Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Bank System, Inc. (the “Company” or “CBSI”) as of and for the three and 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, “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. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption, “Forward-Looking Statements,” on page 52.
Critical Accounting Policies
As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could meaningfully differ from these estimates. Management believes that the critical accounting estimates include the allowance for credit losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation, the carrying value of goodwill and other intangible assets, and acquired loan valuations. A summary of the accounting policies used by management is disclosed in Note A, “Summary of Significant Accounting Policies” on pages 76-88 of the most recent Form 10-K (fiscal year ended December 31, 2021) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2022. A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on pages 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” 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, 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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Executive Summary
The Company’s business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services to retail, commercial and municipal customers. The Company’s banking subsidiary is Community Bank, N.A. (the “Bank” or “CBNA”). The Company’s Benefit Plans Administrative Services, Inc. (“BPAS”) subsidiary is a leading provider of employee benefits administration, trust services, collective investment fund administration and actuarial consulting services to customers on a national scale. In addition, the Company offers comprehensive financial planning, insurance and wealth management services through its Community Bank Wealth Management Group and OneGroup NY, Inc. (“OneGroup”) operating units.
The Company’s core operating objectives are: (i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies and divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and optimize interest rate risk, yield and liquidity, (iv) increase the noninterest component of total revenues through growth in existing financial services business units, and the acquisition of additional financial services and banking businesses, and (v) utilize technology to deliver customer-responsive products and services and improve efficiencies.
Significant factors reviewed by management to evaluate achievement of the Company’s operating objectives and its operating results and financial condition include, but are not limited to: net income and earnings per share; return on assets and equity; components of net interest margin; noninterest revenues; noninterest expenses; asset quality; loan and deposit growth; capital management; performance of individual banking and financial services units; performance of specific product lines and customers; liquidity and interest rate sensitivity; enhancements to customer products and services and their underlying performance characteristics; technology advancements; market share; peer comparisons; and the performance of recently acquired businesses.
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.
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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 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 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, 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.
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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:
Table 1: Condensed Income Statements
Three Months Ended
Six Months Ended
June 30,
June 30,
(000’s omitted, except per share data)
2022
2021
2022
2021
Net interest income
$
103,141
$
92,105
$
198,013
$
186,059
Provision for credit losses
6,038
(4,338)
6,944
(10,057)
Noninterest revenues
64,097
59,460
129,770
117,991
Noninterest expenses
110,424
93,543
210,231
186,789
Income before income taxes
50,776
62,360
110,608
127,318
Income taxes
10,971
14,416
23,748
26,524
Net income
$
39,805
$
47,944
$
86,860
$
100,794
Diluted weighted average common shares outstanding
54,393
54,613
54,456
54,523
Diluted earnings per share
$
0.73
$
0.88
$
1.60
$
1.85
Net Interest Income
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.
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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 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.
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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 and other fees and the accretion of acquired loan marks. Average loan balances include nonaccrual loans and loans held for sale.
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Table 2a: Quarterly Average Balance Sheet
Three Months Ended
Three Months Ended
June 30, 2022
June 30, 2021
Avg.
Avg.
Average
Yield/Rate
Average
Yield/Rate
(000's omitted except yields and rates)
Balance
Interest
Paid
Balance
Interest
Paid
Interest-earning assets:
Cash equivalents
$
472,671
$
764
0.65
%
$
2,074,757
$
563
0.11
%
Taxable investment securities (1)
5,760,399
24,135
1.68
%
3,547,646
16,226
1.83
%
Nontaxable investment securities (1)
513,506
4,195
3.28
%
409,244
3,370
3.30
%
Loans (net of unearned discount) (2)
7,725,107
78,089
4.05
%
7,341,226
76,065
4.16
%
Total interest-earning assets
14,471,683
107,183
2.97
%
13,372,873
96,224
2.89
%
Noninterest-earning assets
981,029
1,347,211
Total assets
$
15,452,712
$
14,720,084
Interest-bearing liabilities:
Interest checking, savings, and money market deposits
$
8,323,724
1,010
0.05
%
$
7,607,119
763
0.04
%
Time deposits
945,135
1,681
0.71
%
974,510
2,200
0.91
%
Customer repurchase agreements
294,704
214
0.29
%
248,923
227
0.37
%
Overnight FRB borrowings
1,560
7
1.75
%
0
0
0.00
%
FHLB borrowings
11,142
83
3.00
%
4,768
26
2.14
%
Subordinated notes payable
3,268
39
4.69
%
3,294
39
4.69
%
Total interest-bearing liabilities
9,579,533
3,034
0.13
%
8,838,614
3,255
0.15
%
Noninterest-bearing liabilities:
Noninterest checking deposits
4,061,738
3,719,592
Other liabilities
68,031
160,147
Shareholders' equity
1,743,410
2,001,731
Total liabilities and shareholders' equity
$
15,452,712
$
14,720,084
Net interest earnings
$
104,149
$
92,969
Net interest spread
2.84
%
2.74
%
Net interest margin on interest-earning assets
2.89
%
2.79
%
Fully tax-equivalent adjustment (3)
$
1,008
$
864
(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.
