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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-03-01 · 440 added, 398 removed, 642 unchanged (57% of the section changed)

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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 64.

Critical Accounting Policies

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are provided under the caption “Forward-Looking Statements” on page 64.

Critical Accounting Policies and Estimates

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.

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A summary of the accounting policies used by management is disclosed in Note A, “Summary of Significant Accounting Policies”, starting on page 76.

Allowance for Credit Losses

The allowance for credit losses (“ACL”) represents management’s judgment of an estimated amount of lifetime losses expected to be incurred on outstanding loans at the balance sheet date.

This is estimated using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts.

The determination of the appropriateness of the ACL is complex and applies significant and highly subjective estimates.

The ACL is measured on a collective (pooled) basis for loan segments that share similar risk characteristics, including collateral type, credit ratings/scores, size, duration, interest rate structure, industry, geography, origination vintage and payment structure.

The Company utilizes three methods for calculating the ACL:

cumulative loss, vintage loss and line loss.

Historical credit loss experience provides the basis for the estimation of expected future credit losses in all three methodologies.

Qualitative adjustments are made for differences in loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquired loans, levels of delinquencies, current levels of net charge-offs, risk ratings as well as actual and forecasted macroeconomic trends.

Macroeconomic data includes unemployment rates, changes in property values such as home prices, commercial real estate prices and automobile prices, gross domestic product, median household income net of inflation and other relevant factors.

Management utilizes judgment in determining and applying the qualitative factors and weighting the economic scenarios used, which include baseline, upside and downside.

Further details regarding the methodologies applied to estimate the various components of the ACL are provided in Note A, “Summary of Significant Accounting Policies”, starting on page 76.

Pension, Post-Retirement and Other Employee Benefit Plans

The Company provides a qualified defined benefit pension to eligible employees and retirees, other post-retirement health and life insurance benefits to certain retirees, an unfunded supplemental pension plan for certain key executives and an unfunded stock balance plan for certain of its nonemployee directors.

The benefit obligations for the pension and post-retirement benefits plans require significant management judgment.

The assumptions used in calculating the benefit obligation include the discount rate, expected return on plan assets, rate of compensation increase and interest crediting rates.

The discount rate is determined based upon the yield on high-quality fixed income investments expected to be available during the period to maturity of the pension benefits.

The expected long-term rate of return was estimated by taking into consideration asset allocation, long-term capital market assumptions, reviewing historical returns on the type of assets held and current economic factors.

Mortality tables are also utilized in calculating the benefit obligation, the selection of which is based on management judgment.

The evaluation of the amount and timing of the recognition of current and deferred income taxes is subject to management judgment and estimates.

The judgments and estimates required for the evaluation are updated based upon changes in the Company’s business and applicable federal, state and local tax laws.

Changes in tax laws, regulations and tax planning strategies will impact management’s judgment on the evaluation of income taxes.

Investment Valuation

Certain assets and liabilities are measured at fair value on a recurring basis including available-for-sale investment securities and equity securities.

The Company’s assets in these categories are measured at either Level 1 or Level 2 in the fair value hierarchy.

Management judgment is involved in selecting the level in the fair value hierarchy to classify these assets.

Level 1 requires the least amount of judgment as it utilizes quoted prices in active markets for identical assets or liabilities.

The Company’s assets that are measured at Level 2 require more judgment, as these are quoted prices in markets that are not active or rely on inputs other than quoted prices that are observable.

Securities classified as Level 1 in the fair value hierarchy include U.S.

Treasury obligations and marketable equity securities that are actively traded.

Level 2 securities include U.S.

agency securities, mortgage-backed securities issued by government-sponsored entities, municipal securities and corporate debt securities that are valued by reference to prices for similar securities or through model-based techniques in which significant inputs include reported trades, trade execution data, interest rate swap yield curves, market prepayment speeds, credit information, market spreads, and security’s terms and conditions.

Management judgment is involved in applying those inputs.

Certain assets and liabilities are measured at fair value on a non-recurring basis and are included in Level 3 in the fair value hierarchy, which utilizes significant valuation assumptions that are not readily observable in the market.

These include individually assessed loans, other real estate owned, mortgage servicing rights and contingent consideration.

These assets and liabilities are valued based on inputs selected using management judgment, which includes fair value of underlying collateral (determined using third party appraisals or other indications of value), discount rates, prepayment speeds and estimates of future cash flows.

Goodwill and Other Intangible Assets

Intangible assets include core deposit intangibles, customer relationship intangibles and goodwill arising from acquisitions.

Management judgment and estimates are involved in determining the initial and ongoing carrying value of goodwill and other intangible assets.

Initial value requires the assessment of fair value of the intangible asset based on discounted cash flow modeling techniques and inputs such as discount rates, required equity market premiums, peer volatility indicators and company-specific risk indicators.

Core deposit intangibles and customer relationship intangibles are amortized on either an accelerated or straight-line basis over periods ranging from seven to 20 years, based on management judgment.

The Company evaluates goodwill for impairment on an annual basis and performs a quarterly analysis to determine if any triggering events have occurred that would require an interim evaluation.

In accordance with FASB ASC 350, the Company first performs a qualitative assessment of goodwill to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

This qualitative assessment requires significant management judgment, and if the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is not less than its carrying value, no quantitative analysis is necessary.

The inputs for the qualitative analysis that require management judgment include macroeconomic conditions, industry and market conditions, financial performance of the reporting unit and other relevant events that affect the fair value of a reporting unit.

Acquired Loan Valuations

Acquired loans are recorded at their fair value as of the date of acquisition.

The determination of the fair value of the acquired loan portfolio requires significant management judgments and estimates.

The valuation of acquired loans utilizes discounted cash flow methodologies, and significant inputs include prepayment speeds, expected credit loss rates and discount rates, all of which are determined using a combination of historical results and observable market data, among other sources.

Management judgment is also involved in determining the amount of acquired loans that have experienced a more-than-insignificant credit deterioration since origination, which would be classified as purchased credit deteriorated (“PCD”), as compared to non-PCD loans, for the appropriate accounting treatment.

Supplemental Reporting of Non-GAAP Results of Operations

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

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

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, net gain on sale of investments, unrealized gain (loss) on equity securities, gain on debt extinguishment and litigation accrual expenses from income before income taxes.

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

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

Diluted adjusted net earnings per share, a non-GAAP measure, were $3.64 in 2021, up $0.27, or 8.0%, from 2020 and up $0.20, or 5.8%, from 2019.

Adjusted pre-tax, pre-provision net revenue per share, a non-GAAP measure, was $4.28 in 2021, up $0.02, or 0.5%, from 2020 and up $0.05, or 1.2%, from 2019.

Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 17.

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The Company’s core operating objectives are:

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

(i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies and divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and optimize interest rate risk, yield and liquidity, (iv) increase the noninterest component of total revenues through growth in existing banking, employee benefit, insurance and wealth management 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:

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and the performance of recently acquired businesses.

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

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

Elmira had total assets of $632.2 million, total deposits of $541.0 million, and net loans of $458.6 million at December 31, 2021.

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

The Company expects to complete the acquisition in the second quarter of 2022, subject to customary closing conditions, including required regulatory approval.

On November 1, 2022, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of JMD Associates, LLC (“JMD”), an insurance agency headquartered in Boca Raton, Florida.

The Company paid $1.0 million in cash and recorded a $0.1 million intangible asset for a noncompete agreement, a $0.4 million customer list intangible and $0.5 million of goodwill in conjunction with the acquisition.

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 $583.4 million of identifiable assets, including $437.0 million of loans, $11.3 million of investment securities and $8.0 million of core deposit intangibles, as well as $522.3 million of deposits.

Goodwill of $42.2 million was recognized as a result of the merger.

On January 1, 2022, the Company, through its subsidiary OneGroup, completed acquisitions of certain assets of three insurance agencies for an aggregate amount of $2.5 million in cash.

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

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

(“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area for $13.1 million, including $11.6 million in cash and contingent consideration valued at $1.5 million.

As of December 31, 2022, the contingent consideration is valued at $1.7 million.

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

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

As of December 31, 2021, the contingent consideration is valued at $1.6 million, resulting in a $0.2 million acquisition-related contingent consideration adjustment recorded in the consolidated statements of income in 2021.

As of December 31, 2022, the contingent consideration is valued at $1.1 million.

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

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Goodwill of $20.0 million, a $2.9 million core deposit intangible asset and a $1.2 million customer list intangible asset were recognized as a result of the merger.

On September 18, 2019, the Company, through its subsidiary, Community Investment Services, Inc.

(“CISI”), completed its acquisition of certain assets of a practice engaged in the financial services business headquartered in Syracuse, New York.

The Company paid $0.5 million in cash to acquire a customer list, and recorded a $0.5 million customer list intangible asset in conjunction with the acquisition.

On July 12, 2019, the Company completed its merger with Kinderhook Bank Corp.

(“Kinderhook”), parent company of The National Union Bank of Kinderhook, headquartered in Kinderhook, New York, for $93.4 million in cash.

The merger added 11 branch locations across a five county area in the Capital District of Upstate New York.

The merger resulted in the acquisition of $642.8 million of assets, including $479.9 million of loans and $39.8 million of investment securities, as well as $568.2 million of deposits.

Goodwill of $40.0 million was recognized as a result of the merger.

On January 2, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Wealth Resources Network, Inc.

(“Wealth Resources”), a financial services business headquartered in Liverpool, New York.

The Company paid $1.2 million in cash to acquire a customer list from Wealth Resources, and recorded a $1.2 million customer list intangible asset in conjunction with the acquisition.

The Company reported net income of $189.7 million for the year ended December 31, 2021 that was $25.0 million, or 15.2%, above the prior year, while earnings per share of $3.48 for the year was $0.40, or 13.0%, above the prior year.

The increase in net income and earnings per share was due in part to the decrease in provision for credit losses, which included $3.1 million of acquisition-related provision for credit losses associated with the acquisition of Steuben in 2020, with the remaining decrease largely attributable to steady improvements in the economic outlook and the loan portfolio’s asset quality profile during 2021.

Other factors resulting in the increases to net income and earnings per share were higher noninterest revenues, an increase in net interest income, a decrease in acquisition-related expenses and a decrease in litigation accrual expenses.

Partially offsetting these items were higher noninterest expenses, including a full year of the expanded business activities from the Steuben acquisition completed in the second quarter of 2020 and the three financial services businesses acquired in 2021, an increase in income taxes, a decrease in gain on debt extinguishment and an increase in weighted average diluted shares outstanding attributable to the full year’s impact of shares issued in connection with the Steuben acquisition in 2020 and administration of the Company’s employee stock plans.

The Company reported net income of $188.1 million for the year ended December 31, 2022 that was $1.6 million, or 0.9%, below the prior year, while earnings per share of $3.46 for the year was $0.02, or 0.6%, below the prior year.

The decreases in net income and earnings per share were mainly driven by an increase in noninterest expenses, due in part to the general post-pandemic increase in the level of business activities along with incremental expenses associated with operating an expanded franchise subsequent to the Elmira acquisition and higher acquisition-related expenses during the period, and increases in the provision for credit losses and income taxes.

The provision for credit losses during 2022 reflected historically high levels of loan growth, including $3.9 million of acquisition-related provision for credit losses due to the Elmira acquisition, and continued weakening of the economic forecast, while the provision for credit losses during 2021 was a net benefit reflecting steady improvements in the economic outlook and the loan portfolio’s asset quality profile.

Partially offsetting these items were higher levels of net interest income, due primarily to a significant increase in average loan balances and an increase in the yield on average interest-earning assets, partially offset by higher funding costs, an increase in noninterest revenues, as both total banking and total financial services noninterest revenues grew, and lower weighted average diluted shares outstanding attributable to share repurchases during 2022.

Net income adjusted to exclude acquisition expenses, acquisition-related provision for credit losses, acquisition-related contingent consideration adjustment, unrealized gain (loss) on equity securities, litigation accrual, gain on debt extinguishment, amortization of intangibles, and acquired non-PCD loan accretion (“Adjusted Net Income”), a non-GAAP measure, increased $5.2 million, or 2.6%, compared to the prior year.

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See Table 17 for Reconciliation of GAAP to Non-GAAP Measures.

The Company experienced year-over-year growth in average interest-earning assets and average deposits, primarily reflective of large net inflows of funds from government stimulus programs, the Paycheck Protection Program (“PPP”) loan originations and the full year impact from the acquisition of Steuben in the second quarter of 2020.

Average external borrowings in 2021 decreased from 2020 reflective of decreases in average subordinated debt held by unconsolidated subsidiary trusts, average subordinated notes payable and average Federal Home Loan Bank of New York (“FHLB”) borrowings, partially offset by an increase in average securities sold under an agreement to repurchase (“customer repurchase agreements”).

The decrease in average subordinated debt held by unconsolidated subsidiary trusts was primarily due to the redemption of $77.3 million of trust preferred subordinated debt held by Community Capital Trust IV (“CCT IV”), an unconsolidated subsidiary trust, during the first quarter of 2021.

The decrease in average subordinated notes payable was primarily driven by the redemption of $10.4 million of subordinated notes payable acquired from the Kinderhook acquisition, during the fourth quarter of 2020.

Asset quality remained strong and generally improved throughout 2021, with the upgrade of several large business loans from nonaccrual to accruing status contributing to the nonperforming and delinquency ratios improving from 2020 levels.

The full year net charge-off ratio was also favorable and improved from one year earlier.

The Company experienced year-over-year growth in average interest-earning assets and average deposits, primarily reflective of organic loan growth and the acquisition of Elmira in the second quarter of 2022.

Average external borrowings in 2022 increased from 2021 as the Company entered an overnight borrowing position during the year to support the funding of strong loan growth.

Asset quality remained strong throughout 2022, with the upgrade of several large business loans from nonaccrual to accruing status contributing to the nonperforming and delinquency ratios improving from 2021 levels, while the full year net charge-off ratio remained consistent with the level one year earlier.

Net Income and Profitability

Net income for 2021 was $189.7 million, an increase of $25.0 million, or 15.2%, from 2020’s net income.

Earnings per share for 2021 was $3.48, up $0.40, or 13.0%, from 2020’s results.

Net income and earnings per share for 2021 were impacted by $0.7 million of acquisition expenses related to the pending Elmira Savings Bank acquisition and the three financial services acquisitions completed in 2021, $0.2 million of acquisition-related contingent consideration adjustment related to the FBD acquisition and a $0.1 million adjustment to litigation accrual expenses in 2021, while the Company incurred $4.9 million of acquisition expenses primarily related to the Steuben acquisition, $3.1 million of acquisition-related provision for credit losses related to the Steuben acquisition and $3.0 million of litigation accrual expenses in 2020.

Net income for 2022 was $188.1 million, a decrease of $1.6 million, or 0.9%, from 2021’s net income.

Earnings per share for 2022 was $3.46, down $0.02, or 0.6%, from 2021’s results.

Net income and earnings per share for 2022 were impacted by $5.0 million of acquisition expenses and a $3.9 million acquisition-related provision for credit losses related to the Elmira acquisition and $0.3 million of acquisition-related contingent consideration adjustments related to the FBD and TGA acquisitions.

This is compared to 2021 in which the Company incurred $0.7 million of acquisition expenses related to the Elmira acquisition and the three financial services acquisitions completed in 2021, $0.2 million of acquisition-related contingent consideration adjustment related to the FBD acquisition and a $0.1 million adjustment to litigation accrual expenses.

Adjusted net income, a non-GAAP measure, increased $5.2 million, or 2.6%, compared to the prior year, while adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, increased $26.6 million, or 11.4%, compared to 2021.

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See Table 17 for Reconciliation of GAAP to Non-GAAP Measures.

Net income for 2020 was $164.7 million, a decrease of $4.4 million, or 2.6%, from 2019’s earnings.

Earnings per share for 2020 was $3.08, down $0.15, or 4.6%, from 2019’s results.

Net income and earnings per share for 2020 were impacted by $4.9 million of acquisition expenses primarily related to the Steuben acquisition, $3.1 million of acquisition-related provision for credit losses related to the Steuben acquisition and $3.0 million of litigation accrual expenses, while the Company incurred $8.6 million of acquisition expenses in 2019 primarily related to the Kinderhook acquisition and recorded $4.9 million in net gains on the sales of investment securities in 2019.

2020 Adjusted Net Income, a non-GAAP measure, increased $0.2 million, or 0.1%, and Adjusted Earnings per share, a non-GAAP measure, of $3.37 decreased $0.07, or 2.0%, compared to the prior year, respectively.

Net income for 2021 was $189.7 million, an increase of $25.0 million, or 15.2%, from 2020’s earnings.

Earnings per share for 2021 was $3.48, up $0.40, or 13.0%, from 2020’s results.

