.2 million compared to the prior year quarter and $862.7 million compared to the prior YTD period.

The increase in average interest-bearing deposits was due to increases in interest checking, savings and money market deposits due primarily to large inflows of government stimulus-related deposit funding and the Elmira acquisition in May 2022, partially offset by decreases 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”), overnight borrowings at the Federal Reserve Bank of New York (“Federal Reserve”), subordinated notes payable, subordinated debt held by unconsolidated subsidiary trusts and securities sold under agreement to repurchase (customer repurchase agreements), increased $53.7 million and $13.8 million for the quarter and YTD periods respectively.

The increase in average borrowings from the prior year quarter and YTD periods was primarily due to an increase in average customer repurchase agreements, while the increase from the prior YTD period was partially offset by the redemption of certain higher rate subordinated debt instruments in the first quarter of 2021.

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.

Interest income and yields are on a fully tax-equivalent basis (“FTE”) using a marginal income tax rate of 24.2% in both 2022 and 2021.

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 prepayment fees and the accretion of acquired loan marks.

Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment and other 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

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

(000's omitted except yields and rates)

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Customer repurchase agreements

Overnight FRB borrowings

FHLB borrowings

Subordinated notes payable

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 amortized 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

Six Months Ended

June 30, 2022

June 30, 2021

(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

Overnight FRB borrowings

FHLB borrowings

Subordinated notes payable

Subordinated debt held by unconsolidated subsidiary trusts

9 unchanged sentences

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.

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 March 31, 2022

versus March 31, 2021

Three months ended June 30, 2022

Six months ended June 30, 2022

versus June 30, 2021

Increase (Decrease) Due to Change in (1)

(000's omitted)

8 unchanged sentences

Customer repurchase agreements

Overnight FRB borrowings

FHLB borrowings

Subordinated notes payable

Subordinated debt held by unconsolidated subsidiary trusts

15 unchanged sentences

Three Months Ended

Six Months Ended

(000's omitted)

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Other banking revenues

Unrealized gain on equity securities

Unrealized (loss) gain on equity securities

Total noninterest revenues

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

(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.

(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-PCD loan accretion plus noninterest revenues excluding unrealized gains and losses on equity securities.

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

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.

As displayed in Table 4, noninterest revenues, excluding unrealized gain (loss) on equity securities, were $64.1 million for the second quarter of 2022 and $129.8 million for the first six months of 2022.

This represents an increase of $4.6 million, or 7.8%, for the quarter and an increase of $11.8 million, or 10.0%, for the YTD period in comparison to the equivalent 2021 periods.

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

The increase for the YTD period was due to increases in employee benefit services revenue, insurance services revenue, banking noninterest revenue and wealth management services revenue.

Banking noninterest revenue of $17.3 million for the second quarter and $34.3 million for the first six months of 2022 increased $1.7 million, or 11.1%, and increased $3.2 million, or 10.1%, respectively, as compared to the corresponding prior year periods.

The quarterly increase was driven by an increase in deposit service charges and fees, partially offset by decreases in mortgage banking revenues and other banking revenues, while debit interchange and ATM fees were consistent.

The YTD increase was driven by increases in deposit service charges and fees and debit interchange and ATM fees, partially offset by decreases in mortgage banking revenues and other banking revenues.

The increases in deposit service charges and fees were reflective of increased post-pandemic transaction activity including the addition of new deposit relationships from the Elmira acquisition in May 2022.

The Company is continuing to evaluate its deposit offerings and associated deposit services charges and fees.

Employee benefit services revenue increased $1.4 million, or 5.3%, and $4.5 million, or 8.3%, for the three and six months ended June 30, 2022, 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 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.

Insurance services revenue was up $1.6 million, or 19.1%, and $3.8 million, or 23.4%, for the second quarter and YTD periods, respectively, 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.

Wealth management services revenue was down $0.1 million, or 1.0%, for the second quarter of 2022 and was up $0.3 million, or 2.1%, for June 2022 YTD as compared to the same time periods of 2021, despite market-related headwinds which negatively impacted fiduciary-related revenues during the first six months of 2022.

The ratio of noninterest revenues to operating revenues (FTE basis), as defined in footnote 1 of Table 4 above, was 38.3% for the quarter and 39.6% for the six months ended June 30, 2022, respectively, versus 39.3% and 38.9% for the comparable periods of 2021.