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Table 2b: Year-to-Date Average Balance Sheet
Six Months Ended
Six Months Ended
June 30, 2022
June 30, 2021
Avg.
Avg.
Average
Yield/Rate
Average
Yield/Rate
(000's omitted except yields and rates)
Balance
Interest
Paid
Balance
Interest
Paid
Interest-earning assets:
Cash equivalents
$
700,511
$
1,191
0.34
%
$
1,871,863
$
978
0.11
%
Taxable investment securities (1)
5,632,393
46,299
1.66
%
3,394,185
30,986
1.84
%
Nontaxable investment securities (1)
463,664
7,472
3.25
%
418,415
6,881
3.32
%
Loans (net of unearned discount) (2)
7,558,126
150,747
4.02
%
7,349,988
155,947
4.28
%
Total interest-earning assets
14,354,694
205,709
2.89
%
13,034,451
194,792
3.01
%
Noninterest-earning assets
1,169,370
1,405,987
Total assets
$
15,524,064
$
14,440,438
Interest-bearing liabilities:
Interest checking, savings, and money market deposits
$
8,255,651
1,831
0.04
%
$
7,359,477
1,517
0.04
%
Time deposits
930,073
3,425
0.74
%
963,519
4,558
0.95
%
Customer repurchase agreements
303,824
425
0.28
%
260,668
464
0.36
%
Overnight FRB borrowings
784
7
1.75
%
0
0
0.00
%
FHLB borrowings
6,533
93
2.86
%
5,506
57
2.07
%
Subordinated notes payable
3,271
77
4.71
%
3,297
77
4.71
%
Subordinated debt held by unconsolidated subsidiary trusts
0
0
0.00
%
31,184
293
1.89
%
Total interest-bearing liabilities
9,500,136
5,858
0.12
%
8,623,651
6,966
0.16
%
Noninterest-bearing liabilities:
Noninterest checking deposits
4,015,226
3,606,217
Other liabilities
117,397
176,488
Shareholders’ equity
1,891,305
2,034,082
Total liabilities and shareholders’ equity
$
15,524,064
$
14,440,438
Net interest earnings
$
199,851
$
187,826
Net interest spread
2.77
%
2.85
%
Net interest margin on interest-earning assets
2.81
%
2.91
%
Fully tax-equivalent adjustment (3)
$
1,838
$
1,767
(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.
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.
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Table 3: Rate/Volume
Three months ended June 30, 2022
Six months ended June 30, 2022
versus June 30, 2021
versus June 30, 2021
Increase (Decrease) Due to Change in (1)
Increase (Decrease) Due to Change in (1)
(000's omitted)
Volume
Rate
Net Change
Volume
Rate
Net Change
Interest earned on:
Cash equivalents
$
(726)
$
927
$
201
$
(912)
$
1,125
$
213
Taxable investment securities
9,372
(1,463)
7,909
18,665
(3,352)
15,313
Nontaxable investment securities
851
(26)
825
730
(139)
591
Loans
3,911
(1,887)
2,024
4,331
(9,531)
(5,200)
Total interest-earning assets (2)
8,076
2,883
10,959
19,152
(8,235)
10,917
Interest paid on:
Interest checking, savings and money market deposits
77
170
247
194
120
314
Time deposits
(64)
(455)
(519)
(153)
(980)
(1,133)
Customer repurchase agreements
37
(50)
(13)
70
(109)
(39)
Overnight FRB borrowings
7
0
7
7
0
7
FHLB borrowings
44
13
57
12
24
36
Subordinated debt held by unconsolidated subsidiary trusts
0
0
0
(293)
0
(293)
Total interest-bearing liabilities (2)
258
(479)
(221)
658
(1,766)
(1,108)
Net interest earnings (2)
$
7,827
$
3,353
$
11,180
$
18,542
$
(6,517)
$
12,025
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of such change in each component.