Net income and earnings per share for 2021 were impacted $0.7 million of acquisition expenses related to the Elmira acquisition and the three financial services acquisitions completed in 2021, $0.2 million of acquisition-related contingent consideration adjustment related to the FBD acquisition and a $0.1 million adjustment to litigation accrual expenses, while in 2020 the Company incurred $4.9 million of acquisition expenses primarily related to the Steuben acquisition, $3.1 million of acquisition-related provision for credit losses related to the Steuben acquisition and $3.0 million of litigation accrual expenses.

2021 adjusted net income, a non-GAAP measure, increased $18.1 million, or 10.0%, compared to the prior year, while adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, increased $5.5 million, or 2.4%, compared to 2020.

2021 diluted adjusted net earnings per share, a non-GAAP measure, of $3.64 increased $0.27, or 8.0%, compared to the prior year, while adjusted pre-tax, pre-provision net revenue per share, a non-GAAP measure, of $4.28 increased $0.02, or 0.5%, compared to 2020.

See Table 17 for Reconciliation of GAAP to Non-GAAP Measures.

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Provision for credit losses

Gain on sales of investment securities, net

Unrealized gain (loss) on equity securities

Unrealized (loss) gain on equity securities

Gain on debt extinguishment

Noninterest revenue

Noninterest revenues

Acquisition expenses

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Diluted earnings per share

The Company operates in three business segments:

The Company operates three business segments:

Banking, Employee Benefit Services and All Other.

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retirement plans, health & welfare plans, fund administration, institutional trust services, collective investment funds, VEBA/115 trusts, fiduciary services, actuarial & pension services, and healthcare consulting services.

BPAS services more than 4,200 benefit plans with approximately 510,000 plan participants and holds more than $110 billion in employee benefit trust assets and $1.3 trillion in fund administration.

BPAS services more than 4,500 benefit plans with approximately 620,000 plan participants and holds more than $110 billion in employee benefit trust assets.

In addition, BPAS employs 407 professionals serving clients in every U.S.

state plus the Commonwealth of Puerto Rico, and occupies 13 offices located in New York, Pennsylvania, Massachusetts, New Jersey, Texas, Minnesota, South Dakota and Puerto Rico.

state plus the Commonwealth of Puerto Rico, and occupies 14 offices located in New York, Pennsylvania, Massachusetts, New Jersey, Texas, Minnesota, South Dakota, Washington and Puerto Rico.

The All Other segment is comprised of wealth management and insurance services.

Wealth management activities include trust services provided by the personal trust unit of CBNA, investment products and services provided by CISI, The Carta Group, Inc.

Wealth management activities include trust services provided by the personal trust unit of CBNA, investment products and services provided by Community Investment Services, Inc.

(“CISI”), The Carta Group, Inc.

(“Carta Group”) and OneGroup Wealth Partners, Inc.

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The insurance services activities include the offerings of personal and commercial lines of insurance and other risk management products and services provided by OneGroup.

For additional financial information on the Company’s segments, refer to Note U – Segment Information in the Notes to Consolidated Financial Statements.

The wealth management and insurance businesses include 288 employees and 19 customer service facilities in New York, Pennsylvania, Massachusetts, South Carolina and Florida.

The wealth management business includes assets under management of $7.3 billion at the end of 2022.

For additional financial information on the Company’s segments, refer to Note T – Segment Information in the Notes to Consolidated Financial Statements.

The primary factors explaining 2022 earnings performance are discussed in the remaining sections of this document and are summarized by segment as follows:

● Net interest income increased $46.2 million, or 12.3%.

This was the result of a $2.04 billion increase in average interest-earning assets and a 12 basis point decrease in the average rate on interest-bearing liabilities, partially offset by a 54 basis point decrease in the average yield on earning assets and a $1.21 billion increase in average interest-bearing liabilities.

Average loans grew $51.2 million driven primarily by the origination of second draw PPP loans and net organic growth in the consumer portfolios, including consumer mortgage, consumer indirect, consumer direct and home equity loans, while the yield on loans decreased 12 basis points from the prior year.

Also contributing to the growth in interest income was a $1.98 billion increase in the average book value of investments, including cash equivalents.

The increase in the average book balance of investments was the net result of investment purchases of $1.96 billion during the year as well as a significant increase in cash equivalents primarily driven by large deposit inflows related to government stimulus and PPP programs, partially offset by $426.7 million in investment maturities, calls and principal payments.

The average yield on investments, including cash equivalents, decreased 55 basis points from the prior year.

Average interest-bearing deposits increased $1.25 billion due primarily to the aforementioned net inflows of funds from government stimulus programs.

Borrowing interest expense decreased year-over-year as a result of a blended rate that was 79 basis points lower than the prior year and a decrease in average balances of $35.8 million.

• The net benefit in the provision for credit losses of $8.8 million decreased $23.0 million from the prior year’s $14.2 million provision for credit losses, reflective of the continued release of reserves in the first three quarters of 2021.

The economic outlook and the loan portfolio’s asset quality profile both steadily improved during 2021 as compared to the adverse impact COVID-19 had on economic and business conditions within the Company’s markets in 2020.

Net charge-offs of $2.8 million were $2.1 million less than 2020.

This resulted in an annual net charge-off ratio (net charge-offs / total average loans) of 0.04%, which was three basis points lower than the prior year.

Year-end nonperforming loans as a percentage of total loans and nonperforming assets as a percentage of loans and other real estate owned both decreased 42 basis points as compared to December 31, 2020 levels.

This was the result of a $1.16 billion increase in average interest-earning assets and a 16 basis point increase in the average yield on interest-earning assets, partially offset by a $781.2 million increase in average interest-bearing liabilities and nine basis point increase in the average rate on interest-bearing liabilities.

Average loans grew $726.0 million driven by the Elmira acquisition and organic growth in all loan categories, while the yield on loans decreased 5 basis points from the prior year due in part to a $15.4 million decrease in PPP-related interest income.

Also contributing to the growth in interest income was a $429.3 million increase in the average book value of investments, including cash equivalents.

The increase in the average book balance of investments was the net result of investment purchases of $1.36 billion during the year, offset by $266.9 million in investment maturities, calls and principal payments.

The average yield on investments, including cash equivalents, increased 38 basis points from the prior year.

Average interest-bearing deposits increased $570.4 million due primarily to the Elmira acquisition, and the cost of funds increased three basis points to 0.16%.

Borrowing interest expense increased year-over-year as a result of a blended rate that was 114 basis points higher than the prior year and an increase in average balances of $210.8 million.

● The provision for credit losses of $14.8 million increased $23.6 million from the prior year’s $8.8 million net benefit, reflective of loan growth both organically and from the Elmira acquisition, and a weakening economic forecast throughout 2022.

The provision for credit losses for 2022 included $3.9 million of provision related to loans acquired from Elmira.

Net charge-offs of $3.3 million were $0.5 million higher than 2021, due to increases in charge-offs in the consumer installment portfolio (which includes consumer indirect and consumer direct loan segments), partially offset by decreases in charge-offs in the business lending, consumer mortgage and home equity portfolios.

This resulted in an annual net charge-off ratio (net charge-offs / total average loans) of 0.04%, which was consistent with the prior year.

Year-end nonperforming loans as a percentage of total loans and nonperforming assets as a percentage of loans and other real estate owned decreased 24 and 25 basis points, respectively, as compared to December 31, 2021 levels.

Additional information on trends and policy related to asset quality is provided in the asset quality section on pages 54 through 58.

• Banking noninterest revenue, excluding unrealized gain (loss) on equity securities and gain on debt extinguishment, of $67.9 million for 2021 decreased by $1.3 million from 2020’s level.

The decrease was primarily driven by decreases in mortgage banking revenues as the Company is currently holding the majority of its new consumer mortgage production in portfolio due to a change in its strategy, and a decline in deposit service charges and fees and other banking revenues including decreases in overdraft fees in part due to the higher average deposit balances resulting from government stimulus program inflows.

This was partially offset by an increase in debit interchange and ATM fees, reflective of increased transaction activity including the impact of a full year of activity resulting from the addition of new deposit relationships from the Steuben acquisition in 2020.

The Company recognized $0.4 million in gain on debt extinguishment in 2020.

• Banking noninterest expenses, including acquisition and litigation accrual expenses, increased $4.5 million, or 1.7%, in 2021 reflective of an increase in merit and incentive-related employee wages, higher payroll taxes including increases in state-related unemployment taxes and higher employee benefit-related expenses including significant increases in employee medical benefit costs.

Other factors included an increase in data processing and communications expenses due to the implementation of new customer-facing digital technologies and back office systems, along with a general increase in the level of business activities as compared to the low 2020 levels resulting from the COVID-19 pandemic, partially offset by the absence of the one-time litigation accrual expenses incurred in 2020 and a decline in acquisition expenses.

Excluding acquisition and litigation accrual expenses, banking noninterest expenses increased $11.9 million, or 4.6%, reflective of a full year of business activity from the Steuben acquisition as well as the other factors discussed above.

● Banking noninterest revenue, excluding unrealized gains and losses on equity securities, of $75.5 million for 2022 increased by $7.6 million from 2021’s level.

The increase was primarily driven by an increase in deposit service and other banking fees that benefitted from the continued post-pandemic recovery of economic activity, as well as incremental revenues from the Elmira acquisition, offset, in part, by a decrease in mortgage banking revenues.

The Company continues to currently hold the majority of its new consumer mortgage production in portfolio rather than selling into the secondary market.

● Banking noninterest expenses, including acquisition and litigation accrual expenses, increased $22.8 million, or 8.4%, in 2022, reflective of an increase in merit-related employee wages, data processing and communications, professional fees, and marketing.

Included in total noninterest expenses is $5.0 million of acquisition-related expenses from the Elmira acquisition completed in the second quarter of 2022.

Excluding acquisition expenses, banking noninterest expenses increased $18.4 million, or 6.8%, reflective of the increase in general business activity, costs of operating an expanded business after the Elmira acquisition, and the other factors noted above.

EMPLOYEE BENEFIT SERVICES

● Employee benefit services noninterest revenue for 2021 of $116.6 million increased $13.2 million, or 12.7%, from the prior year level, primarily related to increases in employee benefit trust and custodial fees due in part to higher asset-based revenues, as well as incremental revenues from the acquisition of FBD during the third quarter of 2021.

● Employee benefit services noninterest revenue for 2022 of $118.0 million increased $1.3 million, or 1.1%, from the prior year level, due to growth in the customer base and a full year of activity from the FBD acquisition that occurred in 2021, offset by market-related headwinds that limited growth in asset-based revenues on employee benefit trusts.

● Employee benefit services noninterest expenses for 2022 totaled $77.6 million.

This represented an increase from 2020 of $4.3 million, or 6.4%, and was primarily attributable to an increase in personnel costs associated with the aforementioned acquisition of FBD and the continued buildout of resources to support an expanding revenue base, along with a general increase in the level of business activities as compared to the diminished levels in 2020 as a result of the COVID-19 pandemic.

Excluding acquisition-related expenses, employee benefit services noninterest expenses increased $4.0 million, or 6.1%.

This represented an increase from 2021 of $6.9 million, or 9.7%, and was primarily attributable to increases in employee wages and additional occupancy and data processing expenses.

Excluding the acquisition-related contingent consideration adjustment, employee benefit services noninterest expenses increased $7.6 million, or 10.8% from 2021.

ALL OTHER (WEALTH MANAGEMENT AND INSURANCE SERVICES)

● Wealth management and insurance services noninterest revenue for 2021 was $68.8 million;

an increase of $7.2 million, or 11.7%, from the prior year level.

The increase was due to incremental revenues from the acquisitions of NuVantage and TGA in 2021, along with organic growth in both businesses.

● Wealth management and insurance services noninterest expenses of $53.7 million increased $3.8 million, or 7.5%, from 2020 primarily due to increased personnel costs associated with the aforementioned acquisitions and the continued buildout of resources to support an expanding revenue base, along with a general increase in the level of business activities as compared to the subdued levels in 2020 resulting from the COVID-19 pandemic.

● Wealth management and insurance services noninterest revenue for 2022 was $73.1 million, an increase of $4.3 million, or 6.2%, from the prior year level.

The increase was due to organic growth in the insurance services business and incremental revenues from current year acquisitions, as well as a full year of revenue from acquisitions that occurred in 2021, offset by challenges posed by market valuations that decreased asset-based revenue for wealth management services.

● Wealth management and insurance services noninterest expenses of $60.8 million increased $7.1 million, or 13.3%, from 2021 primarily due to acquisitions, including increased personnel costs, as well as the continued buildout of resources to support an expanding revenue base and the continued general increase in the level of business activities.

Selected Profitability and Other Measures

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Average equity to average assets

As displayed in Table 2, the 2021 return on average assets ratio was consistent and the return on average equity ratio increased 106 basis points as compared to 2020.

The stable return on average assets was the result of an increase in net income that was impacted by a $23.1 million decrease in provision for credit losses, offset by an increase in average assets, primarily related to continued net inflows of deposits, including those associated with additional stimulus payments and a second round of PPP lending.

The return on average equity ratio increased in 2021 as net income increased impacted by the aforementioned provision for credit losses, while average equity increased at a lesser rate, primarily related to earnings retention and the full year impact of shares issued in connection with the Steuben acquisition in 2020, partially offset by decreases in the market value of the Company’s available-for-sale investments due to higher market interest rates.

The return on average assets ratio in 2020 decreased 25 basis points, while the return on average equity ratio decreased 129 basis points as compared to 2019.

The decrease in return on average assets was primarily the result of an increase in average assets, primarily related to large net inflows of funds from government stimulus programs, PPP loan originations and the acquisitions of Kinderhook in the third quarter of 2019 and Steuben in the second quarter of 2020, and a decrease in net income that was impacted by a $5.8 million increase in provision for credit losses, a $4.9 million decrease in net gains on sales of investment securities and $3.0 million of litigation accrual expenses incurred in 2020.

The return on average equity ratio decreased in 2020 as compared to 2019 as average equity increased, primarily related to shares issued in connection with the Steuben acquisition and increases in the market value of the Company’s available-for-sale investments, while net income decreased impacted by the aforementioned provision for credit losses, litigation accrual expenses and lower security gains.

The return on average assets adjusted to exclude acquisition expenses, acquisition-related provision for credit losses, acquisition-related contingent consideration adjustments, unrealized gain (loss) on equity securities, gain on debt extinguishment, amortization of intangibles, litigation accrual expenses and acquired non-PCD loan accretion (“adjusted return on average assets”), a non-GAAP measure, decreased six basis points to 1.34% in 2021, as compared to 1.40% in 2020.

The return on average equity adjusted to exclude acquisition expenses, acquisition-related provision for credit losses, acquisition-related contingent consideration adjustments, unrealized gain (loss) on equity securities, gain on debt extinguishment, amortization of intangibles, litigation accrual expenses and acquired non-PCD loan accretion (“adjusted return on average equity”), a non-GAAP measure, increased 71 basis points to 9.60% in 2021, from 8.89% in 2020.

See Table 16 for Reconciliation of GAAP to Non-GAAP Measures.

The dividend payout ratio for 2021 of 48.3% decreased from 53.7% in 2020 as there was a 15.2% increase in net income and a 3.5% increase in dividends declared.

As displayed in Table 2, the 2022 return on average assets ratio decreased seven basis points, while the return on average equity ratio increased 166 basis points as compared to 2021.

The decrease in the return on average assets was the result of an increase in average assets, primarily related to strong organic loan growth and the Elmira acquisition coupled with a slight decrease in net income that was impacted by a $23.6 million increase in provision for credit losses.

The return on average equity ratio increased in 2022 as average equity decreased due primarily to a decline in the after-tax market value of the Company’s available-for-sale investments due to higher market interest rates, while net income, which was impacted by the aforementioned provision for credit losses, decreased slightly.

The return on average assets ratio in 2021 was consistent with 2020, while the return on average equity ratio increased 106 basis points as compared to 2020.

The stable return on average assets in 2021 was the result of an increase in net income that was impacted by a $23.1 million decrease in provision for credit losses, offset by an increase in average assets, primarily related to continued net inflows of deposits, including those associated with additional stimulus payments and a second round of PPP lending.

The return on average equity ratio increased in 2021 as compared to 2020 as net income increased impacted by the aforementioned provision for credit losses, while average equity increased at a lesser rate, primarily related to earnings retention and the full year impact of shares issued in connection with the Steuben acquisition in 2020, partially offset by decreases in the market value of the Company’s available-for-sale investments due to higher market interest rates.

The return on average assets adjusted to exclude acquisition expenses, acquisition-related provision for credit losses, acquisition-related contingent consideration adjustments, unrealized gain (loss) on equity securities, litigation accrual expenses, gain on debt extinguishment, amortization of intangibles and acquired non-PCD loan accretion (“adjusted return on average assets”), a non-GAAP measure, decreased three basis points to 1.31% in 2022, as compared to 1.34% in 2021.