The increase for the year-to-date period is a function of a 10.0% increase in adjusted noninterest revenues while adjusted net interest income (FTE basis) increased 6.4%.

Noninterest Expenses

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Three Months Ended

Six Months Ended

(000's omitted)

6 unchanged sentences

Acquisition expenses

Acquisition-related contingent consideration adjustment

Total noninterest expenses

1 unchanged sentence

Efficiency ratio (2)

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

(1) Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses, acquisition-related contingent consideration adjustment 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-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 $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.

As shown in Table 5, the Company recorded noninterest expenses of $110.4 million and $210.2 million for the second quarter and YTD periods of 2022, respectively, representing an increase of $16.9 million, or 18.0%, and an increase of $23.4 million, or 12.5%, from the prior year periods.

Acquisition expenses and acquisition-related contingent consideration adjustments of $4.4 million and $4.7 million are included in second quarter and YTD 2022 noninterest expenses, respectively.

Salaries and employee benefits increased $7.5 million, or 13.0%, and $11.5 million, or 10.0%, for the second quarter and YTD periods of 2022, respectively, as compared to the corresponding periods of 2021.

The increase in salaries and benefits was driven by increases in merit and incentive-related employee wages, acquisition-related staffing increases, higher payroll taxes and higher employee benefit-related expenses.

The remaining change to noninterest expenses are attributed to occupancy and equipment (up $0.2 million for the quarter and down $0.2 million YTD), data processing and communications (up $0.8 million for the quarter and $1.1 million YTD), amortization of intangible assets (up $0.6 million for the quarter and $1.0 million YTD), legal and professional fees (up $0.9 million for the quarter and $1.5 million YTD), business development and marketing (up $1.0 million for the quarter and $1.7 million YTD) and other expenses (up $1.6 million for the quarter and $2.2 million YTD).

Noninterest expenses were generally up due to the increase in the level of business activities and incremental expenses associated with operating an expanded franchise subsequent to the Elmira acquisition, 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.

The Company’s efficiency ratio (as defined in the table above) was 61.1% for the second quarter, 1.4 percentage points unfavorable to the comparable quarter of 2021.

This resulted from operating expenses (as described above) increasing 13.2%, while operating revenues (as described above) increased 10.6%.

The efficiency ratio of 60.4% for the first six months of 2022 was 1.0 percentage point unfavorable compared to the first six months of 2021 due to 9.9% higher operating expenses (as described above), while operating revenues (as described above) increased by 8.0%.

Current year operating expenses, excluding amortization of intangible assets, acquisition expenses and acquisition-related contingent consideration adjustments, as a percentage of average assets increased 0.19 percentage points versus the prior year quarter and increased 0.05 percentage points versus the prior year-to-date period as operating expenses (as defined above) increased at a faster rate than average assets.

Operating expenses (as defined above) increased 13.2% for the quarter and increased 9.9% for the year-to-date period, while average assets increased 5.0% for the quarter and increased 7.5% for the year-to-date period.

The second quarter and YTD 2022 effective income tax rates were 21.6% and 21.5%, respectively, as compared to 23.1% and 20.8% for the comparable periods of 2021.

The decrease in the second quarter 2022 effective income tax rate is primarily attributable to an increase in certain state income tax rates that were enacted in the second quarter of 2021.

The increase in the YTD 2022 effective income tax rates is primarily attributable to a lower level of benefit derived from stock based compensation activity during YTD 2022.

The Company recorded a $0.6 million and $2.0 million reduction in income tax expense associated with stock-based compensation tax benefits for YTD 2022 and YTD 2021, respectively.

The effective tax rates adjusted to exclude stock-based compensation tax benefits for the second quarter and YTD 2022 were 21.6% and 22.0%, respectively, as compared to 23.4% and 22.4%, for the comparable periods of 2021.

Investment Securities

The carrying value of investment securities (including unrealized gains and losses) was $5.64 billion at the end of the second quarter, an increase of $663.9 million from December 31, 2021 and $1.59 billion higher than June 30, 2021.

The carrying value of cash equivalents was $20.3 million at the end of the second quarter, a decrease of $1.70 billion from December 31, 2021 and $2.00 billion from June 30, 2021.

The book value of investment securities (excluding unrealized gains and losses) of $6.31 billion at the end of the second quarter increased $1.28 billion from December 31, 2021 and increased $2.22 billion from June 30, 2021.