(2) Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components.
Noninterest Revenues
The Company’s sources of noninterest revenues are of four primary types: 1) general banking services related to loans, including mortgage banking, deposits and other core customer activities typically provided through the branch network and digital banking channels (performed by CBNA); 2) employee benefit trust, collective investment fund, transfer agency, actuarial and benefit plan administration services (performed by BPAS and its subsidiaries); 3) wealth management services, comprised of trust services (performed by the trust unit within CBNA), broker-dealer and investment advisory products and services (performed by Community Investment Services Inc. (“CISI”), OneGroup Wealth Partners, Inc. and The Carta Group, Inc.) and asset management services (performed by Nottingham Advisors, Inc.); and 4) insurance and risk management products and services (performed by OneGroup). Additionally, the Company has other transactions, including unrealized gains or losses on equity securities.
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Table 4: Noninterest Revenues
Three Months Ended
Six Months Ended
June 30,
June 30,
(000's omitted)
2022
2021
2022
2021
Employee benefit services
$
28,921
$
27,477
$
58,501
$
54,010
Deposit service charges and fees
9,610
7,708
18,960
15,489
Mortgage banking
269
331
424
1,019
Debit interchange and ATM fees
6,528
6,528
13,333
12,827
Insurance services
9,780
8,209
20,189
16,362
Wealth management services
8,141
8,227
16,774
16,426
Other banking revenues
870
980
1,609
1,834
Subtotal
64,119
59,460
129,790
117,967
Unrealized (loss) gain on equity securities
(22)
0
(20)
24
Total noninterest revenues
$
64,097
$
59,460
$
129,770
$
117,991
Noninterest revenues/operating revenues (FTE basis) (1)
38.3
%
39.3
%
39.6
%
38.9
%
(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, 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. 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%.
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Noninterest Expenses
Table 5 below sets forth the quarterly results of the major noninterest expense categories for the current and prior year, as well as efficiency ratios (defined below), a standard measure of expense utilization effectiveness commonly used in the banking industry.
Table 5: Noninterest Expenses
Three Months Ended
Six Months Ended
June 30,
June 30,
(000's omitted)
2022
2021
2022
2021
Salaries and employee benefits
$
65,398
$
57,892
$
127,046
$
115,524
Occupancy and equipment
10,424
10,270
21,376
21,570
Data processing and communications
13,611
12,766
26,270
25,157
Amortization of intangible assets
3,851
3,246
7,583
6,597
Legal and professional fees
3,385
2,499
7,002
5,533
Business development and marketing
3,616
2,659
6,359
4,689
Acquisition expenses
3,960
4
4,259
31
Acquisition-related contingent consideration adjustment
400
0
400
0
Other
5,779
4,207
9,936
7,688
Total noninterest expenses
$
110,424
$
93,543
$
210,231
$
186,789
Operating expenses (1) /average assets
2.65
%
2.46
%
2.57
%
2.52
%
Efficiency ratio (2)
61.1
%
59.7
%
60.4
%
59.4
%
(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 gains and losses 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 $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.
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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.
Income Taxes
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%. 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 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.
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The following table sets forth the fair value of the Company’s investment securities portfolio:
Table 6: Investment Securities
June 30,
December 31,
June 30,
(000's omitted)
2022
2021
2021
Available-for-Sale Portfolio:
U.S. Treasury and agency securities
$
4,615,546
$
3,998,564
$
3,025,072
Obligations of state and political subdivisions
527,155
430,289
426,152
Government agency mortgage-backed securities
425,357
477,056
529,139
Corporate debt securities
7,231
7,962
3,094
Government agency collateralized mortgage obligations
15,138
20,339
29,282
Total available-for-sale portfolio
5,590,427
4,934,210
4,012,739
Equity and other Securities:
Equity securities, at fair value
443
463
469
Federal Home Loan Bank common stock
13,199
7,188
7,262
Federal Reserve Bank common stock
35,323
33,916
33,916
Other equity securities, at adjusted cost
3,630
3,312
3,276
Total equity and other securities
52,595
44,879
44,923
Total investments
$
5,643,022
$
4,979,089
$
4,057,662
Loans
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 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. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category.