The return on average equity adjusted to exclude acquisition expenses, acquisition-related provision for credit losses, acquisition-related contingent consideration adjustments, unrealized gain (loss) on equity securities, litigation accrual expenses, gain on debt extinguishment, amortization of intangibles and acquired non-PCD loan accretion (“adjusted return on average equity”), a non-GAAP measure, increased 214 basis points to 11.74% in 2022, from 9.60% in 2021.

See Table 17 beginning on page 65 for Reconciliation of GAAP to Non-GAAP Measures.

The dividend payout ratio for 2022 of 49.9% increased from 48.3% in 2021 driven by a 2.5% increase in dividends declared and a 0.9% decrease in net income.

The increase in dividends declared in 2022 was a result of a 2.4% increase in the dividends declared per share and the issuance of shares in connection with the administration of the Company’s employee stock plans.

The dividend payout ratio for 2020 of 53.7% increased from 48.4% in 2019 as there was an 8.2% increase in dividends declared from 2019 and a 2.6% decrease in net income.

The increase in dividends declared in 2020 was a result of a 5.1% increase in the dividends declared per share and the issuance of shares in connection with the Steuben acquisition and administration of the Company’s 401(k) plan and employee stock plan.

The average equity to average assets ratio decreased in 2021 as the growth in assets outpaced the growth in common shareholders’ equity.

During 2021, average assets increased 15.0% while average equity increased a lesser 1.8%, in part due to a significant decline the after-tax market value adjustment on available-for-sale investments.

In 2020, the average equity to average assets ratio decreased as average equity rose 12.9% and average assets grew 16.8% in comparison to 2019.

The dividend payout ratio for 2021 of 48.3% decreased from 53.7% in 2020 as a 15.2% increase in net income outpaced a 3.5% increase in dividends declared.

The increase in dividends declared in 2021 was a result of a 2.4% increase in the dividends declared per share and the issuance of shares in conjunction with the 2020 Steuben merger, as well as the administration of the Company’s employee stock plans.

The average equity to average assets ratio decreased in 2022 due to a decrease in average equity driven by the aforementioned decline in the after-tax market value of the Company’s available-for-sale investments combined with growth in average assets.

During 2022, average equity decreased 16.0% while average assets increased 4.9%, due to strong organic loan growth and the Elmira acquisition.

In 2021, the average equity to average assets ratio decreased as average assets rose 15.0% due to stimulus-related deposit inflows and average equity grew a lesser 1.8% in comparison to 2020 largely due to a decline in the available-for-sale investment securities after-tax market value adjustment.

Net Interest Income

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

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

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 interest on borrowings.

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

As disclosed in Table 3, net interest income (with nontaxable income converted to a fully tax-equivalent basis) totaled $424.7 million in 2022, an increase of $46.9 million, or 12.4%, from the prior year.

The increase is a result of a $2.04 billion, or 17.9%, increase in average interest-earning assets and a 12 basis point decrease in the average rate on interest-bearing liabilities, partially offset by a 54 basis point decrease in the average yield on interest-earning assets and a $1.21 billion increase in average interest-bearing liabilities.

As reflected in Table 4, the favorable impact of the increase in interest-earning assets ($64.6 million) and decrease in the rate on interest-bearing liabilities ($10.8 million) was partially offset by the unfavorable impact of the decrease in the average yield on interest-earning assets ($67.0 million) and the increase in interest-bearing liabilities ($2.9 million).

The 2021 net interest margin decreased 46 basis points to 2.82% from 3.28% reported in 2020.

The decrease was attributable to a 54 basis point decrease in the interest-earning asset yield partially offset by a 12 basis point decrease in the cost of interest-bearing liabilities primarily due to the impact of lower market rates during 2021 resulting from the economic impacts of the COVID-19 pandemic.

The 4.22% yield on loans in 2021 decreased 12 basis points as compared to 4.34% in 2020 primarily due to the impact of lower market rates during 2021 resulting from the aforementioned economic impacts of the COVID-19 pandemic and a $1.5 million decrease in acquired loan accretion.

Included in the loan yield was the impact of $18.7 million in PPP-related interest income, including the recognition of $15.8 million of deferred loan fees as compared to $9.5 million in PPP-related interest income, including the recognition of $6.0 million of deferred loan fees in 2020.

The yield on investments, including cash equivalents, of 1.35% in 2021 was 55 basis points lower than 2020.

The increase is a result of a $1.16 billion, or 8.6%, increase in average interest-earning assets and a 16 basis point increase in the yield on average interest-earning assets, partially offset by a nine basis point increase in the rate on average interest-bearing liabilities and a $781.2 million, or 8.8%, increase in average interest-bearing liabilities.

As reflected in Table 4, the favorable impacts of the increase in average interest-earning assets ($34.8 million) and increase in the yield on average interest-earning assets ($22.2 million) were partially offset by the unfavorable impacts of the increase in the rate on average interest-bearing liabilities ($8.9 million) and the increase in average interest-bearing liabilities ($1.2 million).

The 2022 net interest margin increased 10 basis points to 2.92% from 2.82% reported in 2021.

The increase was attributable to a 16 basis point increase in the interest-earning asset yield partially offset by a nine basis point increase in the cost of interest-bearing liabilities primarily due to the impact of higher market rates during 2022, including a 425 basis point increase in the Federal Funds rate during the year as a result of the Federal Reserve Bank’s efforts to lower elevated inflation.

The 4.17% yield on loans in 2022 decreased five basis points as compared to 4.22% in 2021 due in part to lower PPP-related interest income, partially offset by the impact of higher market rates, including the prime rate, on new loans and variable and adjustable rate loans driven by the impact that the aforementioned Federal Funds rate hikes had on market interest rates during 2022.

PPP-related interest income in 2022 decreased $15.4 million as compared to the prior year as the 2022 loan yield included the impact of $3.3 million in PPP-related interest income, including the recognition of $3.0 million of deferred loan fees, as compared to $18.7 million in PPP-related interest income, including the recognition of $15.8 million of deferred loan fees in 2021.

The yield on investments, including cash equivalents, of 1.72% in 2022 was 37 basis points higher than 2021 due to a change in market rates and the proportion of investments and interest-earning cash equivalents.

The cost of interest-bearing liabilities was 0.24% during 2022 as compared to 0.15% for 2021.

The decreased cost reflects the seven basis point decrease in the average rate paid on deposits and the 79 basis point lower average rate paid on borrowings in 2021.

The increased cost reflects the two basis point increase in the rate paid on average deposits and the 113 basis point higher average rate paid on borrowings in 2022.

The 2021 net interest margin decreased 46 basis points to 2.82% from 3.28% reported in 2020.

The decrease was attributable to a 54 basis point decrease in the interest-earning asset yield partially offset by a 12 basis point decrease in the cost of interest-bearing liabilities primarily due to the impact of lower market rates during 2021 that were impacted by the economic impacts of the COVID-19 pandemic.

The 4.34% yield on loans in 2020 decreased 39 basis points as compared to 4.73% in 2019, including the impact of acquired loan accretion, primarily due to the decline in market rates during 2020 resulting from the aforementioned economic impacts of the COVID-19 pandemic.

The 4.22% yield on loans in 2021 decreased 12 basis points from 4.34% in 2020 primarily due to the impact of lower market rates during 2021 resulting from the aforementioned economic impacts of the COVID-19 pandemic and a $1.5 million decrease in acquired loan accretion.

Included in the 2021 loan yield was the impact of $18.7 million in PPP-related interest income, including the recognition of $15.8 million of deferred loan fees as compared to $9.5 million in PPP-related interest income, including the recognition of $6.0 million of deferred loan fees in 2020.

The yield on investments, including cash equivalents, of 1.35% in 2021 was 55 basis points lower than 2020.

The cost of interest-bearing liabilities was 0.15% during 2021 as compared to 0.27% for 2020.

The decreased cost reflects the seven basis point decrease in the average rate paid on deposits and the 59 basis point lower average rate paid on borrowings in 2020.

As shown in Table 3, total FTE-basis interest income decreased by $2.4 million, or 0.6%, in 2021 in comparison to 2020.

The decreased cost reflects the seven basis point decrease in the average rate paid on deposits and the 79 basis point lower average rate paid on borrowings in 2021 as compared to 2020.

As shown in Table 3, total FTE-basis interest income increased by $57.0 million, or 14.6%, in 2022 in comparison to 2021.

Table 4 indicates that a higher average interest-earning asset balance created $34.8 million of incremental interest income while the higher yield on earning assets had a favorable impact of $22.2 million on interest income.

Average loans increased $726.0 million, or 9.9%, in 2022.

This increase was driven by increases in the average balance of all portfolios including the consumer mortgage, consumer indirect, business lending, home equity and consumer direct portfolios due to both strong organic growth and the Elmira acquisition.

FTE-basis loan interest income and fees increased $26.7 million, or 8.6%, in 2022 as compared to 2021, attributable to the aforementioned higher average loan balances and the impact of higher market rates, including the prime rate, on new loans and variable and adjustable rate loans driven by the aforementioned Federal Funds rate hikes during 2022.

Partially offsetting the increase was a five basis point decrease in the loan yield primarily due to the impact of a $15.4 million decrease in PPP-related interest income.

Investment and interest-earning cash interest income (FTE basis) in 2022 was $30.3 million, or 37.1%, higher than the prior year as a result of a 37 basis point increase in the average investment yield and a $1.98 billion increase in the average book basis balance of investments, partially offset by a $1.55 billion decrease in average cash equivalents.

The higher average investment yield was reflective of the Company’s investment of over $1.3 billion of cash equivalents that were earning a low yield into higher yielding investment securities during the second half of 2021 and first half of 2022 and an increase in market rates between the periods.

Total FTE-basis interest income decreased by $2.4 million, or 0.6%, in 2021 in comparison to 2020.

Table 4 indicates that a higher average interest-earning asset balance created $64.6 million of incremental interest income while the lower yield on earning assets had an unfavorable impact of $67.0 million on interest income.

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FTE-basis loan interest income and fees decreased $6.6 million, or 2.1%, in 2021 as compared to 2020, attributable to a 12 basis point decrease in the loan yield primarily due to the impact of lower market rates during 2021, partially offset by the higher average loan balances and a $9.2 million increase in PPP-related interest income.

Investment interest income (FTE basis) in 2021 was $4.2 million, or 5.4%, higher than the prior year as a result of a $1.98 billion increase in the average book basis balance of investments, including a $1.08 billion increase in average cash equivalents, partially offset by a 55 basis point decrease in average investment yield.

The lower average investment yield in 2021 was reflective of funding inflows from deposit growth and cash flows from higher rate maturing instruments in the investment portfolio being reinvested at lower market interest rates or being held in low-rate interest-earning cash.

Total FTE-basis interest income increased by $3.5 million, or 0.9%, in 2020 in comparison to 2019.

Table 4 indicates that a higher average interest-earning asset balance created $63.0 million of incremental interest income and a lower yield on earning assets had an unfavorable impact of $59.5 million on interest income.

Average loans increased $722.4 million, or 11.0%, in 2020.

This increase was primarily due to the origination of PPP loans and acquired growth from the Steuben and Kinderhook acquisitions.

FTE-basis loan interest income and fees increased $6.4 million, or 2.1%, in 2020 as compared to 2019, attributable to the higher average balances partially offset by a 39 basis point decrease in the loan yield primarily due to the impact of lower market rates during 2020.

Investment interest income (FTE basis) in 2020 was $2.9 million, or 3.6%, lower than the prior year as a result of a 68 basis point decrease in average investment yield, partially offset by a $972.2 million increase in the average book basis balance of investments, including cash equivalents.

The lower average investment yield in 2020 was reflective of deposit inflows and cash flows from higher rate maturing instruments in the investment portfolio being reinvested at lower market interest rates or held in low-rate interest-earning cash.

The higher average investment book balance is inclusive of the $179.7 million of available-for-sale securities and $0.8 million of equity and other securities acquired with the Steuben transaction.

Investment interest income (FTE basis) in 2021 was $4.2 million, or 5.4%, higher than 2020 as a result of a $1.98 billion increase in the average book basis balance of investments, including a $1.08 billion increase in average cash equivalents, partially offset by a 55 basis point decrease in average investment yield.

The lower average investment yield in 2021 as compared to 2020 was reflective of funding inflows from deposit growth and cash flows from higher rate maturing instruments in the investment portfolio being reinvested at lower market interest rates or being held in low-rate interest-earning cash.

Total interest expense increased by $10.1 million, or 77.6%, to $23.1 million in 2022 from $13.0 million in 2021.

As shown in Table 4, higher interest rates on interest-bearing liabilities resulted in an increase in interest expense of $8.9 million, while higher deposit and borrowing balances resulted in a $1.2 million increase in interest expense.

Interest expense as a percentage of average earning assets for 2022 increased six basis points to 0.16% from 0.10% in the prior year.

The rate on interest-bearing deposits of 0.16% was two basis points higher than 2021, primarily due to an increase in certain product rates in response to changes in market interest rates during the year.

The rate on borrowings increased 113 basis points to 1.61% in 2022, primarily due to the increase in the proportion of variable rate overnight borrowings that carry a higher average rate than repurchase agreements and FHLB borrowings.

Total average funding balances (deposits and borrowings) in 2022 increased $1.14 billion, or 9.0%.

Average deposits increased $927.9 million, driven by a full-year impact of large net inflows of funds from government stimulus and PPP programs throughout 2021, as well as the addition of deposits in conjunction with the Elmira acquisition in the second quarter of 2022.

Average non-time deposit balances increased $956.3 million and accounted for 93.0% of total average deposits compared to 92.2% in 2021, due largely to the aforementioned net inflows of funds from government stimulus programs in 2021 that were primarily being held in non-time accounts in the low interest rate environment in 2021 and early 2022, and the impact of the deposits assumed from the Elmira acquisition.

Average time deposits decreased $28.4 million year-over-year and represented 7.0% of total average deposits for 2022 compared to 7.8% in 2021.

Average external borrowings increased $210.8 million, or 73.1%, in 2022 as compared to 2021, due to increases in average overnight borrowings of $175.1 million, average customer repurchase agreements of $42.2 million and average FHLB borrowings of $9.0 million, partially offset by a decrease in average subordinated debt held by unconsolidated subsidiary trusts of $15.5 million.

The increase in average overnight borrowings was due to the Company entering an overnight borrowing position during the year to support the funding of strong loan growth, while the increase in average FHLB borrowings was driven by borrowings assumed from the Elmira acquisition.

The decrease in average subordinated debt held by unconsolidated subsidiary trusts was due to the redemption of $77.3 million of trust preferred subordinated debt in the first quarter of 2021.

Total interest expense decreased by $7.9 million, or 37.7%, to $13.0 million in 2021 from $20.9 million in 2020.

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Average deposits increased $1.97 billion, driven by large net inflows of funds from government stimulus and PPP programs.

Average non-time deposit balances increased $1.95 billion and accounted for 92.2% of total average deposits compared to 90.9% in 2020, due largely to the aforementioned net inflows of funds from government stimulus programs primarily being held in non-time accounts in the low interest rate environment.

Average time deposits increased $21.6 million year-over-year and represented 7.8% of total average deposits for 2021 compared to 9.1% in 2020.

Average external borrowings decreased $35.8 million in 2021 as compared to 2020, due to decreases in average subordinated debt held by unconsolidated subsidiary trusts of $62.4 million, average subordinated notes payable of $9.2 million and average FHLB borrowings of $6.7 million, partially offset by an increase in average customer repurchase agreements of $42.5 million.

The decrease in average subordinated debt held by unconsolidated subsidiary trusts was due to the redemption of $77.3 million of trust preferred subordinated debt as discussed previously and the decrease in average subordinated notes payable was due to the redemption of $10.4 million of subordinated notes payable assumed from the Kinderhook acquisition in the fourth quarter of 2020.

Total interest expense decreased by $5.7 million, or 21.4%, to $20.9 million in 2020 from $26.6 million in 2019.

As shown in Table 4, lower interest rates on interest-bearing liabilities resulted in a decrease in interest expense of $9.2 million, while higher deposit balances resulted in a $3.5 million increase in interest expense.

Interest expense as a percentage of average earning assets for 2020 decreased nine basis points to 0.18%.

The rate on interest-bearing deposits of 0.23% was nine basis points lower than 2019, primarily due to a decrease in certain product rates in response to changes in market interest rates during the year.

The rate on borrowings decreased 59 basis points to 1.27% in 2020, primarily due to the decrease in the average variable rate paid on subordinated debt held by unconsolidated subsidiary trusts and customer repurchase agreements.