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

Treasury and agency securities with an average yield of 1.62%, $31.5 million of government agency mortgage-backed securities with an average yield of 2.75%, and $181.6 million of obligations of state and political subdivisions with an average yield of 3.96%.

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.

Additionally, the Company acquired $11.3 million of investments from Elmira during the second quarter of 2022.

These additions were partially offset by $86.9 million of investment maturities, calls and principal payments during the first six months of 2022.

Additionally, there was $9.8 million of net accretion on investment securities during the first six months of 2022.

The effective duration of the investment securities portfolio was 6.7 years at the end of the second quarter of 2022, as compared to 7.5 years at the end of 2021 and 7.7 years at the end of the second 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 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.

At June 30, 2022, the portfolio had a $663.9 million net unrealized loss, as compared to a $44.9 million net unrealized loss at December 31, 2021 and a $26.3 million net unrealized loss at June 30, 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:

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

Investment Securities

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Total investments

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.

Loans ended the second quarter at $8.14 billion, an increase of $900.5 million, or 12.4%, from one year earlier and an increase of $771.1 million, or 10.5%, from the end of 2021.

The increase during the last twelve months was driven by increases in all loan categories, including consumer mortgage, business lending, consumer indirect, home equity, and consumer direct loans, due to the Elmira acquisition and net organic growth despite a $259.9 million decrease in PPP loans due to loan forgiveness activities.

Excluding loans acquired in connection with the Elmira acquisition and PPP loans, ending loans increased $313.4 million, or 4.2%, during the quarter.

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

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.

The business lending portfolio increased $145.5 million, or 4.6%, from June 30, 2021 and increased $256.1 million, or 8.3%, from December 31, 2021, driven by the Elmira acquisition and organic growth despite decreases in PPP loans.

The Company participated in both rounds of the PPP, a specialized low-interest loan program funded by the U.S.

Treasury Department and administered by the United States Small Business Administration (“SBA”).

As of June 30, 2022, the Company’s business lending portfolio included PPP loans with a total balance of $15.4 million, as compared to $87.9 million at December 31, 2021 and $284.8 million at June 30, 2021.

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

1 unchanged sentence

The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category.

The Company participated in both rounds of the PPP, a specialized low-interest loan program funded by the U.S.

Treasury Department and administered by the SBA, including lending pursuant to the 2020 Coronavirus Aid, Relief, and Security Act’s (“CARES Act”), now known as first draw loans.

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

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.

Consumer mortgages increased $495.3 million, or 20.6%, from one year ago and increased $347.7 million, or 13.6%, from December 31, 2021, including $271.4 million of loans acquired from Elmira in the second quarter of 2022.

In addition to the Elmira acquisition, the increase in consumer mortgages was driven by refinance activities, 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.

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.

Home equity loans increased $34.3 million, or 8.8%, from one year ago, and increased $27.4 million, or 6.9%, from December 31, 2021, including $18.4 million of loans acquired from Elmira in the second quarter of 2022.

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 $225.4 million, or 17.9%, from one year ago and increased $139.9 million, or 10.4%, from December 31, 2021, including $21.9 million of loans acquired from Elmira in the second quarter of 2022.

Despite national vehicle supply shortages, the Company’s market area and dealer network have experienced robust sales activity, which combined with higher collateral values have resulted in significant growth in the Company’s consumer indirect portfolio.

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.

1 unchanged sentence

Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.

The ultimate impact the COVID-19 pandemic will have on loan demand and the Company’s loan balances for the rest of 2022 remains uncertain at this time.

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 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

3 unchanged sentences

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.

As shown in Table 7, total allowance for credit losses at the end of the second quarter was $55.5 million, an increase of $3.8 million, or 7.3%, from one year earlier and an increase of $5.7 million, or 11.4%, from the end of 2021.

Allowance for Credit Losses by Loan Type

March 31, 2022

June 30, 2022

December 31, 2021

March 31, 2021

June 30, 2021

(000's omitted except for ratios)

5 unchanged sentences

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 unallocated allowance of $1.0 million at June 30, 2022 was consistent with December 31, 2021 and June 30, 2021.

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

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Consumer direct

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.

Net charge-offs during the second quarter of 2022 were $0.4 million, an increase of $1.0 million compared to the second quarter of 2021.

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

The total net charge-off ratio (net charge-offs annualized as a percentage of average loans outstanding for the quarter) for the second quarter was 0.02%, seven basis points lower than the ratio at December 31, 2021 and five basis points higher than the ratio at June 30, 2021.