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 $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.
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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. Consumer direct loans provide attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. 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.
Asset Quality
The following table sets forth the allocation of the allowance for credit losses by loan category as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes when the risk factors of each component part change. The allocation is not indicative of either the specific amounts of the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table 7, total allowance for credit losses at the end of the 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.
Table 7: Allowance for Credit Losses by Loan Type
June 30, 2022
December 31, 2021
June 30, 2021
(000's omitted except for ratios)
Allowance
Loan Mix
Allowance
Loan Mix
Allowance
Loan Mix
Business lending
$
23,241
40.9
%
$
22,995
41.7
%
$
25,302
44.0
%
Consumer mortgage
12,631
35.7
%
10,017
34.7
%
10,001
33.2
%
Consumer indirect
14,378
16.1
%
11,737
16.1
%
11,103
15.3
%
Consumer direct
2,822
2.1
%
2,306
2.1
%
2,548
2.1
%
Home equity
1,470
5.2
%
1,814
5.4
%
1,796
5.4
%
Unallocated
1,000
0.0
%
1,000
0.0
%
1,000
0.0
%
Total loans
$
55,542
100.0
%
$
49,869
100.0
%
$
51,750
100.0
%
As demonstrated in Table 7 and discussed previously, business lending and consumer installment carry higher credit risk than residential real estate, and as a result, these loans carry allowance for credit losses that cover a higher percentage of their total portfolio balances. The unallocated allowance is maintained for potential inherent losses in the specific portfolios that are not captured due to model imprecision. The unallocated allowance of $1.0 million at 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. However, given the inherent imprecision in the many estimates used in the determination of the allocated portion of the allowance, management remained conservative in the approaches used to establish the overall allowance for credit losses. Management considers the allocated and unallocated portions of the allowance for credit losses to be prudent and reasonable. Furthermore, the Company’s allowance for credit losses is general in nature and is available to absorb losses from any loan category.
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Allowance for credit losses and loan net charge-off ratios are as follows:
Table 8: Loan Ratios
June 30,
December 31,
June 30,
2022
2021
2021
Allowance for credit losses/total loans
0.68
%
0.68
%
0.71
%
Allowance for credit losses/nonperforming loans
150
%
110
%
74
%
Nonaccrual loans/total loans
0.39
%
0.57
%
0.95
%
Allowance for credit losses/nonaccrual loans
175
%
120
%
76
%
Net charge-offs (annualized) to average loans outstanding (quarterly):
Business lending
(0.01)
%
0.10
%
(0.03)
%
Consumer mortgage
0.01
%
0.00
%
0.02
%
Consumer indirect
0.15
%
0.24
%
(0.16)
%
Consumer direct
(0.02)
%
0.53
%
(0.05)
%
Home equity
0.00
%
0.01
%
0.01
%
Total loans
0.02
%
0.09
%
(0.03)
%
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 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 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.
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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 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. The Company’s larger criticized credits are also reviewed on a quarterly basis by senior credit administration management, special assets officers and commercial lending management to monitor their status and discuss relationship management plans. 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 0.75% 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 $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 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.
Deposits
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.
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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 .
Table 9: Quarterly Average Deposits
June 30,
December 31,
June 30,
(000’s omitted)
2022
2021
2021
Noninterest checking deposits
$
4,061,738
$
3,935,586
$
3,719,592
Interest checking deposits
3,436,320
3,215,815
3,192,123
Savings deposits
2,410,405
2,227,776
2,161,716
Money market deposits
2,476,999
2,510,766
2,253,280
Time deposits
945,135
942,205
974,510
Total deposits
$
13,330,597
$
12,832,148
$
12,301,221
Nonpublic fund deposits
$
11,691,764
$
11,165,894
$
10,769,929
Public fund deposits
1,638,833
1,666,254
1,531,292
Total deposits
$
13,330,597
$
12,832,148
$
12,301,221
Borrowings
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 $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. The other comprehensive loss, net of tax, was comprised of a $468.6 million decrease in the after-tax market value adjustment on the available-for-sale investment portfolio as market interest rates increased between the periods, partially offset by a positive $0.5 million adjustment to the funded status of the Company’s retirement plans. 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 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 decreased 0.3% over the last twelve months, as common stock repurchases outweighed activity in the Company’s employee stock plans.