Total average funding balances (deposits and borrowings) in 2020 increased $1.60 billion, or 17.6%.

Average deposits increased $1.60 billion, driven by large net inflows of funds from government stimulus programs and acquired growth from the Steuben acquisition.

Average non-time deposit balances increased $1.51 billion and accounted for 90.9% of total average deposits compared to 90.3% in 2019, due to the aforementioned net inflows of funds from government stimulus programs and the addition of $419.8 million in non-time deposit balances with the Steuben acquisition.

Average time deposits increased by $92.8 million year-over-year, including $96.4 million in time deposits from the Steuben acquisition.

Average time deposits represented 9.1% of total average deposits for 2020 compared to 9.7% in 2019.

Average external borrowings decreased $3.2 million in 2020 as compared to 2019, due to a decrease in average subordinated debt held by unconsolidated subsidiary trusts of $14.4 million, partially offset by an increase in average subordinated notes payable of $6.0 million, an increase in average customer repurchase agreements of $4.0 million and an increase in average FHLB borrowings of $1.2 million.

The decrease in average subordinated debt held by unconsolidated subsidiary trusts is due to the redemption of trust preferred debt held by MBVT Statutory Trust I and Kinderhook Capital Trust during the third quarter of 2019 for a total of $22.7 million, partially offset by a partial year of subordinated debt assumed with the Steuben acquisition.

The Company assumed $6.0 million of FHLB borrowings and $2.1 million of subordinated notes held by unconsolidated subsidiary trusts from the Steuben acquisition.

The subordinated notes held by unconsolidated subsidiary trusts assumed from the Steuben acquisition were redeemed in the third quarter of 2020 and $10.4 million of subordinated notes payable assumed from the Kinderhook acquisition were redeemed in the fourth quarter of 2020.

The following table sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the years ended December 31, 2021 and 2020.

Interest income and yields are on a fully tax-equivalent basis using marginal income tax rates of 24.3% and 24.0% in 2021 and 2020, respectively.

(“Kinderhook”) acquisition in the fourth quarter of 2020.

The following table sets forth information related to average interest-earning assets and average interest-bearing liabilities and their associated yields and rates for the years ended December 31, 2022 and 2021.

Interest income and yields are on a fully tax-equivalent basis using a marginal income tax rate of 24.3% 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 loan fees and acquired loan accretion.

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 acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

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Time deposits

Repurchase agreements

Customer repurchase agreements

Overnight borrowings

FHLB borrowings

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Fully tax-equivalent adjustment (3)

(1) Averages for investment securities are based on historical cost 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.

(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 Company wrote off an immaterial amount of accrued interest on nonaccrual loans by reversing interest income in 2021.

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, 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.

As discussed above and disclosed in Table 4 below, the change in net interest income (FTE basis) may be analyzed by segregating the volume and rate components of the changes in interest income and interest expense for each underlying category.

2022 Compared to 2021

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Time deposits

Repurchase agreements

Customer repurchase agreements

Overnight borrowings

FHLB borrowings

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

Exclusive of the impact of PPP loans, the Company expects its 2022 net interest margin to remain below pre-pandemic results due to the significant and precipitous drop in the overnight Federal Funds and Prime interest rates in early 2020 that have remained in effect in 2021.

While the overnight Federal Funds and Prime interest rates are expected to begin to rise during 2022, in the near term expected decreases in average earning asset yields are unlikely to be fully offset by the deployment of excess cash and cash equivalents into investment securities and expected decreases in the average cost of funds.

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

Small Business Administration (“SBA”).

The Company expects to recognize the majority of its remaining net deferred PPP fees totaling $3.1 million through interest income during the first and second quarters of 2022.

Noninterest Revenues

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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 CISI, Wealth Partners and Carta Group) and asset management services (performed by Nottingham);

2) employee benefit trust, collective investment fund, transfer agency, actuarial, benefit plan administration and recordkeeping services (performed by BPAS and its subsidiaries);

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 periodically generates noninterest revenues from investing and borrowing activities, including unrealized gain (loss) on equity securities, realized gains or losses from the sale of investment securities and gains or losses on debt extinguishment.

Additionally, the Company has other transactions that impact noninterest revenues, including unrealized gains or losses on equity securities and gains or losses on debt extinguishment.

Noninterest Revenues

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Deposit service charges and fees

Mortgage banking

Debit interchange and ATM fees

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Wealth management services

Mortgage banking

Other banking revenues

Unrealized gain (loss) on equity securities

Unrealized (loss) gain on equity securities

Gain on debt extinguishment

Gain on sales of investment securities, net

Total noninterest revenues

Noninterest revenues/total revenues

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

(1) For purposes of this ratio noninterest revenues excludes unrealized gain or loss on equity securities, gain on debt extinguishment and net gain on sales of investment securities.

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

(1) For purposes of this ratio noninterest revenues excludes unrealized gain or loss on equity securities and gain on debt extinguishment.

See Table 17 for Reconciliation of GAAP to Non-GAAP measures.

As displayed in Table 5, total noninterest revenues, excluding unrealized gain (loss) on equity securities and gain on debt extinguishment, increased $18.2 million, or 8.0%, to $246.2 million in 2021 as compared to 2020.

The increase was comprised of increases in employee benefit services revenues, wealth management and insurance services revenues, and debit interchange and ATM fees, partially offset by decreases in mortgage banking revenues, other banking revenues and deposit service charges and fees.

Noninterest revenues, excluding unrealized gain on equity securities, gain on debt extinguishment and gain on the sale of investment securities, increased by $2.3 million, or 1.0%, to $228.0 million in 2020 as compared to 2019.

The increase was comprised of an increase in mortgage banking revenues, growth in revenue from the Company’s employee benefit services businesses, an increase in wealth management and insurance services revenue and an increase in debit interchange and ATM fees, partially offset by a decrease in deposit service charges and fees and other banking revenues.

Noninterest revenues as a percent of operating revenues (FTE basis) were 39.7% in 2021, up from 38.3% in the prior year.

The current year increase was due to an 8.0% increase in noninterest revenues mentioned above, while adjusted net interest income (FTE basis) increased 1.5% driven by significant earnings asset growth that was mostly offset by a lower net interest margin.

The decrease in this ratio from 38.7% in 2019 to 38.3% in 2020 was driven by the 2.5% increase in adjusted net interest income (FTE basis) driven by significant earnings asset growth, while noninterest revenues increased by the 1.0% mentioned above.

A portion of the Company’s noninterest revenue is comprised of the wide variety of fees earned from general banking services provided through the branch network, digital banking channels, mortgage banking and other banking services, which totaled $64.7 million in 2021, a decrease of $1.8 million, or 2.7%, from the prior year.

The decrease was primarily driven by a decrease in mortgage banking revenues as the Company is currently holding the majority of its new consumer mortgage production in portfolio due to a change in its strategy, and declines in deposit service charges and fees and other banking revenues including a reduction in overdraft fees in part due to the higher average deposit balances resulting from government stimulus program inflows.

As displayed in Table 5, total noninterest revenues, excluding unrealized gains or losses on equity securities, increased $12.6 million, or 5.1%, to $258.8 million in 2022 as compared to 2021.

The increase was comprised of increases in insurance services revenues, deposit service charges and fees, other banking revenues, employee benefit services revenues and debit interchange and ATM fees, partially offset by decreases in wealth management services revenues and mortgage banking revenues.

Noninterest revenues, excluding unrealized gains or losses on equity securities and gain on debt extinguishment, increased by $18.2 million, or 8.0%, to $246.2 million in 2021 as compared to 2020.

The increase was comprised of increases in employee benefit services revenues, wealth management services revenues and insurance services revenues, and debit interchange and ATM fees, partially offset by decreases in mortgage banking revenues, other banking revenues and deposit service charges and fees.

Noninterest revenues as a percent of total revenues (defined as net interest income plus noninterest revenues) was 38.1% in 2022, down from 39.7% in 2021.

Noninterest revenues as a percent of operating revenues (FTE basis), a non-GAAP measure, were 38.1% in 2022, down from 39.7% in the prior year.

The current year decrease was due to a 12.4% increase in adjusted net interest income (FTE basis) driven by significant interest-earning asset growth and a higher net interest margin, while noninterest revenues increased by the 5.1% mentioned above.

The increase in this ratio from 38.3% in 2020 to 39.7% in 2021 was driven by the 8.0% increase in noninterest revenues mentioned above, while adjusted net interest income (FTE basis) increased 1.5%, driven by significant earnings asset growth that was mostly offset by a lower net interest margin.

A portion of the Company’s noninterest revenue is comprised of the wide variety of fees earned from general banking services provided through the branch network, digital banking channels, mortgage banking and other banking services, which totaled $71.9 million in 2022, an increase of $7.2 million, or 11.2%, from the prior year.

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

The aforementioned increases were reflective of higher levels of transaction activity driven by continued post-pandemic economic recovery along with incremental revenues resulting from the addition of new deposit relationships from the Elmira acquisition in 2022, while the decrease in mortgage banking revenues was primarily driven by a decline in the fair value of mortgage servicing rights.

The Company modified certain deposit service charges and fees during the fourth quarter of 2022 in order to better align with industry trends and to ensure the Company continues to provide customers with affordable and competitive banking options.

The Company expects to continue to evaluate its deposit service charges and fees for further modifications during 2023 in order to better serve the Company’s customers and help them more effectively manage their finances.

Fees from general banking services were $64.7 million in 2021, a decrease of $1.8 million, or 2.7%, from 2020.

The decrease was primarily driven by decreases in deposit services charges and fees and other banking revenues due to a precipitous drop in deposit transaction activity as a result of the COVID-19 pandemic, partially offset by an increase in mortgage banking revenues, reflective of the Company’s decision to sell certain secondary market eligible residential mortgage loans during 2020 and the benefit derived from interest rate movements.

In addition, debit interchange and ATM fees increased, reflective of the addition of new deposit relationships from the Kinderhook and Steuben acquisitions.

The decrease was primarily driven by a decrease in mortgage banking revenues as the Company was holding the majority of its new consumer mortgage production in portfolio during 2021 due to a change in its strategy, and declines in deposit service charges and fees and other banking revenues including a reduction in overdraft fees in part due to the higher average deposit balances resulting from government stimulus program inflows.

This was partially offset by an increase in debit interchange and ATM fees, reflective of increased transaction activity, including the impact of a full year of activity resulting from the addition of new deposit relationships from the Steuben acquisition in 2020.

As disclosed in Table 5, noninterest revenue from financial services (revenues from employee benefit services, wealth management services and insurance services) increased $5.3 million, or 2.9%, in 2022 to $186.9 million.

In 2021, financial services revenue accounted for 74% of total noninterest revenues, as compared to 71% in 2020.

Employee benefit services generated revenue of $114.3 million in 2021 that reflected growth of $13.0 million, or 12.8%, primarily related to increases in employee benefit trust and custodial fees, as well as incremental revenues from the acquisition of FBD during the third quarter of 2021.

Employee benefit services generated revenue of $101.3 million in 2020 that reflected growth of $4.2 million, or 4.3%, over 2019 revenues primarily due to organic increases in plan administration, recordkeeping and trustee fees.

Wealth management and insurance services revenues increased $7.0 million, or 11.6%, in 2021 due to a $5.4 million increase in wealth management services revenues primarily driven by increases in investment management and trust services revenues due to the addition of new relationships, higher equity market valuations and a $1.6 million increase in insurance services revenues attributable to incremental revenues from the acquisitions of TGA during the third quarter of 2021 and NuVantage during the second quarter of 2021 as well as organic expansion.

Wealth management and insurance services revenues increased $2.2 million, or 3.8%, in 2020 from the prior year due to a $2.0 million increase in wealth management services revenues and a $0.2 million increase in insurance services revenues attributable to organic growth in both categories.

Employee benefit trust assets increased $13.4 billion to $120.3 billion for the employee benefit services segment in 2021 as compared to 2020 due primarily to organic growth in the collective investment trust business and market appreciation.

Assets under management increased $887.6 million to $8.5 billion for the wealth management businesses at year end 2021 as compared to one year earlier due to organic growth and market appreciation.

Trust assets within the Company’s employee benefit services segment increased $17.7 billion to $107.0 billion at the end of 2020 as compared to 2019 due primarily to organic growth in the collective investment trust business and market appreciation.

Assets under management within the Company’s wealth management services segment increased to $7.7 billion at the end of 2020, up $1.1 billion from year-end 2019 due to organic growth and market appreciation.

The Company expects to re-evaluate its deposit offerings and associated deposit services charges and fees in 2022 and is uncertain to whether any resulting modifications will have a material impact to banking noninterest revenues.

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

In 2022, financial services revenues accounted for 72% of total noninterest revenues, as compared to 74% in 2021.

Employee benefit services generated revenue of $115.4 million in 2022 that reflected growth of $1.1 million, or 0.9%, primarily related to a full year of incremental revenues from the third quarter of 2021 acquisition of FBD as well as increases in employee benefit trust and custodial fees despite the negative impact of market-related headwinds.

Employee benefit services generated revenue of $114.3 million in 2021 that reflected growth of $13.0 million, or 12.8%, over 2020 revenues primarily due to increases in employee benefit trust and custodial fees, as well as incremental revenues from the aforementioned FBD acquisition.

Wealth management and insurance services revenues increased $4.3 million, or 6.3%, in 2022 due to a $5.8 million increase in insurance services revenues attributable to a full year of incremental revenues from the first quarter of 2022 acquisitions of three insurance agencies, the third quarter of 2021 acquisition of TGA and the second quarter 2021 acquisition of NuVantage, as well as organic expansion, partially offset by a $1.5 million decrease in wealth management services revenues primarily driven by more challenging investment market conditions during 2022.

Wealth management and insurance services revenues increased $7.0 million, or 11.6%, in 2021 from the prior year due to a $5.4 million increase in wealth management services revenues primarily driven by increases in investment management and trust services revenues due to the addition of new relationships as well as higher equity market valuations and a $1.6 million increase in insurance services revenues attributable to incremental revenues from the aforementioned 2021 acquisitions of TGA and NuVantage as well as organic expansion.

Employee benefit trust assets decreased $12.8 billion to $107.5 billion for the employee benefit services segment in 2022 as compared to 2021 due primarily to the impact of lower financial market valuations at the end of 2022.

Assets under management decreased $1.2 billion to $7.3 billion for the wealth management businesses at year end 2022 as compared to one year earlier due to the aforementioned lower financial market valuations.

Employee benefit trust assets within the Company’s employee benefit services segment increased $13.4 billion to $120.3 billion at the end of 2021 as compared to 2020 due primarily to organic growth in the collective investment trust business and market appreciation.

Assets under management within the Company’s wealth management services segment increased to $8.5 billion at the end of 2021, up $887.6 million from year-end 2020 due to organic growth and market appreciation.

Noninterest Expenses

As shown in Table 6, noninterest expenses of $388.1 million in 2021 were $11.6 million, or 3.1%, higher than 2020, primarily reflective of an increase in salaries and employee benefits driven by increases in merit and incentive-related employee compensation, higher payroll taxes, including increases in state-related unemployment taxes, higher employee benefit-related expenses, including significant increases in employee medical benefit costs, and staffing increases due to recent acquisitions.

Other factors included an increase in data processing and communications expenses associated with the implementation of new customer-facing digital technologies and back office systems, and an increase in other expenses due to the general increase in the level of business activities, including increases in professional fees and travel-related expenses, partially offset by a decrease in acquisition-related expenses and a decrease in litigation accrual expenses.

Noninterest expenses in 2020 increased $4.5 million, or 1.2%, from 2019 to $376.5 million, primarily reflective of an increase in salaries and employee benefits driven by merit-related increases in employee wages and a net increase in full-time equivalent employees between the periods, an increase in data processing and communications expenses associated with the implementation of new customer-facing digital technologies and back office systems, the additional expenses associated with operating an expanded branch network subsequent to the Kinderhook and Steuben transactions and the $3.0 million in one-time litigation accrual expenses incurred in 2020, partially offset by lower acquisition-related expenses and a decline in other expenses due to the general decrease in the level of business activities as a result of the COVID-19 pandemic.

Operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets) as a percent of average assets for 2021 was 2.52%, a decrease of 23 basis points from 2.75% in 2020 and 63 basis points lower than 3.15% in 2019.

The decrease in this ratio for 2021 was due to a 5.3% increase in operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets), while average assets grew by 15.0% due primarily to large net inflows of funds related to government stimulus programs and PPP loan originations.

The decrease in this ratio for 2020 from 2019 was due to a 2.0% increase in operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets), while average assets grew by 16.8% due primarily to large net inflows of funds related to government stimulus programs, PPP loan originations and the acquisitions of Steuben and Kinderhook.