Net charge-off ratios for the second quarter of 2022 for the business lending, consumer mortgage, consumer direct, and home equity 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 that its credit-related losses have recently been below longer-term historical levels in part due to the extraordinary Federal and State Government financial assistance provided to consumers throughout the pandemic, as well as the funding support to business customers who participated in PPP lending.

Other real estate owned (“OREO”) at June 30, 2022 was $0.6 million.

This compares to $0.7 million at December 31, 2021 and $0.9 million at June 30, 2021.

At June 30, 2022, OREO consisted of nine residential properties with a total value of $0.5 million and one commercial property with a value of $0.1 million.

This compares to two residential properties with a total value of $0.1 million and one commercial property with a value of $0.6 million at December 31, 2021, and four residential properties with a total value of $0.3 million and one commercial property with a value of $0.6 million at June 30, 2021.

Approximately 29% of the nonperforming loans at June 30, 2022 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type.

The level of nonperforming business 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 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.

These borrowers had successfully restored all past due payment 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.

Approximately 62% of nonperforming loans at June 30, 2022 were comprised of consumer mortgages.

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

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

The Company will continue to closely monitor the impact that economic conditions 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 9% 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 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 allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 150% at the end of the second quarter, as compared to 110% at year-end 2021 and 74% at June 30, 2021.

The increase in this ratio between the annual quarterly periods was primarily driven by the 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.

Based on the group’s consensus, a relationship may be assigned a special assets officer or other senior lending officer to review the loan, meet with the borrowers, assess the collateral and recommend an action plan.

Based on this analysis, a relationship may be assigned a special assets officer or other senior lending officer to review the loan, meet with the borrowers, assess the collateral and recommend an action plan.

This plan could include foreclosure, restructuring loans, issuing demand letters or other actions.

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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 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.

Delinquent loans (30 days past due through nonaccruing) as a percent of total loans was 0.75% at the end of the second quarter, 25 basis points below the 1.00% at year-end 2021 and 47 basis points below the 1.22% at June 30, 2021.

The business lending delinquency ratio at the end of the second quarter of 0.40% was 57 basis points below the level of 0.97% at December 31, 2021 and 120 basis points below the level of 1.60% at June 30, 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 indirect and home equity portfolios decreased as compared to the levels at December 31, 2021 while consumer direct increased and consumer mortgage remained consistent.

The delinquency rates for the consumer direct, consumer indirect, home equity, and consumer mortgage all increased compared to the levels at June 30, 2021.

Prediction of future delinquency and credit loss performance is difficult, because although recent economic growth has been above average and restrictions initially put in place during the pandemic have been lifted, there remains uncertainty regarding 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.

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.

The Company recorded a $6.0 million provision for credit losses in the second quarter of 2022, $3.9 million of which was due to the acquisition of Elmira and $0.3 million related to off-balance sheet credit exposures.

The second quarter provision for credit losses was $10.3 million higher than the equivalent prior year period’s net benefit in the provision for credit losses of $4.3 million, which was reflective of a post-vaccine economic recovery and a significant decrease in loans on pandemic-related payment deferral.

The allowance for credit losses of $55.5 million as of June 30, 2022 increased $5.6 million compared to December 31, 2021 and increased $3.7 million compared to June 30, 2021, due in part to a $750.4 million increase in non-PPP loans outstanding, including $437.0 million of loans acquired from Elmira, combined with economic forecasts moderating during the second quarter of 2022.

The allowance for credit losses to total loans ratio was 0.68% at June 30, 2022, consistent with the level at December 31, 2021 and three basis points lower than the level at June 30, 2021.

Refer to Note E:

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.

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

As of June 30, 2022, the net purchase discount related to the $1.36 billion of remaining non-PCD acquired loan balances was approximately $27.0 million, or 1.98% of that portfolio.

As shown in Table 9, average deposits of $13.33 billion in the second quarter were $1.03 billion, or 8.4%, higher than the second quarter of 2021, primarily due to larger than anticipated net inflows of funds related to government stimulus and PPP programs and the addition of acquired Elmira deposit liabilities during the second quarter of 2022.

The Company acquired $522.3 million of deposits in the Elmira acquisition, including $356.5 million of non-time deposits and $165.8 million of time deposits.

Total average deposit balances increased $498.5 million, or 3.9%, from the fourth quarter of last year, due to continued net inflows of deposits and the addition of acquired Elmira deposit liabilities between the periods.