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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
Community
Community Bank
Community
System, Inc.
Bank, N.A.
System, Inc.
Bank, N.A.
Tier 1 leverage ratio
8.65
%
6.90
%
9.09
%
7.26
%
Tier 1 risk-based capital ratio
15.91
%
12.73
%
18.60
%
14.92
%
Total risk-based capital ratio
16.58
%
13.41
%
19.28
%
15.62
%
Common equity Tier 1 capital ratio
15.91
%
12.73
%
18.60
%
14.92
%
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.
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Liquidity
Liquidity risk is a measure of the Company’s ability to raise cash when needed at a reasonable cost and minimize any loss. The Company maintains appropriate liquidity levels in both normal operating conditions as well as stressed environments. The Company must be capable of meeting all obligations to its customers at any time and, therefore, the active management of its liquidity position remains an important management objective. The Bank has appointed the Asset Liability Committee (“ALCO”) to manage liquidity risk using policy guidelines and limits on indicators of potential liquidity risk. The indicators are monitored using a scorecard with three risk level limits. These risk indicators measure core liquidity and funding needs, capital at risk and change in available funding sources. The risk indicators are monitored using such metrics as the core basic surplus ratio, unencumbered securities to average assets, free loan collateral to average assets, loans to deposits, deposits to total funding and borrowings to total funding ratios.
Given the uncertain nature of the Company’s customers’ demands, as well as the Company’s desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on and off-balance sheet funds available that can be utilized when needed. Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity must be supplemented with additional sources such as credit lines from correspondent banks and borrowings from the FHLB and the Federal Reserve. 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 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 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. There was $25.0 million available in unsecured lines of credit with other correspondent banks at quarter end.
The Company’s primary approach to measuring short-term liquidity is known as the Basic Surplus/Deficit model. It is used to calculate liquidity over two time periods: first, the amount of cash that could be made available within 30 days (calculated as liquid assets less short-term liabilities as a percentage of average assets); and second, a projection of subsequent cash availability over an additional 60 days. 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 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 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. This five-year measure reflects ample liquidity for loan and other asset growth over the next five years.
Though remote, the possibility of a funding crisis exists at all financial institutions. Accordingly, management has addressed this issue by formulating a Liquidity Contingency Plan, which has been reviewed and approved by both the Company’s Board of Directors (the “Board”) and the Company’s ALCO. The plan addresses the actions that the Company would take in response to both a short-term and long-term funding crisis.
A short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly short-term funding operations. Such a crisis would likely be temporary in nature and would not involve a change in credit ratings. A long-term funding crisis would most likely be the result of drastic credit deterioration at the Company. Management believes that both potential circumstances have been fully addressed through the establishment of trigger points for monitoring such events and detailed action plans that would be initiated if those trigger points are reached.
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Forward-Looking Statements
This report contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Forward-looking statements often use words such as “anticipate,” “could,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “forecast,” “believe,” or other words of similar meaning. These statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. Moreover, the Company’s plans, objectives and intentions are subject to change based on various factors (some of which are beyond the Company’s control). 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, 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) 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; (4) the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin; (5) future provisions for credit losses on loans and debt securities; (6) changes in nonperforming assets; (7) the effect of a fall in stock market or bond prices on the Company’s fee income businesses, including its employee benefit services, wealth management, and insurance businesses; (8) risks related to credit quality; (9) inflation, interest rate, liquidity, market and monetary fluctuations; (10) the strength of the U.S. economy in general and the strength of the local economies where the Company conducts its business; (11) the timely development of new products and services and customer perception of the overall value thereof (including features, pricing and quality) compared to competing products and services; (12) changes in consumer spending, borrowing and savings habits; (13) technological changes and implementation and financial risks associated with transitioning to new technology-based systems involving large multi-year contracts; (14) the ability of the Company to maintain the security of its financial, accounting, technology, data processing and other operating systems and facilities; (15) effectiveness of the Company’s risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, the Company’s ability to manage its credit or interest rate risk, the sufficiency of its allowance for credit losses and the accuracy of the assumptions or estimates used in preparing the Company’s financial statements and disclosures; (16) failure of third parties to provide various services that are important to the Company’s operations; (17) any acquisitions or mergers that might be considered or consummated by the Company and the costs and factors associated therewith, including differences in the actual financial results of the acquisition or merger compared to expectations and the realization of anticipated cost savings and revenue enhancements; (18) the ability to maintain and increase market share and control expenses; (19) the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of the Company and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, service fees, risk management, securities and other aspects of the financial services industry; (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; (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; (23) other risk factors outlined in the Company’s filings with the SEC from time to time; and (24) the success of the Company at managing the risks of the foregoing.