The efficiency ratio, a non-GAAP measure, a performance measurement tool widely used by banks, is defined by the Company as operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets) divided by operating revenue (fully tax-equivalent net interest income plus noninterest revenue, excluding acquired non-PCD loan accretion, unrealized gain (loss) on equity securities, net gain on sales of investment securities and gain on debt extinguishment).

Lower ratios correlate to higher operating efficiency.

The 2021 efficiency ratio of 60.2% was 0.6% higher than the 2020 efficiency ratio of 59.6% as the 5.3% increase in operating expenses, as defined above, grew at a slightly faster pace than the 4.2% increase in operating revenue, comprised of a 1.5% increase in adjusted net interest income and an 8.0% increase in adjusted noninterest revenue.

The 2020 efficiency ratio of 59.6% was consistent with 2019 as the 2.1% increase in operating revenue, comprised of a 2.8% increase in adjusted net interest income and a 1.0% increase in adjusted noninterest revenue, grew at a slightly faster pace than the 2.0% increase in operating expenses, as defined above.

As shown in Table 6, noninterest expenses of $424.3 million in 2022 were $36.1 million, or 9.3%, higher than 2021, reflective of an increase in salaries and employee benefits driven by increases in merit-related employee compensation and staffing increases due to organic growth and recent acquisitions, as well as an increase in data processing and communications expenses associated with the continued investment in new customer interface and operational support technologies and acquisition expenses related to the integration of the Elmira acquisition.

Other expenses also increased, driven primarily by additional travel, legal and professional fees and business development and marketing expenses.

Noninterest expenses in 2021 increased $11.6 million, or 3.1%, from 2020 to $388.1 million, primarily reflective of an increase in salaries and employee benefits driven by increases in merit and incentive-related employee compensation, higher payroll taxes, including increases in state-related unemployment taxes, higher employee benefit-related expenses, including significant increases in employee medical benefit costs, and staffing increases due to acquisitions.

Other factors included an increase in data processing and communications expenses associated with the aforementioned investment in technology, and an increase in other expenses due to the general increase in the level of business activities, including increases in professional fees and travel-related expenses, partially offset by a decrease in acquisition-related expenses and a decrease in litigation accrual expenses.

Operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets) as a percent of average assets (a non-GAAP measure) for 2022 was 2.60%, an increase of eight basis points from 2.52% in 2021 and 15 basis points lower than 2.75% in 2020.

The increase in this ratio for 2022 was due to an 8.3% increase in operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets), while average assets grew by 4.9%, primarily due to strong organic loan growth and the Elmira acquisition, which was muted by significant declines in the market value of available-for-sale investment securities due to a major upward movement in market interest rates.

The decrease in this ratio for 2021 was due to a 5.3% increase in operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets), while average assets grew by 15.0%, primarily due to large net inflows of funds related to government stimulus programs and PPP loan originations.

The GAAP efficiency ratio expresses the level of noninterest expenses as a percentage of total revenue (net interest income plus total noninterest revenue).

The Company also utilizes the non-GAAP efficiency ratio, which is a performance measurement tool widely used by banks, and is defined by the Company as operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets) divided by operating revenue (fully tax-equivalent net interest income plus noninterest revenue, excluding acquired non-PCD loan accretion, unrealized gain (loss) on equity securities and gain on debt extinguishment).

Lower ratios correlate to better operating efficiency.

The 2022 GAAP efficiency ratio of 62.5% was consistent with the GAAP efficiency ratio for 2021 as noninterest expenses increased in proportion to total revenues.

The 2021 GAAP efficiency ratio of 62.5% decreased 0.6 percentage points from the 2020 GAAP efficiency ratio of 63.1%, as the 4.0% increase in total revenues, comprised of a 1.6% increase in net interest income and a 7.8% increase in noninterest revenues, grew at a slightly faster pace than the 3.1% increase in noninterest expenses.

The 2022 non-GAAP efficiency ratio of 59.5% was 0.7 percentage points lower than the 2021 non-GAAP efficiency ratio of 60.2% as the 9.5% increase in operating revenues, comprised of a 12.4% increase in adjusted net interest income and a 5.1% increase in adjusted noninterest revenues, grew at a faster pace than the 8.3% increase in operating expenses, as defined above.

The 2021 non-GAAP efficiency ratio of 60.2% was 0.6 percentage points higher than the 2020 non-GAAP efficiency ratio of 59.6% as the 5.3% increase in operating expenses, as defined above, grew at a slightly faster pace than the 4.2% increase in operating revenue, comprised of a 1.5% increase in adjusted net interest income and an 8.9% increase in adjusted noninterest revenues.

See Table 17 for Reconciliation of GAAP to Non-GAAP Measures.

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Total noninterest expenses

Noninterest expenses/average assets

Operating expenses (1) /average assets

Efficiency ratio (2)

Efficiency ratio (GAAP)

Efficiency ratio (non-GAAP) (2)

(1) Operating expenses are total noninterest expenses excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets.

See Table 17 for Reconciliation of GAAP to Non-GAAP Measures.

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

See Table 17 for Reconciliation of GAAP to Non-GAAP Measures.

Salaries and employee benefits increased $13.1 million, or 5.7%, in 2021, driven by increases in merit and incentive-related employee compensation, higher payroll taxes, including increases in state-related unemployment taxes and higher employee benefit-related expenses including significant increases in employee medical benefit costs.

Salaries and employee benefits increased $8.5 million, or 3.9%, in 2020 from 2019, driven by merit-related increases in employee wages and a net increase in full-time equivalent employees between the periods, due to both the Kinderhook acquisition in early third quarter 2019 and the Steuben acquisition in the second quarter of 2020, but were partially offset by lower employee benefit expenses primarily associated with a decrease in employee medical expenses due to reduced provider utilization.

Salaries and employee benefits increased $15.8 million, or 6.6%, in 2022, driven by increases in merit-related employee compensation and a net increase in full-time equivalent employees between the periods, including the impact of staff that was added in conjunction with the Elmira acquisition.

Salaries and employee benefits increased $13.1 million, or 5.7%, in 2021 from 2020, driven by increases in merit and incentive-related employee compensation, higher payroll taxes, including increases in state-related unemployment taxes and higher employee benefit-related expenses including significant increases in employee medical benefit costs.

Total full-time equivalent staff at the end of 2022 was 2,803 compared to 2,743 at December 31, 2021 and 2,829 at the end of 2020.

See Note K to the financial statements for further information about the pension plan.

Total non-personnel, noninterest expenses, excluding one-time acquisition-related and litigation accrual expenses, increased $5.6 million, or 4.0%, in 2021, reflective of the general increase in the level of business activities.

Total non-personnel, noninterest expenses, excluding acquisition-related expenses, increased $16.4 million, or 11.2%, in 2022, reflective of increases across all categories of expenses.

The increase in data processing and communications expenses was primarily due to the aforementioned investment in technology.

Occupancy and equipment increased due to the Elmira acquisition and inflationary pressures, partially offset by the effects of branch consolidations undertaken in 2021 and 2022.

Legal and professional fees, business development and marketing and other expenses, including travel and entertainment, were up during 2022 as compared to 2021 as the general level of business activities continued to increase following the lifting of pandemic-related restrictions.

Total non-personnel, noninterest expenses, excluding acquisition and litigation accrual expenses, increased $5.6 million, or 4.0%, in 2021 from 2020, reflective of the general increase in the level of business activities.

Increases in data processing and communications, occupancy and equipment, legal and professional fees, and other expenses were partially offset by decreases in amortization of intangible assets and business development and marketing.

The increase in data processing and communications expenses was primarily due to the implementation of new customer-facing digital technologies and back office systems.

The increase in data processing and communications expenses was primarily due to investment in a variety of new front-line and back office systems.

Occupancy and equipment increased due to the Steuben acquisition and inflationary pressures, partially offset by the effects of branch consolidations undertaken in 2021.

Legal and professional fees and other expenses, including travel and entertainment, were up during 2021 as compared to 2020 as the general amount of business activities increased to levels more consistent with pre-pandemic conditions.

Total non-personnel, noninterest expenses, excluding one-time acquisition and litigation accrual expenses, decreased $3.2 million, or 2.3%, in 2020 from 2019, reflective of the general decrease in the level of business activities as a result of the COVID-19 pandemic.

Decreases in other expenses, business development and marketing, and amortization of intangible assets were partially offset by increases in data processing and communications, occupancy and equipment and legal and professional fees.

Other expenses and business development and marketing decreased and were most heavily impacted by the diminished level of business activities that resulted from the COVID-19 pandemic, including travel and entertainment.

The increase in data processing and communications expenses was due to the Steuben acquisition and the implementation of new customer-facing digital technologies and back office systems during 2020.

Acquisition-related expenses for 2021 totaled $0.9 million, including $0.6 million associated with the pending Elmira acquisition, $0.1 million associated with the financial services acquisitions completed in 2021 and a $0.2 million acquisition-related contingent consideration adjustment associated with the FBD acquisition.

Acquisition expenses for 2020 totaled $4.9 million, including $4.7 million associated with the Steuben acquisition and $0.2 million associated with the Kinderhook acquisition.

Acquisition expenses for 2019 totaled $8.6 million, including $8.0 million associated with the Kinderhook acquisition and $0.6 million associated with the Steuben acquisition.

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

The settlement was approved for $2.9 million which was paid in the third quarter of 2021, resulting in a $0.1 million adjustment to the Company’s litigation accrual in 2021.

While the Company remains focused on managing operating expense growth, the Company expects operating expenses to increase modestly in 2022 as compared to 2021 due to the continued resumption of certain marketing and business and employee development endeavors that were suspended due to the COVID-19 pandemic, higher wage and benefit costs, inflationary pressures, continued investment in the implementation of new customer-facing digital technologies and back office systems, and incremental expenses associated with operating an expanded branch network as a result of the pending Elmira acquisition once completed.

Acquisition-related expenses for 2022 totaled $4.7 million, comprised of $5.0 million associated with the Elmira acquisition that was completed during the second quarter and a $0.3 million benefit from acquisition-related contingent consideration associated with the FBD and TGA acquisitions completed in 2021.

Acquisition-related expenses for 2021 totaled $0.9 million, including $0.6 million associated with the Elmira acquisition pending at the time, $0.1 million associated with the financial services acquisitions completed in 2021 and a $0.2 million acquisition-related contingent consideration adjustment associated with the FBD acquisition.

The Company estimates its income tax expense based on the amount it expects to owe the respective taxing authorities, plus the impact of deferred tax items.

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The effective tax rate for 2022 was 21.7%, compared to 21.4% in 2021 and 20.1% in 2020.

The increase in the effective rate for 2022, compared to the effective tax rate for 2021, is primarily attributable to lower levels of tax benefits related to stock-based compensation activity.

The increase in the effective rate for 2021, compared to the effective tax rate for 2020, is primarily attributable to an increase in certain state income taxes that were enacted between the periods and a decrease in the proportion of tax-exempt revenues in relation to total revenues.

The increase in the effective rate for 2020, compared to the effective tax rate for 2019, is primarily attributable to a decrease in tax benefits related to stock-based compensation activity and the impact of changes in state apportionment.

Shareholders’ Equity

Shareholders’ Equity and Regulatory Capital

Shareholders’ equity ended 2022 at $1.55 billion, down $549.1 million, or 26.1%, from the end of 2021.

This decrease reflects a $635.8 million decrease in accumulated other comprehensive income, common stock dividends declared of $93.9 million and common stock repurchased of $16.4 million.

These decreases were partially offset by net income of $189.7 million, $9.8 million from the issuance of shares through employee stock plans and $6.3 million from stock-based compensation.

The change in accumulated other comprehensive income was comprised of a $126.1 million decrease due to changes in the unrealized gains and losses in the Company’s available-for-sale investment portfolio, partially offset by a positive $13.4 million adjustment in the overfunded status of the Company’s employee retirement plans.

These decreases were partially offset by net income of $188.1 million, $7.7 million from stock-based compensation and $1.2 million from the issuance of shares through employee stock plans.

The change in accumulated other comprehensive income was comprised of a $620.0 million increase in net unrealized losses in the Company’s available-for-sale investment portfolio (including unrealized losses prior to the transfer of a portion of securities from available-for-sale to held-to-maturity) and a negative $15.8 million adjustment in the overfunded status of the Company’s employee retirement plans.

Excluding accumulated other comprehensive income in both 2022 and 2021, shareholders’ equity increased by $86.7 million, or 4.0%.

Shares outstanding increased by 0.3 million during the year due to share issuances under the employee stock plans and deferred compensation arrangements, partially offset by 0.1 million shares repurchased during 2021.

Shareholders’ equity ended 2020 at $2.10 billion, up $248.9 million, or 13.4%, from the end of 2019.

This increase reflects net income of $164.7 million, $76.9 million from the issuance of shares as consideration for the Steuben acquisition, $15.8 million from the issuance of shares through the employee stock plans, $6.4 million from stock-based compensation, $1.1 million from the implementation of ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326) , also referred to as CECL, on January 1, 2020, $0.1 million for treasury stock issued to the Company’s 401(k) plan and a $72.3 million increase in accumulated other comprehensive income.

These increases were partially offset by common stock dividends declared of $88.5 million.

The change in accumulated other comprehensive income was comprised of a $66.3 million increase due to changes in the unrealized gains and losses in the Company’s available-for-sale investment portfolio and a positive $6.0 million adjustment in the overfunded status of the Company’s employee retirement plans.

Shares outstanding decreased by 0.1 million during the year due to the repurchase of 0.3 million shares during 2022, partially offset by share issuances under employee stock plans and deferred compensation arrangements.

Shareholders’ equity ended 2021 at $2.10 billion, down $3.3 million, or 0.2%, from the end of 2020.

This decrease reflects a $112.7 million decrease in accumulated other comprehensive income, common stock dividends declared of $91.6 million and common stock repurchased of $4.8 million.

These decreases were partially offset by net income of $189.7 million, $9.8 million from the issuance of shares through employee stock plans and $6.3 million from stock-based compensation.

The change in accumulated other comprehensive income was comprised of a $126.1 million increase in net unrealized losses in the Company’s available-for-sale investment portfolio, partially offset by a positive $13.4 million adjustment in the overfunded status of the Company’s employee retirement plans.

Excluding accumulated other comprehensive income in both 2021 and 2020, shareholders’ equity increased by $109.4 million, or 5.4%.

Shares outstanding increased by 1.8 million during the year due to the issuance of 1.4 million shares of common stock as consideration for the Steuben acquisition and share issuances under the employee stock plan, deferred compensation arrangements and to the Company’s 401(k) plan.

The Company’s ratio of ending tier 1 capital to adjusted quarterly average assets (or tier 1 leverage ratio), a primary measure for which regulators have established a 5% minimum for an institution to be considered “well-capitalized,” decreased 1.07 percentage points from the prior year to end the year at 9.09%.

This was the result of an increase of 13.1% in average adjusted net assets (excludes investment market value adjustment and intangible assets net of related deferred tax liabilities) driven by significant deposit inflows related to government stimulus programs, while tier 1 capital increased by 1.3% from the prior year, including the impact of the first quarter of 2021 redemption of $77.3 million of trust preferred subordinated debt held by Community Capital Trust IV, an unconsolidated subsidiary trust, which qualified as tier 1 capital.

Shares outstanding increased by 0.3 million during the year due to share issuances under employee stock plans and deferred compensation arrangements, partially offset by 0.1 million shares repurchased during 2021.

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 dividend paying ability and 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 and certain liabilities and 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 December 31, 2022 and December 31, 2021.

Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer as of December 31, 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.

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

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

Regulatory Ratios

December 31, 2022

December 31, 2021

Community Bank

Tier 1 leverage ratio

Tier 1 risk-based capital ratio

Total risk-based capital ratio

Common equity Tier 1 capital ratio

The Company’s ratio of ending tier 1 capital to adjusted quarterly average assets (or Tier 1 leverage ratio), a primary measure for which regulators have established a 5% minimum for an institution to be considered “well-capitalized,” decreased 30 basis points from the prior year to end the year at 8.79%.

This was the result of tier 1 capital increasing by 3.8% from the prior year, as the impact of net earnings retention outweighed the intangible assets added from the Elmira acquisition and share repurchases while there was an increase of 7.3% in average adjusted net assets (excludes investment market value adjustment and intangible assets net of related deferred tax liabilities), primarily due to strong organic loan growth and the Elmira acquisition.

For additional financial information on the Company’s regulatory capital, refer to Note P – Regulatory Matters in the Notes to Consolidated Financial Statements.

The tangible equity-to-tangible assets ratio, a non-GAAP measure, was 8.69% at the end of 2021 versus 9.92% one year earlier.