Average noninterest checking deposits as a percentage of average total deposits was 30.5% in the second quarter compared to 30.2% in the second quarter of 2021 and 30.7% in the fourth quarter of last year.

Non-maturity deposits (noninterest checking, interest checking, savings and money markets) represent 92.9% of the Company’s deposit funding base, while time deposits represent 7.1% of total average deposits.

The quarterly average cost of deposits was 0.08% for the second quarter of 2022, compared to 0.08% for the fourth quarter of 2021 and 0.10% in the second quarter of 2021, reflective of a decrease in the interest rate paid on time deposits.

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

Average nonpublic fund deposits for the second quarter of 2022 increased $525.9 million, or 4.7%, versus the fourth quarter of 2021 and increased $921.8 million, or 8.6%, versus the year-earlier period.

Average public fund deposits for the second quarter decreased $27.4 million, or 1.6%, from the fourth quarter of 2021 and increased $107.5 million, or 7.0%, from the second quarter of 2021.

Average public fund deposits as a percentage of total average deposits decreased slightly from 12.4% in the second quarter of 2021 to 12.3% in the second quarter of 2022 .

Quarterly Average Deposits

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Total deposits

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.

Borrowings, excluding securities sold under agreement to repurchase, at the end of the second quarter of 2022 totaled $88.7 million.

This was $83.6 million higher than borrowings at December 31, 2021 and $82.5 million above the level at the end of the second quarter of 2021.

The increases were primarily due to an increase in overnight Federal Reserve borrowings of $66.0 million for liquidity funding and $17.6 million of FHLB borrowings acquired from the Elmira acquisition during the second quarter of 2022.

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 $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 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.

Customer repurchase agreements were $223.8 million at the end of the second quarter of 2022, a decrease of $101.0 million from December 31, 2021 due primarily to the seasonal characteristics of this portfolio, and were $28.9 million above their level at June 30, 2021.

Shareholders’ Equity and Regulatory Capital

Total shareholders’ equity was $1.66 billion at the end of the second quarter, down $439.1 million from the balance at December 31, 2021.

The decrease was driven by $468.1 million of other comprehensive loss, net of tax, dividends declared of $46.5 million and common stock repurchased of $16.4 million, partially offset by net income of $86.9 million, net activity under the Company’s employee stock plan of $0.8 million, and $4.2 million recognized from employee stock options earned.

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Over the past 12 months, total shareholders’ equity decreased $399.4 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 dividend payout ratio (dividends declared divided by net income) for the first six months of 2022 was 53.5%, compared to 44.9% for the six months ended June 30, 2021.

Dividends declared for the first six months of 2022 increased 2.8% compared to the first six months of 2021, as the Company’s quarterly dividend per share was raised from $0.42 to $0.43 in July 2021, while net income decreased 13.8% versus the equivalent year-to-date period due to increases in the provision for credit losses, acquisition-related provision for credit losses, and operating expenses partially offset by increases in net interest income and noninterest revenues.

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

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

Additionally, the number of common shares outstanding decreased 0.3% over the last twelve months, as common stock repurchases outweighed activity in the Company’s employee stock plans.

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Company and the Bank are required to maintain a “capital conservation buffer,” composed entirely of common equity Tier 1 capital, in addition to minimum risk-based capital ratios.

The required capital conservation buffer is 2.5% as of June 30, 2022 and December 31, 2021.

Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer as of June 30, 2022 and December 31, 2021, the Company and the Bank must maintain:

(i) Common equity Tier 1 capital to total risk-weighted assets (“Common equity tier 1 capital ratio”) of at least 7.0%,

(ii) Tier 1 capital to total risk-weighted assets (“Tier 1 risk-based capital ratio”) of at least 8.5%, and

(iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets (“Total risk-based capital ratio”) of at least 10.5%.

In addition, the Company and Bank must maintain a ratio of ending Tier 1 capital to adjusted quarterly average assets (“Tier 1 leverage ratio”) of at least 5.0% to be considered “well capitalized” under the regulatory framework for prompt corrective action.

Management believes, as of June 30, 2022 and December 31, 2021, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”.

As of June 30, 2022 and December 31, 2021, the regulatory capital ratios for the Company and Bank are presented below.