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 (“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. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.
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Reconciliation of GAAP to Non-GAAP Measures
Table 10: GAAP to Non-GAAP Reconciliations
Three Months Ended
Six Months Ended
June 30,
June 30,
(000's omitted)
2022
2021
2022
2021
Income statement data
Pre-tax, pre-provision net revenue
Net income (GAAP)
$
39,805
$
47,944
$
86,860
$
100,794
Income taxes
10,971
14,416
23,748
26,524
Income before income taxes
50,776
62,360
110,608
127,318
Provision for credit losses
6,038
(4,338)
6,944
(10,057)
Pre-tax, pre-provision net revenue (non-GAAP)
56,814
58,022
117,552
117,261
Acquisition expenses
3,960
4
4,259
31
Acquisition-related contingent consideration adjustment
400
0
400
0
Unrealized loss (gain) on equity securities
22
0
20
(24)
Adjusted pre-tax, pre-provision net revenue (non-GAAP)
$
61,196
$
58,026
$
122,231
$
117,268
Pre-tax, pre-provision net revenue per share
Diluted earnings per share (GAAP)
$
0.73
$
0.88
$
1.60
$
1.85
Income taxes
0.20
0.26
0.44
0.49
Income before income taxes
0.93
1.14
2.04
2.34
Provision for credit losses
0.12
(0.08)
0.11
(0.19)
Pre-tax, pre-provision net revenue per share (non-GAAP)
1.05
1.06
2.15
2.15
Acquisition expenses
0.07
0.00
0.08
0.00
Acquisition-related contingent consideration adjustment
0.01
0.00
0.01
0.00
Unrealized loss (gain) on equity securities
0.00
0.00
0.00
0.00
Adjusted pre-tax, pre-provision net revenue per share (non-GAAP)
$
1.13
$
1.06
$
2.24
$
2.15
Net income
Net income (GAAP)
$
39,805
$
47,944
$
86,860
$
100,794
Acquisition expenses
3,960
4
4,259
31
Tax effect of acquisition expenses
(856)
(1)
(919)
(6)
Subtotal (non-GAAP)
42,909
47,947
90,200
100,819
Acquisition-related contingent consideration adjustment
400
0
400
0
Tax effect of acquisition-related contingent consideration adjustment
(86)
0
(86)
0
Subtotal (non-GAAP)
43,223
47,947
90,514
100,819
Acquisition-related provision for credit losses
3,927
0
3,927
0
Tax effect of acquisition-related provision for credit losses
(848)
0
(848)
0
Subtotal (non-GAAP)
46,302
47,947
93,593
100,819
Unrealized loss (gain) on equity securities
22
0
20
(24)
Tax effect of unrealized loss (gain) on equity securities
(5)
0
(4)
4
Operating net income (non-GAAP)
46,319
47,947
93,609
100,799
Amortization of intangibles
3,851
3,246
7,583
6,597
Tax effect of amortization of intangibles
(832)
(750)
(1,629)
(1,375)
Subtotal (non-GAAP)
49,338
50,443
99,563
106,021
Acquired non-PCD loan accretion
(1,023)
(1,169)
(1,757)
(2,271)
Tax effect of acquired non-PCD loan accretion
221
270
378
475
Adjusted net income (non-GAAP)
$
48,536
$
49,544
$
98,184
$
104,225
Return on average assets
Adjusted net income (non-GAAP)
$
48,536
$
49,544
$
98,184
$
104,225
Average total assets
15,452,712
14,720,084
15,524,064
14,440,438
Adjusted return on average assets (non-GAAP)
1.26
%
1.35
%
1.28
%
1.46
%
Return on average equity
Adjusted net income (non-GAAP)
$
48,536
$
49,544
$
98,184
$
104,225
Average total equity
1,743,410
2,001,731
1,891,305
2,034,082
Adjusted return on average equity (non-GAAP)
11.17
%
9.93