The net shareholders’ equity-to-assets ratio was 9.80% at the end of 2022 compared to 13.51% at the end of 2021.

The tangible equity-to-tangible assets ratio, a non-GAAP and regulatory reporting measure, was 4.64% at the end of 2022 versus 8.69% one year earlier.

See Table 17 for Reconciliation of GAAP to Non-GAAP Measures.

The decrease was due to tangible common shareholders’ equity decreasing by 1.6% from the prior year primarily due to a $126.1 million decline in the after-tax market value adjustment on the Company’s available-for-sale investment securities portfolio due to higher market interest rates, while tangible assets increased 12.2% from the prior year.

The Company manages organic and acquired growth in a manner that enables it to continue to maintain and grow its capital base and maintain its ability to take advantage of future strategic growth opportunities.

The decrease was due to tangible common shareholders’ equity declining by 45.7% in 2022 primarily due to a $620.0 million decline in the after-tax market value adjustment on the Company’s available-for-sale investment securities portfolio due to higher market interest rates, while tangible assets increased 1.7% from the prior year.

The Company manages organic and acquired growth in a manner that enables it to continue to maintain and grow its capital base over time and maintain its ability to take advantage of future strategic growth opportunities.

Cash dividends declared on common stock in 2022 of $93.9 million represented an increase of 2.5% over the prior year.

This growth was a result of a $0.04 increase in dividends per share for the year and the increase in outstanding shares as noted above.

This growth was a result of a $0.04 increase in dividends per share for the year, partially offset by a slight decrease in outstanding shares as noted above.

Dividends per share for 2022 of $1.74 represents a 2.4% increase from $1.70 in 2021, a result of quarterly dividends per share increasing from $0.42 to $0.43, or 2.4%, in the third quarter of 2021 and from $0.43 to $0.44, or 2.3%, in the third quarter of 2022.

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The dividend payout ratio for this year was 49.9% compared to 48.3% in 2021, and 53.7% in 2020.

The dividend payout ratio decreased during 2021 because net income increased 15.2% while dividends declared increased 3.5% from 2020.

The dividend payout ratio increased during 2022 because dividends declared increased 2.5% while net income decreased 0.9% from 2021.

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

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

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

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

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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 in time of need.

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

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

The primary source of non-deposit funds is FHLB overnight advances, of which there were no outstanding borrowings at December 31, 2021.

The primary source of non-deposit funds are FHLB or Federal Reserve overnight advances, of which there were $768.4 million of outstanding borrowings at December 31, 2022.

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

At December 31, 2021, the Bank had $1.88 billion of cash and cash equivalents of which $1.72 billion are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks.

The Company also had $1.71 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and maintained $247.7 million of funding availability at the Federal Reserve’s discount window.

At December 31, 2022, the Bank had $209.9 million of cash and cash equivalents of which $18.4 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks.

The Company also had $1.08 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and had $490.5 million of funding availability at the Federal Reserve’s discount window.

Additionally, the Company has $2.90 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 the end of 2021.

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

On February 1, 2023, the Company announced the completion of the sale of $786.1 million of its lower-yielding available-for-sale debt securities for an estimated after-tax realized loss of approximately $39.6 million.

Proceeds from the sale of $733.8 million were redeployed towards paying off existing wholesale borrowings with a spread differential of approximately 320 basis points higher than the securities that were sold.

The Company estimates that the loss will be recouped within approximately 2 years, accelerating the previously discussed repositioning of the balance sheet of the Company into higher yielding assets.

This transaction, along with the $600 million of investment portfolio cash flows expected to be collected in 2023, brings the total cash flow of investment securities to over $1.3 billion for full year 2023.

When factoring in these planned sales of treasury bonds, the Company’s unused borrowing capacity at the FHLB (based on all other 12/31/2022 data) would be approximately $1.81 billion.

The adjusted unencumbered securities that could be pledged at the FHLB or Federal Reserve to obtain additional funding would be roughly $2.2 billion.

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

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

As of December 31, 2021, this ratio was 26.6% for both 30 and 90 days, excluding the Company's capacity to borrow additional funds from the FHLB and other sources.

As of December 31, 2022, this ratio was 17.0% for 30-days and 17.2% 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%.

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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.

The possibility of a funding crisis exists at all financial institutions.

A funding crisis would most likely result from a shock to the financial system which disrupts orderly short-term funding operations or from a significant tightening of monetary policy that limits the national money supply.

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 detailed action plans and the establishment of trigger points for monitoring such events.

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

Intangible Assets

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Intangible assets at the end of 2022 totaled $902.8 million, an increase of $38.5 million from the prior year due to the addition of $42.7 million of goodwill and $11.0 million of other intangibles arising from acquisition activity, partially offset by $15.2 million of amortization during the year.

The additional goodwill and other intangibles recorded in 2021 resulted from the NuVantage, TGA and FBD acquisitions and a $0.3 million adjustment to goodwill from the Steuben acquisition that occurred in 2020.

The additional goodwill and other intangibles recorded in 2022 resulted from the OneGroup insurance agency acquisitions and the Elmira acquisition that were completed in 2022.

Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired.

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The Company completed its goodwill impairment analyses as of December 31, 2022 and no adjustments were necessary for the banking or financial services businesses.

The Company performed a qualitative assessment for evaluating impairment of goodwill and other intangibles for 2022, including assessments of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events and changes in share price.

The Company also analyzed the previous quantitative goodwill impairment analyses performed as of December 31, 2021 as part of the 2022 qualitative analysis.

The impairment analyses were based upon discounted cash flow modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows.

It also requires the selection of discount rates that reflect the current return characteristics of the market in relation to present risk-free interest rates, estimated equity market premiums and company-specific performance and risk indicators.

Furthermore, during 2021 and 2020, the Company performed quarterly qualitative analyses of goodwill impairment and performed a quantitative assessment of its insurance subsidiary included in the All Other segment during the fourth quarter of 2020 and concluded no adjustments were necessary for the banking or financial services businesses.

The qualitative analyses performed in 2021 and 2020 included assessments of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events and changes in share price.

The Company expects to conduct qualitative and quantitative goodwill impairment analyses for all applicable business entities for the 2022 operating period.

The Company determined that the inputs, assumptions and conclusions reached remained appropriate for the purpose of the current year qualitative analysis, and as no impairment was noted during the qualitative analyses, a quantitative analysis for 2022 was not necessary.

During 2022, the Company also performed a quarterly analysis to determine if triggering events occurred that would necessitate an interim qualitative assessment of goodwill or other intangible impairment.

No triggering events or impairment was noted during these interim analyses.

Management believes that there is a low probability of future impairment with regard to the goodwill associated with its whole-bank, branch and financial services business acquisitions.

Core deposit intangibles represent the value of acquired non-time deposits in excess of funding that could have been obtained in the capital markets.

Core deposit intangibles are amortized on either an accelerated or straight-line basis over periods ranging from seven to twenty years.

Core deposit intangibles are amortized on an accelerated basis over periods ranging from seven to twenty years.

The recognition of customer relationship intangibles was determined based on a methodology that calculates the present value of the projected future net income derived from the acquired customer base.

These customer relationship intangibles are being amortized on an accelerated basis over periods ranging from eight to twelve years.

Gross loans outstanding of $7.37 billion as of December 31, 2021 decreased $42.3 million, or 0.6%, compared to December 31, 2020, reflecting decreases in business lending, due primarily to forgiveness of PPP loans, and home equity portfolios, partially offset by increases in the consumer indirect, consumer mortgage, and consumer direct portfolios.

Excluding PPP loans, gross loans outstanding increased $334.5 million, or 4.8%, compared to December 31, 2020.

Gross loans outstanding of $8.81 billion as of December 31, 2022 increased $1.44 billion, or 19.5%, compared to December 31, 2021, driven by increases in all loan categories due to net organic growth and the Elmira acquisition, despite an $83.8 million decrease in PPP loans.

Excluding loans acquired in connection with the Elmira acquisition and PPP loans, ending loans increased $1.08 billion, or 14.9%, year-over-year.

The loan-to-deposit ratio was 67.7% as of December 31, 2022 compared to 57.1% at December 31, 2021.

Gross loans outstanding of $7.37 billion as of December 31, 2021 decreased $42.3 million, or 0.6%, compared to December 31, 2020, reflecting decreases in business lending due primarily to forgiveness of PPP loans, and a decline in the home equity portfolio, partially offset by increases in the consumer indirect, consumer mortgage, and consumer direct portfolios.

Excluding PPP loans, gross loans outstanding at the end of 2021 increased $334.5 million, or 4.8%, compared to December 31, 2020.

The non-PPP loan growth in the loan portfolio during 2021 was primarily attributable to the organic origination of consumer mortgages and consumer indirect loans.

Gross loans outstanding of $7.42 billion as of December 31, 2020 increased $525.4 million, or 7.6%, compared to December 31, 2019, reflecting growth in the business lending and home equity portfolios, partially offset by decreases in the consumer indirect, consumer direct, and consumer mortgage portfolios.

The growth in the loan portfolio during 2020 was primarily attributable to the origination of PPP loans and the Steuben acquisition.

Excluding loans acquired from Steuben, loans increased $185.7 million, or 2.7%.

The compounded annual growth rate (“CAGR”) for the Company’s total loan portfolio between 2017 and 2022 was 7.1%.

The greatest overall expansion occurred in business loans, which grew at a 15.6% CAGR driven mostly by acquisitions during the five year period and PPP loan originations in 2020 and 2021.

The greatest overall expansion occurred in consumer indirect, which grew at an 8.8% CAGR driven primarily by organic growth in the five-year period.

Business lending grew at an 8.5% CAGR, driven by both organic growth and acquisitions.

The consumer mortgage portfolio grew at a compounded annual growth rate of 6.3% from 2017 to 2022.

The consumer installment segment, including indirect and direct loans, grew at a CAGR of 1.7%.

The home equity lending segment declined at a compounded annual growth rate of 0.2% from 2016 to 2021, including the impact from acquisitions.

The home equity segment grew at a CAGR of 0.6% from 2017 to 2022 and the consumer direct segment declined at a CAGR of 0.3% from 2017 to 2022.

The weighting of the components of the Company’s loan portfolio enables it to be highly diversified.

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The business lending portfolio is also broadly diversified by industry type as demonstrated by the following distributions at year-end 2022:

commercial real estate (45%), restaurant & lodging (10%), general services (9%), healthcare (6%), retail trade (6%), manufacturing (6%), construction (3%), agriculture (3%) and motor vehicle and parts dealers (3%).

real estate developers (50%), restaurant & lodging (10%), general services (8%), retail trade (6%), healthcare (5%), manufacturing (5%), construction (3%), agriculture (3%) and motor vehicle and parts dealers (3%).

A variety of other industries with less than a 3% share of the total portfolio comprise the remaining 7%.

The combined total of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and vehicle dealer floor plan financing is characterized as the Company’s business lending activity.

The business lending portfolio decreased $364.2 million, or 10.6%, in 2021 primarily due to the forgiveness of PPP loans by the SBA.

Despite an $83.8 million decrease in PPP loans from forgiveness by the SBA, the business lending portfolio increased $569.8 million, or 18.5%, in 2022 due to net organic loan growth and the Elmira acquisition.

The business lending portfolio decreased $364.2 million, or 10.6%, in 2021 primarily due to the forgiveness of PPP loans.

Excluding PPP loans, the business lending portfolio increased $12.7 million, or 0.4%, between December 31, 2020 and December 31, 2021.

The business lending portfolio increased $664.2 million, or 23.9%, between December 31, 2019 and December 31, 2020 due to the origination of PPP loans and loans acquired in the Steuben transaction.

Excluding loans from the Steuben acquisition, the portfolio increased $410.7 million, or 14.8%, in 2020.

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

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.

The consumer mortgage portfolio includes no exposure to high-risk mortgage products and is comprised of fixed (96%) and adjustable rate (4%) residential lending.

Consumer mortgages increased $456.4 million, or 17.9%, between the end of 2021 and 2022, driven by organic growth and $271.4 million of loans acquired from Elmira, and includes the impact of selling $5.3 million of consumer mortgage production in the secondary market.

In addition to the Elmira acquisition, the Company experienced net organic growth in the consumer mortgage segment due to refinancing activities in late 2021 and early 2022, combined with the Company’s competitive product offerings and business development efforts and comparatively stable housing market conditions in the Company’s primary markets.

Consumer mortgages increased $154.6 million, or 6.4%, between the end of 2020 and 2021, driven by low market rates and strong housing demand at the time, and includes the impact of selling $20.1 million of consumer mortgage production in the secondary market.

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 consumer mortgage production.

The Company held almost all of its new consumer mortgage production in portfolio during 2021.

Home equity loans increased $35.9 million, or 9.0%, during 2022, including $18.4 million of loans acquired from Elmira, while home equity loans decreased $1.8 million, or 0.4%, during 2021.

The increase was due to the Company offering compelling pricing, benefitting from reduced participation by certain competitors and capturing an increased share of the solid sales volumes that existed in its market area and dealer network, which, combined with higher vehicle sales prices, resulted in significant growth in the Company’s consumer indirect portfolio, despite a national vehicle shortage.

During 2021, consumer installment loans increased $169.0 million, or 14.4%, due in large part to increased demand driven by low market rates at that time, competitive pricing offered by the Company and higher levels of consumer disposable income.

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.

The following table shows the maturities and type of interest rates for loans as of December 31, 2022:

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(1) Scheduled repayments are reported in the maturity category in which the payment is due.

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

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

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

As of December 31, 2021, the Company’s business lending portfolio included 32 first draw PPP loans with a total balance of $10.7 million and 690 second draw PPP loans with a total balance of $77.2 million.

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

The consumer mortgage loans include no exposure to high-risk mortgage products and are comprised of fixed (99%) and adjustable rate (1%) residential lending.

Consumer mortgages increased $154.6 million, or 6.4%, between the end of 2020 and 2021, driven by low market rates and strong housing demand and includes the impact of selling $20.1 million of consumer mortgage production to the secondary market.

Consumer mortgages decreased $29.4 million, or 1.2%, between the end of 2019 and 2020, including $26.7 million of loans acquired with the Steuben acquisition and the impact of selling $79.7 million of consumer mortgage production to the secondary market.

With the precipitous drop in mortgage interest rates during the latter half of the first quarter of 2020, coupled with strong housing prices and demand in the Company’s primary markets, the Company experienced large volumes of mortgage refinance and origination activity in 2021 and 2020 and intense competition in the marketplace to capture this business.

The Company is currently holding the majority of its new consumer mortgage production in portfolio due to current market conditions.

Home equity loans decreased $1.8 million, or 0.4%, during 2021, while home equity loans increased $13.5 million, or 3.5%, during 2020, including $39.6 million of home equity loans acquired with the Steuben transaction.

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

Consumer installment loans, both those originated directly in the branches (referred to as “consumer direct”) and indirectly in automobile, marine, and recreational vehicle dealerships (referred to as “consumer indirect”), increased $169.0 million, or 14.4%, from one year ago, including a $167.9 million increase in consumer indirect loans and $1.1 million increase in consumer direct loans, due in large part to increased demand driven by low market interest rates, competitive pricing offered by the Company and higher consumer disposable income because of government stimulus programs and tight labor markets.

During 2020, consumer installment loans decreased $122.9 million, or 9.5%, including $19.9 million of consumer installment loans acquired with the Steuben transaction.

Strained supplies in all categories, while not impactful enough thus far may stunt growth opportunities and continue to cause elevated collateral values in all indirect collateral categories.

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

Consumer direct loans provide attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category.

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

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

The Company anticipates assisting the majority of its PPP borrowers with forgiveness requests during the first and second quarters of 2022.

The longer-term implications that COVID-19 will have on business lending loan demand are presently difficult to predict.

Asset Quality

The Company places a loan on nonaccrual status when the loan becomes 90 days past due, or sooner if management concludes collection of interest is doubtful, except when, in the opinion of management, it is well-collateralized and in the process of collection.

The Company places a loan on nonaccrual status when the loan becomes 90 days past due, or sooner if management concludes collection of principal and interest is doubtful, except when, in the opinion of management, it is well-collateralized and in the process of collection.

Nonperforming loans, defined as nonaccruing loans and accruing loans 90 days or more past due, ended 2022 at $33.4 million.

This represents a decrease of $12.1 million from the $45.5 million in nonperforming loans at the end of 2021.

The decrease in nonperforming loans was driven by the upgrade of several large business loans from nonaccrual status to accruing status during the fourth quarter of 2021.

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

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

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

The ratio of nonperforming loans to total loans at December 31, 2021 decreased 42 basis points from the prior year to 0.62%.

The decrease in nonperforming loans was driven by the upgrade of several large business loans from nonaccrual status to accruing status during the first quarter of 2022 that had previously requested extended loan repayment forbearance due to pandemic-related hardship.