June 30, 2022

December 31, 2021

Community Bank

Tier 1 leverage ratio

Tier 1 risk-based capital ratio

Total risk-based capital ratio

Common equity Tier 1 capital ratio

The Company’s Tier 1 leverage ratio was 8.65% at the end of the second quarter, down 44 basis points from year-end 2021 and 71 basis points below its level one year earlier.

The decrease in the Tier 1 leverage ratio in comparison to December 31, 2021 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income items, decreasing 1.8%, as the impact of the Elmira acquisition and share repurchases outweighed net earnings retention, while average assets, excluding intangibles and the market value adjustment on investments, increased 3.3%, primarily due to continued inflows of customer deposits and the Elmira acquisition.

The Tier 1 leverage ratio decreased compared to the prior year’s second quarter as shareholders’ equity, excluding intangibles and other comprehensive income, decreased 0.2%, as the impact of the Elmira acquisition and share repurchases outweighed earnings retention, while average assets excluding intangibles and the market value adjustment on investments, increased 8.0% primarily due to continued inflows of customer deposits and the acquisition of Elmira.

The net tangible equity-to-assets ratio (a non-GAAP measure) of 5.40% decreased 3.29 percentage points from December 31, 2021 and decreased 3.62 percentage points versus June 30, 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 $473.3 million, or 37.5%, decrease in tangible equity due to the decline in the after-tax market value adjustment on available-for-sale investment securities and a $75.2 million net increase in intangible assets due to the Elmira acquisition and a $612.6 million, or 4.4%, increase in tangible assets due to the Elmira acquisition and net inflows of deposits.

The decrease in the net tangible equity to net tangible assets ratio (non-GAAP) from the fourth quarter of 2021 was driven by a $491.5 million decrease in tangible equity due to the impact of the Elmira acquisition and higher market interest rates on the after-tax market value adjustment on available-for-sale investment securities, while tangible assets decreased $117.2 million.

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

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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 March 31, 2022.

The primary source of non-deposit funds are FHLB or Federal Reserve overnight advances, of which there were $66.0 million of outstanding borrowings at June 30, 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 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.

At June 30, 2022, the Bank had $197.6 million of cash and cash equivalents of which $20.3 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks.

The Company also had $1.81 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and had $435.3 million of funding availability at the Federal Reserve’s discount window.

Additionally, the Company has $3.13 billion of unencumbered securities that could be pledged at the FHLB or Federal Reserve to obtain additional funding.

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

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.

As of June 30, 2022, this ratio was 19.4% for 30-days and 19.6% 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 March 31, 2022, there is more than enough liquidity available during the next year to cover projected cash outflows.

As of June 30, 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 March 31, 2022 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 June 30, 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.

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Factors that could cause actual results to differ from those discussed in the forward-looking statements include:

(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;

(1) the macroeconomic and other challenges and uncertainties related to the COVID-19 pandemic, variants of COVID-19, related vaccine rollout and efficacy, and government measures taken in response thereto, 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 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;

(3) changes to the U.S.

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;

(3) 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;

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(20) 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;

(21) the outcome of pending or future litigation, government proceedings and local, state and Federal tax audits;

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

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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 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.

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 (“SEC”) for the year ended December 31, 2021 and the Quarterly Report on Form 10-Q filed with the SEC on May 10, 2022 for the quarter ended March 31, 2022.

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.

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Three Months Ended

Six Months Ended

(000's omitted)

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Acquisition expenses

Unrealized gain on equity securities

Acquisition-related contingent consideration adjustment

Unrealized loss (gain) on equity securities

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

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Acquisition expenses

Unrealized gain on equity securities

Acquisition-related contingent consideration adjustment

Unrealized loss (gain) on equity securities

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

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Subtotal (non-GAAP)

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Acquisition-related contingent consideration adjustment

Tax effect of acquisition-related contingent consideration adjustment

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

Operating net income (non-GAAP)

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Three Months Ended

Six Months Ended

(000's omitted)

Income statement data (continued)

Earnings per common share

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Subtotal (non-GAAP)

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Acquisition-related contingent consideration adjustment

Tax effect of acquisition-related contingent consideration adjustment

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

Operating earnings per share (non-GAAP)

9 unchanged sentences

Acquisition expenses

Acquisition-related contingent consideration adjustment

Total adjusted noninterest expenses (non-GAAP)

4 unchanged sentences

Acquired non-PCD loan accretion

Unrealized gain on equity securities

Unrealized loss (gain) on equity securities

Operating revenues (non-GAAP) - denominator

16 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