%
10.47
%
10.33
%
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Three Months Ended
Six Months Ended
June 30,
June 30,
(000's omitted)
2022
2021
2022
2021
Earnings per common share
Diluted earnings per share (GAAP)
$
0.73
$
0.88
$
1.60
$
1.85
Acquisition expenses
0.07
0.00
0.07
0.00
Tax effect of acquisition expenses
(0.02)
0.00
(0.02)
0.00
Subtotal (non-GAAP)
0.78
0.88
1.65
1.85
Acquisition-related contingent consideration adjustment
0.01
0.00
0.01
0.00
Tax effect of acquisition-related contingent consideration adjustment
0.00
0.00
0.00
0.00
Subtotal (non-GAAP)
0.79
0.88
1.66
1.85
Acquisition-related provision for credit losses
0.07
0.00
0.07
0.00
Tax effect of acquisition-related provision for credit losses
(0.01)
0.00
(0.01)
0.00
Subtotal (non-GAAP)
0.85
0.88
1.72
1.85
Unrealized loss (gain) on equity securities
0.00
0.00
0.00
0.00
Tax effect of unrealized loss (gain) on equity securities
0.00
0.00
0.00
0.00
Operating earnings per share (non-GAAP)
0.85
0.88
1.72
1.85
Amortization of intangibles
0.07
0.06
0.14
0.12
Tax effect of amortization of intangibles
(0.02)
(0.01)
(0.03)
(0.03)
Subtotal (non-GAAP)
0.90
0.93
1.83
1.94
Acquired non-PCD loan accretion
(0.02)
(0.02)
(0.03)
(0.04)
Tax effect of acquired non-PCD loan accretion
0.01
0.00
0.01
0.01
Diluted adjusted net earnings per share (non-GAAP)
$
0.89
$
0.91
$
1.81
$
1.91
Noninterest operating expenses
Noninterest expenses (GAAP)
$
110,424
$
93,543
$
210,231
$
186,789
Amortization of intangibles
(3,851)
(3,246)
(7,583)
(6,597)
Acquisition expenses
(3,960)
(4)
(4,259)
(31)
Acquisition-related contingent consideration adjustment
(400)
0
(400)
0
Total adjusted noninterest expenses (non-GAAP)
$
102,213
$
90,293
$
197,989
$
180,161
Efficiency ratio
Adjusted noninterest expenses (non-GAAP) - numerator
$
102,213
$
90,293
$
197,989
$
180,161
Fully tax-equivalent net interest income
104,149
92,969
199,851
187,826
Noninterest revenues
64,097
59,460
129,770
117,991
Acquired non-PCD loan accretion
(1,023)
(1,169)
(1,757)
(2,271)
Unrealized loss (gain) on equity securities
22
0
20
(24)
Operating revenues (non-GAAP) - denominator
$
167,245
$
151,260
$
327,884
$
303,522
Efficiency ratio (non-GAAP)
61.1%
59.7%
60.4%
59.4%
June 30,
December 31,
June 30,
(000's omitted)
2022
2021
2021
Balance sheet data - at end of quarter
Total assets
Total assets (GAAP)
$
15,487,833
$
15,552,657
$
14,801,287
Intangible assets
(917,891)
(864,335)
(842,672)
Deferred taxes on intangible assets
45,349
44,160
44,072
Total tangible assets (non-GAAP)
$
14,615,291
$
14,732,482
$
14,002,687
Total common equity
Shareholders' Equity (GAAP)
$
1,661,696
$
2,100,807
$
2,061,100
Intangible assets
(917,891)
(864,335)
(842,672)
Deferred taxes on intangible assets
45,349
44,160
44,072
Total tangible common equity (non-GAAP)
$
789,154
$
1,280,632
$
1,262,500
Net tangible equity-to-assets ratio at quarter end
Total tangible common equity (non-GAAP) - numerator
$
789,154
$
1,280,632
$
1,262,500
Total tangible assets (non-GAAP) - denominator
$
14,615,291
$
14,732,482
$
14,002,687
Net tangible equity-to-assets ratio at quarter end (non-GAAP)
5.40
%
8.69
%
9.02
%
54
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.