The ratio of nonperforming loans to total loans at December 31, 2022 of 0.38% decreased 24 basis points from the prior year’s level.

The ratio of nonperforming assets (which includes other real estate owned, or “OREO”, in addition to nonperforming loans) to total loans plus OREO decreased to 0.38% at year-end 2022, down 25 basis points from one year earlier.

At December 31, 2021, OREO consisted of two residential properties with a total value of $0.1 million and one commercial real estate property with a total value of $0.6 million.

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

From a credit risk and lending perspective, the Company continues to take actions to assess and monitor its COVID-19 related credit exposures.

No specific credit impairment has been identified within the Company’s investment securities portfolio, including the Company’s municipal securities portfolio since the onset of the pandemic.

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

As of December 31, 2021, the Company had five borrowers in forbearance due to COVID-19 related financial hardship, representing $4.2 million in outstanding loan balances, or 0.1% of total loans outstanding.

This compares to 74 borrowers and $66.5 million in outstanding loan balances, or 0.9%, of total loans outstanding in forbearance at December 31, 2020.

Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period.

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

Approximately 53% of the nonperforming loans at December 31, 2021 are related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type.

The level of nonperforming business loans decreased from the prior year due to the upgrade of several large business loans from nonaccrual status to accruing status during the fourth quarter of 2021, as described previously.

Approximately 40% of nonperforming loans at December 31, 2021 are related to the consumer mortgage portfolio.

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

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

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

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

The remaining 7% of nonperforming loans relate to consumer installment and home equity loans, with home equity non-performing loan levels being driven by the same factors identified for consumer mortgages.

Nonperforming loan levels in these categories have decreased slightly as compared to one year earlier.

At December 31, 2022, OREO consisted of seven residential properties with a total value of $0.5 million.

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

Approximately 78% of the nonperforming loans at December 31, 2022 are related to the consumer mortgage portfolio.

Collateral values of residential properties within most of the Company’s market areas have generally increased steadily over the past several years.

Approximately 14% of nonperforming loans at December 31, 2022 are related to the business lending portfolio, which is comprised of business loans broadly diversified by collateral and industry type.

The level of nonperforming business loans decreased from the prior year due primarily to the upgrade of several large business loans from nonaccrual status to accruing status during the first quarter of 2022, as described previously.

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

Nonperforming loan levels in the consumer installment category are typically very low in comparison to the other portfolios because they are usually charged off before they reach non-performing status, and consequently the increase in the amount of non-performing consumer installment loans at the end of 2022 as compared to one year earlier was nominal.

The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 183% at the end of 2022 compared to 110% at year-end 2021 and 79% at December 31, 2020.

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

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

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

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.

Total delinquencies, defined as loans 30 days or more past due or in nonaccrual status, finished the current year at 1.00% of total loans outstanding, compared to 1.50% at the end of 2020.

While there were decreases in the delinquent loan levels in all portfolios as compared to one year ago, the overall decrease was primarily driven by the aforementioned upgrade of several large business loans from nonaccrual status to accruing status during the fourth quarter of 2021.

The Company’s larger criticized credits are also reviewed on a quarterly basis by senior credit administration management, special assets officers and business lending management to monitor their status and discuss relationship management plans.

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

Total delinquencies, defined as loans 30 days or more past due or in nonaccrual status, ended 2022 at 0.89% of total loans outstanding, compared to 1.00% at the end of 2021.

While there were increases in the delinquent loan levels for the consumer mortgage, consumer installment, and home equity portfolios as compared to one year ago, the overall decrease was driven by business lending and the aforementioned upgrade of several large business loans from nonaccrual status to accruing status during the first quarter of 2022 as well as an overall stable business environment in the Company’s market areas.

As of year-end 2022, delinquency ratios for business lending, consumer installment loans, consumer mortgages and home equity loans were 0.40%, 1.07%, 1.32%, and 1.35%, respectively.

These ratios compare to the year-end 2021 delinquency rates for business lending, consumer installment loans, consumer mortgages and home equity loans of 0.97%, 0.78%, 1.12%, and 1.15%, respectively.

The Company believes the decreases in delinquent loan levels has been partially attributable 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.

Delinquency levels, particularly in the 30 to 89 days category, tend to be somewhat volatile due to their seasonal characteristics and measurement at a point in time, and therefore management believes that it is useful to evaluate this ratio over a longer time period.

The average quarter-end delinquency ratio for total loans in 2021 was 1.20%, as compared to an average of 1.03% in 2020, and 0.89% in 2019, reflective of the adverse impact that COVID-19 had on certain customers in 2020 and 2021 and the reclassification of certain business loans from accrual to nonaccrual status in the fourth quarter of 2020.

The average quarter-end delinquency ratio for total loans in 2022 was 0.80%, as compared to an average of 1.20% in 2021, and 1.03% in 2020, reflective of the upgrade of business loans and stable business environment previously discussed.

Loans are considered modified in a troubled debt restructuring (“TDR”) when, due to a borrower’s financial difficulties, the Company makes one or more concessions to the borrower that it would not otherwise consider.

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This compares to 81 loans totaling $3.9 million considered to be nonaccruing TDRs and 151 loans totaling $4.3 million considered to be accruing TDRs at December 31, 2021.

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

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

Allowance for credit losses and loan net charge-off ratios for the past two years are as follows:

Years Ended December 31,

Allowance for credit losses/total loans

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Consumer direct

Total net charge-offs in 2021 were $2.8 million, $2.1 million less than the prior year due to a decrease in net charge-offs in all four of the Company’s consumer portfolios, partially offset by an increase in net charge-offs in the business lending portfolio.

Net charge-offs in 2020 were $2.8 million less than 2019 due to a decrease in net charge-offs in all five of the Company’s portfolios.

Total net charge-offs in 2022 were $3.3 million, $0.5 million more than the prior year due to an increase in charge-offs in the consumer installment portfolio, partially offset by decreases in charge-offs in business lending, consumer mortgage, and home equity.

Net charge-offs in 2021 of $2.8 million were $2.1 million less than 2020 due to a decrease in net charge-offs in all of the Company’s consumer portfolios, partially offset by an increase in net charge-offs in the business lending portfolio.

Due to the significant increases in average loan balances over time as a result of acquisitions and organic growth, management believes that net charge-offs as a percent of average loans (“net charge-off ratio”) offers the most meaningful representation of charge-off trends.

The total net charge-off ratio of 0.04% for 2021 was three basis points lower than the 0.07% ratio from 2020, and eight basis points lower than the 0.12% ratio from 2019.

The total net charge-off ratio of 0.04% for 2022 was consistent with the ratio from 2021 and three basis points lower than the ratio of 0.07% from 2020.

Gross charge-offs as a percentage of average loans were 0.13% in 2022, as compared to 0.12% in 2021, and 0.15% in 2020, evidence of management’s continued focus on maintaining conservative underwriting standards.

Recoveries were $7.1 million in 2022, representing 73% of average gross charge-offs for the latest two years, compared to 62% in 2021 and 47% in 2020, reflective of relatively strong price levels for real estate and automobiles in 2022 and the continued effectiveness of the Company’s repossession and disposition capabilities.

Business loan net charge-offs increased in 2021, totaling $1.1 million, or 0.03% of average business loans outstanding, compared to $0.8 million, or 0.02% of the average outstanding balance in 2020, but the business loan net charge-off amount and ratio in 2021 remained well below historical levels.

Consumer installment loan net charge-offs decreased to $1.3 million this year from $3.3 million in 2020, with a net charge-off ratio of 0.10% in 2021 and 0.27% in 2020.

The dollar amount of consumer mortgage net charge-offs decreased to $0.3 million in 2021 compared to $0.7 million in 2020, with a net charge-off ratio of 0.01% in 2021 compared to 0.03% in 2020.

Home equity net charge-offs of $0.1 million decreased $0.1 million in 2021 and the net charge-off ratio decreased one basis point to 0.03%.

Business loan net charge-offs decreased in 2022, totaling $0.5 million of net recovery, for a net recovery ratio of 0.02% of average business loans outstanding, compared to net charge-offs of $1.1 million, or 0.03% of the average outstanding balance in 2021.

Consumer installment loan net charge-offs increased to $3.7 million this year from $1.3 million in 2021, with a net charge-off ratio of 0.25% in 2022 and 0.10% in 2021.

Consumer mortgage net charge-offs were consistent at $0.3 million in 2022 and 2021 with a net charge-off ratio of 0.01% in both years.

Home equity had net recoveries of $0.1 million, or 0.02%, in 2022 compared to net charge-offs of $0.1 million, or 0.03%, in 2021.

Management continually evaluates the credit quality of the Company’s loan portfolio and conducts a formal review of the adequacy of the allowance for credit losses on a quarterly basis.

The primary components of the loan review process that are used to determine proper allowance levels are collectively evaluated and individually assessed loan loss allocations.

The primary components of the review process that are used to determine proper allowance levels are collectively evaluated and individually assessed loan loss allocations.

Measurement of individually assessed loan loss allocations is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to repay.

Loans with outstanding balances that are greater than $0.5 million are individually assessed for specific loan loss allocations.

Business loans with outstanding balances that are greater than $0.5 million are individually assessed for specific loan loss allocations.

Consumer mortgages, consumer installment and home equity loans are considered smaller balance homogeneous loans and are evaluated collectively.

The Company considers a loan to be individually assessed when, based on current information and events, it is probable that the Company will be unable to collect all principal and interest according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquired loans, delinquency levels, risk ratings or term of loans as well as changes in macroeconomic conditions, such as changes in unemployment rates, property values such as home prices, commercial real estate prices and automobile prices, gross domestic product, recession probability and other relevant factors.

Management estimates the allowance for credit losses balance using relevant available information from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected future credit losses.

Adjustments are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquired loans, delinquency level, risk ratings or term of loans as well as actual and forecasted macroeconomic trends, such as unemployment rates and changes in property values such as home prices, commercial real estate prices and automobile prices, gross domestic product, median household income net of inflation and other relevant factors in comparison to longer-term.

Multiple economic scenarios are utilized to encompass a range of economic outcomes, including baseline, upside and downside forecasts, which are weighted in the calculation.

The segments of the Company’s loan portfolio are disaggregated into classes that allow management to monitor risk and performance.

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In addition to these risk characteristics, the Company considers the portion of acquired loans to the overall segment balance, the change in the volume and terms of originations, differences between the losses incurred in the period used for quantitative modeling and a longer timeframe that includes the previous recession, as well as recent delinquency, charge-off and risk rating trends compared to historical time periods.

The Company measures the allowance for credit losses using either the cumulative loss rate method, the line loss method, or the vintage loss rate method, dependent on the loan portfolio class.

The allowance levels computed from the collectively evaluated and individually assessed loan loss allocation methods are combined with unallocated allowances, if any, to derive the required allowance for credit losses to be reflected on the consolidated statements of condition.

The Company measures the allowance for credit losses using either the cumulative loss rate method, the line loss method, or the vintage loss rate method, dependent on the loan portfolios’ characteristics.

The allowance for credit losses level computed from the collectively evaluated and individually assessed loan loss allocation methods are combined with unallocated allowances, if any, to derive the required allowance for credit losses to be reflected on the consolidated statements of condition.

The provision for credit losses is calculated by subtracting the previous period allowance for credit losses, net of the interim period net charge-offs, from the current required allowance level.

This provision is then recorded in the income statement for that period.

Members of senior management and the Audit and Compliance Committee of the Board (“Audit Committee”) review the adequacy of the allowance for credit losses quarterly.

Management is committed to continually improving the credit assessment and risk management capabilities of the Company and has dedicated the resources necessary to ensure advancement in this critical area of operations.

Members of senior management and the Audit Committee of the Board (“Audit Committee”) review the adequacy of the allowance for credit losses quarterly.

Acquired loans are reviewed at their acquisition date to determine whether they have experienced a more-than-insignificant credit deterioration since origination.

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

During 2020, the Company recorded $0.7 million of initial allowance for credit losses on PCD loans from the Steuben acquisition.

During 2022, the Company recorded $0.1 million of initial allowance for credit losses on PCD loans from the Elmira acquisition.

For acquired loans that are not deemed PCD at acquisition (“non-PCD”), a fair value adjustment is recorded that includes both credit and interest rate considerations.

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

During 2020, the Company recorded $3.0 million of initial acquisition-related provision for credit losses related to loans from the Steuben acquisition.

As of December 31, 2021, the net purchase discount related to the $1.02 billion of remaining non-PCD loan balances acquired from Steuben Trust Company in 2020, The National Union Bank of Kinderhook in 2019, Merchants Bank in 2017, Oneida Savings Bank in 2015, HSBC Bank USA, N.A.

in 2012, First Niagara Bank, N.A.

in 2012, and Wilber National Bank in 2011 was approximately $8.0 million, or 0.78% of that portfolio.

The allowance for credit losses decreased to $49.9 million at the end of 2021 from $60.9 million as of year-end 2020.

The $11.0 million decrease was driven by an $8.2 million non-acquisition-related net benefit in the provision for credit losses related to loans, $19.1 million lower than the prior year’s non-acquisition-related provision for credit losses of $10.9 million, reflective of the continued release of reserves in the first three quarters of 2021 as the economic outlook and the loan portfolio’s asset quality profile both steadily improved during that time, and $2.8 million of net charge-offs.

During the first three quarters of 2021, economic forecasts improved significantly due to the state of the post-vaccine economic recovery, which, in combination with elevated real estate and vehicle collateral values, significant declines in pandemic-related payment deferrals and improvements in the loan portfolio’s asset quality profile drove the Company to reduce its allowance for credit losses during the first three quarters of 2021, resulting in net benefits recorded in the provision for credit losses for the first three quarters of the year.

Although economic forecasts remained generally stable during the fourth quarter of 2021 despite the rapid spread of the COVID Omicron variant, the Company’s allowance for credit losses increased $0.4 million, resulting in a $2.2 million provision for credit losses in the fourth quarter based in part on a $165.3 million increase in non-PPP loans outstanding during the quarter.

During the first two quarters of 2020, financial conditions deteriorated rapidly as state and local governments shut down a substantial portion of business activities in the Company’s markets and unemployment levels spiked.

These conditions drove the Company to build its allowance for credit losses during the first two quarters of 2020 to account for expected life of loan losses in the loan portfolio.

During the third quarter of 2020, the economic outlook remained unclear as markets were uncertain as to the efficacy, approval and roll-out of a COVID-19 vaccine and the Company continued to build its allowance for credit losses.

During the fourth quarter of 2020, with a greater than anticipated decline in actual unemployment levels, as well as the Federal Government’s approval of a COVID-19 vaccine and Congress’ approval of additional federal stimulus funding, the near-term economic forecast improved significantly driving an improvement in the economic outlook and as a result, a reduction in the Company’s allowance for credit losses during the fourth quarter of 2020.

During the fourth quarter of 2020, the Company recorded a net benefit in the provision for credit losses driven by several factors, including a $2.0 million reversal of a previously recorded allowance for credit loss on a purchased credit deteriorated loan, a significant improvement in the economic outlook and a substantial decrease in loans under COVID-19 related forbearance agreements, offset, in part, by a substantial, but anticipated, increase in nonperforming assets and the related specific impairment reserves on a portion of those nonperforming assets.

The ratio of the allowance for credit losses to total loans of 0.68% for year-end 2021 decreased 14 basis points from the 0.82% ratio for year-end 2020, and was down four basis points from the 0.72% ratio for year-end 2019, due in part to the aforementioned steady improvement of the economic outlook and the loan portfolio’s asset quality during 2021, partially offset by non-PPP loan growth of $334.5 million, or 4.8%, during 2021.

During 2022, the Company recorded $3.9 million of initial acquisition-related provision for credit losses related to loans from the Elmira acquisition.

As of December 31, 2022, the net purchase discount related to the $1.22 billion of remaining non-PCD acquired loan balances was approximately $24.5 million, or 2.00% of that portfolio.

The allowance for credit losses increased to $61.1 million at the end of 2022 from $49.9 million as of year-end 2021.

During 2022, economic forecasts weakened as high inflation and interest rate increases dampened economic activity.

While unemployment remains low, the market has experienced a decline in housing and automobile prices.

Inflation has put pressure on wages and reduced disposable income for consumers nationally.

The Company recorded a provision for credit losses of $14.8 million during 2022 with $3.9 million attributable to the Elmira acquisition.

The increase was a result of organic loan growth and the Elmira acquisition, combined with the weaker economic forecast.

During the first three quarters of 2021, economic forecasts improved significantly due to the state of the post-vaccine economic recovery, which, in combination with elevated real estate and vehicle collateral values, significant declines in pandemic-related payment deferrals and improvements in the loan portfolio’s asset quality profile, drove the Company to reduce its allowance for credit losses, resulting in net benefits recorded in the provision for credit losses for that time period.

Although economic forecasts remained generally stable during the fourth quarter of 2021, the Company’s allowance for credit losses increased $0.4 million, resulting in a $2.2 million provision for credit losses in the fourth quarter of 2021 based in part on a $165.3 million increase in non-PPP loans outstanding during that quarter.

The full year 2021 provision for credit losses was a net benefit of $8.8 million.

The ratio of the allowance for credit losses to total loans of 0.69% for year-end 2022 increased one basis point from the 0.68% ratio for year-end 2021 due primarily to the strong loan growth in higher allowance ratio portfolios such as indirect lending, as well as the weakening of the economic forecast during 2022, and was down 13 basis points from the 0.82% ratio for year-end 2020, due to an overall improvement in the Company’s credit quality profile.

Management believes the year-end 2022 allowance for credit losses to be adequate.

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The provision for credit losses was 443% of net charge-offs this year versus (310%) in 2021 and 286% in 2020.

These ratios in the current year were impacted by the $8.8 million net benefit recorded in the provision for credit losses during 2021.

The ratios in 2021 were impacted by the $8.8 million net benefit recorded in the provision for credit losses during that year.

The following table sets forth the allocation of the allowance for credit losses by loan category as of the end of the years indicated, 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 is not indicative of either the specific amount of future net charge-offs that will be incurred in each of the loan categories, 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.

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

Since the ultimate effect the COVID-19 pandemic, including the impact of new variants, will have on the Company’s credit losses remains uncertain, the net benefit in the provision for credit losses during 2021 should not be interpreted as a trend or utilized to forecast the provision for, or reversal of, credit losses in future periods.

Any improvements in the economic forecast may be offset by higher net charge-off levels, increases in delinquent and nonperforming loan balances, downward shifts of business risk ratings or other factors in future periods.

Funding Sources

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Total deposits

As displayed in Table 11, average total deposits in 2021 increased $1.97 billion, or 19.1%, from the prior year comprised of a $1.95 billion, or 20.7%, increase in non-time deposits, and a $21.6 million, or 2.3%, increase in time deposits.

The increase in average deposits was primarily due to continued net inflows of deposits, including those associated with additional stimulus payments and a second round of PPP lending.

The cost of deposits, including non-interest checking deposit balances, decreased seven basis points from 0.16% in 2020 to 0.09% in 2021.

As displayed in Table 12, average total deposits in 2022 increased $927.9 million, or 7.5%, from the prior year comprised of a $956.3 million, or 8.4%, increase in non-time deposits, partially offset by a $28.4 million, or 3.0%, decrease in time deposits.

The increase in average deposits was primarily due to a full-year impact of large net inflows of funds from government stimulus and PPP programs in 2021 along with the addition of deposits from the Elmira acquisition 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.

The cost of deposits, including non-interest checking deposit balances, increased two basis points from 0.09% in 2021 to 0.11% in 2022.

Total average deposits for 2021 increased $1.97 billion, or 19.1%, from 2020 comprised of a $1.95 billion, or 20.7%, increase in non-time deposits, and a $21.6 million, or 2.3%, increase in time deposits.

The increase in average deposits was primarily due to large net inflows of funds from government stimulus programs and the acquisition of Steuben.

The Company acquired $516.3 million of deposits from the Steuben acquisition, including $96.5 million of time deposits and $419.8 million of non-time deposits.

The increase in average deposits was primarily due to continued net inflows of deposits, including those associated with additional stimulus payments and a second round of PPP lending, as well as the deposits added via the Steuben acquisition in 2020.

The cost of deposits, including non-interest checking deposit balances, decreased seven basis points from 0.16% in 2020 to 0.09% in 2021.

Nonpublic, non-time deposits are frequently considered to be a bank’s most attractive source of funding because they are generally stable, do not need to be collateralized, carry a relatively low rate, generate solid fee income, and provide a strong customer base for which a variety of loan, deposit and other financial service-related products can be cross-sold.

The Company’s funding composition continues to benefit from a high level of nonpublic deposits, which reached an all-time high in 2021 with an average balance of $10.78 billion, an increase of $1.62 billion, or 17.6%, over the comparable 2020 period.

Nonpublic, non-time deposits are frequently considered to be an attractive source of funding because they are generally stable, do not need to be collateralized, carry a relatively low rate, generate solid fee income and provide a strong customer base for which a variety of loan, deposit and other financial service-related products can be cross-sold.

The Company’s funding composition continues to benefit from a high level of nonpublic deposits, which reached an all-time high in 2022 with an average balance of $11.72 billion, an increase of $944.7 million, or 8.8%, over the comparable 2021 period.

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

Full-year average public fund deposits increased $354.4 million, or 30.3%, during 2021 to $1.52 billion, impacted by federal and state stimulus program-related support to municipalities to cover COVID-19 expenditures and investments that cover multi-year timeframes.

Full-year average public fund deposits decreased $16.8 million, or 1.1%, during 2022 to $1.51 billion.

Public fund deposit balances tend to be more volatile than nonpublic deposits because they are heavily impacted by the seasonality of tax collection and fiscal spending patterns, as well as the longer-term financial position of the local government entities, which can change from year to year.

However, the Company has many long-standing relationships with municipal entities throughout its markets and the diversified non-time deposits held by these customers have provided an attractive and comparatively stable funding source over an extended time period.

The Company is required to collateralize certain local municipal deposits in excess of FDIC coverage with marketable securities from its investment portfolio.

Due to this stipulation, as well as the competitive bidding nature of municipal time deposits, management considers this funding source to share some of the same attributes as borrowings.

However, the Company has many long-standing relationships with municipal entities throughout its markets and the deposits held by these customers have provided an attractive and relatively stable funding source over an extended period of time.

The mix of average deposits was largely consistent with the prior year.

Non-time deposits (noninterest checking, interest checking, savings and money markets) represented approximately 93% of the Company’s average deposit funding base versus 92% last year, while time deposits represent approximately 7% of total average deposits compared to 8% in 2021.

The cost of interest-bearing deposits of 0.14% in 2021 was nine basis points lower than the 0.23% cost of interest-bearing deposits in 2020.

The total cost of deposit funding, which includes noninterest-bearing deposits, was 0.09% in 2021, a seven basis point decrease from the prior year.

The Company is uncertain as to whether the relatively high levels of deposits in recent periods will be maintained, spent down, or increased further by additional inflows of funds associated with COVID-19 related government stimulus programs.

The cost of interest-bearing deposits of 0.16% in 2022 was two basis points higher than the 0.14% cost of interest-bearing deposits in 2021.

The total cost of deposit funding, which includes noninterest-bearing deposits, was 0.11% in 2022, a two basis point increase from the prior year.

The remaining maturities of deposits in amounts of $250,000 or more (the FDIC insurance limit) outstanding as of December 31 are as follows:

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The Company also had $3.2 million in fixed-rate subordinated notes acquired with the Kinderhook acquisition outstanding at the end of 2022.

As shown in Table 13, year-end 2021 borrowings totaled $329.9 million, a decrease of $41.4 million from the $371.3 million outstanding at the end of 2020 primarily due to the redemption of $77.3 million of trust preferred subordinated debt held by CCT IV, an unconsolidated subsidiary trust, during the first quarter of 2021 and a decrease in other FHLB borrowings of $4.8 million, partially offset by a $40.7 million increase in securities sold under an agreement to repurchase (“customer repurchase agreements”).

As shown in Table 14, year-end 2022 borrowings totaled $1.14 billion, an increase of $807.9 million from the $329.9 million outstanding at the end of 2021 primarily due to an increase in overnight borrowings of $768.4 million used primarily to support the funding of strong loan growth, a $21.9 million increase in securities sold under an agreement to repurchase (“customer repurchase agreements”) and an increase in other FHLB borrowings of $17.6 million primarily related to the Elmira acquisition during the second quarter of 2022.

Borrowings averaged $498.9 million, or 3.6% of total funding sources for 2022, as compared to $288.2 million, or 2.3% of total funding sources for 2021.

At the end of 2021, the Company had $324.7 million, or 98% of contractual obligations, that had remaining terms of one year or less as compared to 69% of contractual obligations maturing within one year at December 31, 2020.

As displayed in Table 3 on page 40, the percentage of funding from deposits in 2021 was slightly higher than the level in 2020 primarily due to the continued net inflows of deposits, including those associated with additional stimulus payments and a second round of PPP lending.

At the end of 2022, the Company had $1.12 billion, or 98% of contractual obligations, that had remaining terms of one year or less which was consistent with the end of 2021.

As displayed in Table 3 on page 42, the percentage of funding from deposits in 2022 was slightly lower than the level in 2021 primarily due to the increase in average overnight borrowings in 2022 that were needed to support the funding of strong loan growth.

The percentage of average funding derived from deposits was 96.4% in 2022 as compared to 97.7% in 2021 and 97.0% in 2020.

During 2021, average deposits increased 19.1%, while average borrowings decreased 11.0%.

During 2022, average deposits increased 7.5%, while average borrowings increased 73.1%.

The following table summarizes the outstanding balance of borrowings of the Company as of December 31:

(000’s omitted)

Overnight borrowings

Securities sold under agreement to repurchase, short term

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Subordinated notes payable (1)

Subordinated debt held by unconsolidated subsidiary trusts

Balance at end of period

(1) Subordinated notes payable for 2021 and 2020 include $3.0 million in principal and $0.3 million related to a purchase accounting fair value adjustment.

(1) Subordinated notes payable for 2022 and 2021 include $3.0 million in principal with the remaining carrying value related to a purchase accounting fair value adjustment.

Financial Instruments with Off-Balance Sheet Risk

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Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party.

The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to standard credit policies.

Collateral may be required based on management’s assessment of the customer’s creditworthiness.

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and (d) generating a favorable return without undue compromise of the other requirements.

The carrying value of the Company’s investment portfolio ended 2021 at $4.98 billion, an increase of $1.38 billion, or 38.5%, from the end of 2020.

The book value (excluding unrealized gains and losses) of the portfolio increased $1.55 billion, or 44.6%, from December 31, 2020.

The net unrealized loss on the portfolio was $44.9 million as of December 31, 2021.

During the fourth quarter of 2022, the Company reclassified certain U.S.

Treasury securities with a book value of $1.42 billion and market value of $1.08 billion from its available-for-sale investment securities portfolio to its held-to-maturity investment securities portfolio.

While the reclassification had no economic, earnings, or regulatory capital impact, it enables the Company to more effectively manage overall capital levels if interest rates rise above year-end levels in future periods.

The Company evaluated the securities for credit loss and determined that no allowance for credit losses was necessary.

The carrying value of the Company’s investment portfolio ended 2022 at $5.31 billion, an increase of $335.8 million, or 6.7%, from the end of 2021.

The book value (excluding unrealized gains and losses) of the portfolio increased $813.6 million, or 16.2%, from December 31, 2021.

The net unrealized loss on the available-for-sale investment portfolio was $523.6 million as of December 31, 2022, an increase of $477.7 million from the $45.9 million unrealized loss at the end of 2021.

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

Treasury and agency securities with an average yield of 1.32%, $109.6 million of government agency mortgage-backed securities with an average yield of 1.78%, $42.3 million of obligations of state and political subdivisions with an average yield of 2.42% and $5.0 million of corporate debt securities with an average yield of 3.25%.

Treasury and agency securities with an average yield of 1.62%, $41.6 million of government agency mortgage-backed securities with an average yield of 3.22% and $182.0 million of obligations of state and political subdivisions with an average yield of 3.94%.

Included in the purchases was $11.3 million of available-for-sale securities acquired as part of the Elmira transaction during 2022.

These additions were offset by $266.9 million of investment maturities, calls and principal payments and net accretion on investment securities of $20.6 million in 2022.

The effective duration of the securities portfolio was 6.3 years at the end of 2022, as compared to 7.5 years at year end 2021.

The carrying value of the Company’s investment portfolio increased $507.0 million, or 16.4%, during 2020 to end the year at $3.60 billion.

The book value of the portfolio increased $419.8 million from December 31, 2019.

The net unrealized gain on the portfolio was $121.1 million as of December 31, 2020.

During 2020, the Company purchased $984.2 million of U.S.

The carrying value of the Company’s investment portfolio increased $1.38 billion, or 38.5%, during 2021 to end the year at $4.98 billion.

The book value of the portfolio increased $1.55 billion, or 44.6%, from December 31, 2020 to 2021.

The net unrealized loss on the portfolio was $44.9 million as of December 31, 2021, $166.0 million higher than the $121.1 million unrealized gain at the end of 2020.

During 2021, the Company purchased $1.81 billion of U.S.

The Company also acquired $179.7 million of available-for-sale securities and $0.8 million of equity and other securities as part of the Steuben transaction.

These additions were offset by $426.7 million of investment maturities, calls, and principal payments and net accretion on investment securities of $12.2 million in 2021.

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The majority of the municipal bonds are rated A or higher.

The portfolio does not include any private label MBS or private label CMOs.

The overall mix of securities within the portfolio over the last year has changed due to the significant investment purchases made during 2021, with an increase in the proportion of U.S.

Treasury and agency securities, a small increase in the proportion of corporate debt securities, while the proportion of government agency MBS, obligations of state and political subdivisions, government agency CMOs and equity securities decreased.

The net unrealized market value loss on the investment portfolio as of December 31, 2021 was $44.9 million, as compared to a net unrealized gain of $121.1 million one year earlier.

This decrease is indicative of market interest rate increases over the period and changes in the composition of the portfolio.

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

The portfolio does not include any private label MBS or CMOs.

The overall mix of securities within the portfolio over the last year has shifted more heavily weighted to U.S.

Treasury securities due to additional purchases made in 2022.

The net unrealized market value loss on the available-for-sale investment portfolio as of December 31, 2022 was $523.6 million, as compared to a net unrealized loss of $45.9 million one year earlier.

This increase is indicative of the rapid increases in market interest rates over the period.

The following table sets forth the carrying value for the Company's investment securities portfolio:

Investment Securities

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Total available-for-sale portfolio

Held-To-Maturity Portfolio:

Treasury and agency securities

Total held-to-maturity portfolio

Equity and other Securities:

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Five Years But

Available-for-Sale Portfolio:

Treasury and agency securities

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Government agency collateralized mortgage obligations

Held-to-Maturity Portfolio:

Treasury and agency securities

(1) Weighted-average yields are an arithmetic computation of income (not fully tax-equivalent adjusted) divided by book balance;

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

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

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

(1) the macroeconomic and other challenges and uncertainties related to the COVID-19 pandemic, variants of COVID-19, and related vaccine and booster rollouts, 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, including various actions taken in response by governments, central banks and others, 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, higher unemployment rates, labor shortages, supply chain disruption, inability to obtain raw materials and supplies, U.S.

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

(3) changes to the U.S.

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

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

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

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

(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;

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Acquisition-related contingent consideration adjustment

Gain on sale of investments, net

Unrealized (gain) loss on equity securities

Unrealized loss (gain) on equity securities

Litigation accrual

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Acquisition-related contingent consideration adjustment

Gain on sale of investments, net

Unrealized (gain) loss on equity securities

Unrealized loss (gain) on equity securities

Litigation accrual

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Subtotal (non-GAAP)

Gain on sales of investment securities, net

Tax effect of gain on sales of investment securities, net

Subtotal (non-GAAP)

Unrealized (gain) loss on equity securities

Tax effect of unrealized (gain) loss on equity securities

Unrealized loss (gain) on equity securities

Tax effect of unrealized loss (gain) on equity securities

Subtotal (non-GAAP)

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Subtotal (non-GAAP)

Gain on sales of investment securities, net

Tax effect of gain on sales of investment securities, net

Subtotal (non-GAAP)

Unrealized (gain) loss on equity securities

Tax effect of unrealized (gain) loss on equity securities

Unrealized loss (gain) on equity securities

Tax effect of unrealized loss (gain) on equity securities

Subtotal (non-GAAP)

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Efficiency ratio

Noninterest expenses (GAAP) – numerator

Net interest income (GAAP)

Noninterest revenues (GAAP)

Total revenues (GAAP) – denominator

Efficiency ratio (GAAP)

Operating expenses (non-GAAP) - numerator

2 unchanged sentences

Acquired non-PCD loan accretion

Gain on sales of investment securities, net

Unrealized (gain) loss on equity securities

Unrealized loss (gain) on equity securities

Gain on debt extinguishment

12 unchanged sentences

Total tangible common equity (non-GAAP)

Shareholders' equity-to-assets ratio

Total shareholders' equity (GAAP) - numerator

Total assets (GAAP) - denominator

Net shareholders' equity-to-assets ratio (GAAP)

Net tangible equity-to-assets ratio

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis