What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-01 compared with 2022-03-01 · 363 added, 398 removed, 1662 unchanged (31% of the section changed)

20 unchanged sentences

Cash and cash equivalents

Available-for-sale investment securities (cost of $ 4,980,102 and $ 3,427,779 respectively)

Available-for-sale investment securities includes pledged securities that can be sold or repledged of $ 466,902 and $ 485,414 , respectively (cost of $ 4,675,474 and $ 4,980,102 , respectively)

Held-to-maturity securities (fair value of $ 1,034,795 and $ 0 , respectively)

Equity and other securities (cost of $ 82,424 and $ 43,917 , respectively)

Loans held for sale, at fair value

Allowance for credit losses

Goodwill, net

Core deposit intangibles, net

Other intangibles, net

Intangible assets, net

Goodwill and intangible assets, net

Premises and equipment, net

3 unchanged sentences

Total deposits

Overnight borrowings

Securities sold under agreement to repurchase, short-term

1 unchanged sentence

Subordinated notes payable

Subordinated debt held by unconsolidated subsidiary trusts

Accrued interest and other liabilities

7 unchanged sentences

Retained earnings

Accumulated other comprehensive (loss) income

Accumulated other comprehensive loss

Treasury stock, at cost ( 452,952 shares including 135,437 shares held by deferred compensation arrangements at December 31, 2022, and 214,374 shares including 146,860 shares held by deferred compensation arrangements at December 31, 2021)

2 unchanged sentences

Total liabilities and shareholders’ equity

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

See accompanying notes to consolidated financial statements.

COMMUNITY BANK SYSTEM, INC.

23 unchanged sentences

Wealth management services

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

14 unchanged sentences

Diluted earnings per share

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

See accompanying notes to consolidated financial statements.

COMMUNITY BANK SYSTEM, INC.

3 unchanged sentences

Pension and other post retirement obligations:

Amortization of actuarial gains (losses) included in net periodic pension cost, gross

Amortization of actuarial gains (losses) included in net periodic pension cost, net

Amortization of actuarial (losses) gains included in net periodic pension cost, gross

Amortization of actuarial (losses) gains included in net periodic pension cost, net

Amortization of prior service cost included in net periodic pension cost, gross

Amortization of prior service cost included in net periodic pension cost, net

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

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

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

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

Reclassification adjustment for net (gains) included in net income, gross

Reclassification adjustment for net (gains) included in net income, net

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

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

Unrealized (losses) gains on investment securities:

Net unrealized holding (losses) gains on investment securities, gross

Other comprehensive (loss) gain related to unrealized (losses) gains on investment securities, net of taxes

Other comprehensive (loss) income, net of tax

Comprehensive income

Comprehensive (loss) income

As of December 31,

2 unchanged sentences

Net unrealized (loss) for pension and other postretirement obligations

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

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

Unrealized (loss) gain on investment securities

Net unrealized (loss) gain on investment securities

Accumulated other comprehensive (loss) income

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

See accompanying notes to consolidated financial statements.

COMMUNITY BANK SYSTEM, INC.

7 unchanged sentences

Other comprehensive income, net of tax

Cumulative effect of change in accounting principle – ASC 326

Dividends declared:

Common, $ 1.66 per share

Common stock issued under employee stock plans

Common stock activity under employee stock plans

Stock-based compensation

Stock issued for acquisition

Distribution of stock under deferred compensation arrangements

2 unchanged sentences

Balance at December 31, 2020

Other comprehensive income, net of tax

Cumulative effect of change in accounting principle – ASC 326

Other comprehensive loss, net of tax

Dividends declared:

Common, $ 1.70 per share

Common stock issued under employee stock plans

Common stock activity under employee stock plans

Stock-based compensation

Stock issued for acquisition

Distribution of stock under deferred compensation arrangements

Treasury stock purchased

Treasury stock issued to benefit plan

Balance at December 31, 2021

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Dividends declared:

Common, $ 1.74 per share

Common stock issued under employee stock plans

Common stock activity under employee stock plans

Stock-based compensation

2 unchanged sentences

Balance at December 31, 2022

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

See accompanying notes to consolidated financial statements.

COMMUNITY BANK SYSTEM, INC.

10 unchanged sentences

Amortization of mortgage servicing rights

Unrealized (gain) loss on equity securities

Unrealized loss (gain) on equity securities

Gain on debt extinguishment

Income from bank-owned life insurance policies

Gain on sales of investment securities, net

Net (gain) loss on sale of loans and other assets

Net gain on sale of assets

Change in other assets and liabilities

1 unchanged sentence

Investing activities:

Proceeds from sales of available-for-sale investment securities

Proceeds from maturities, calls and paydowns of available-for-sale investment securities

3 unchanged sentences

( 1,963,884 )

( 1,114,914 )

Purchases of equity and other securities

Net decrease (increase) in loans

Net (increase) decrease in loans

( 1,003,741 )

Cash (paid) received for acquisition, net of cash acquired of $ 84,988 , $ 541 , and $ 55,973 , respectively

Settlement of bank owned life insurance policies

Proceeds from sales of premises and equipment, net

Purchases of premises and equipment, net

2 unchanged sentences

( 2,138,985 )

( 1,530,775 )

Financing activities:

Net increase in deposits

Net increase/(decrease) in borrowings, net of payments of $ 4,769 , $ 3,092 , and $ 646 , respectively

Net (decrease) increase in deposits

Net increase (decrease) in overnight borrowings

Net increase in securities sold under agreement to repurchase, short-term

Payments on other Federal Home Loan Bank borrowings

Payments on subordinated debt held by unconsolidated subsidiary trusts

Payments on subordinated notes payable

Issuance of common stock

Purchase of treasury stock

Sale of treasury stock

Proceeds from the issuance of common stock

Purchases of treasury stock

Proceeds from the sale of treasury stock

Increase in deferred compensation agreements

1 unchanged sentence

Withholding taxes paid on share-based compensation

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Change in cash and cash equivalents

( 1,665,168 )

Cash and cash equivalents at beginning of year

6 unchanged sentences

Transfers from loans to other real estate

Transfers from premises and equipment, net to other assets

Acquisitions:

2 unchanged sentences

Fair value of liabilities assumed

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

See accompanying notes to consolidated financial statements.

COMMUNITY BANK SYSTEM, INC.

6 unchanged sentences

As of December 31, 2022, BPAS owns five subsidiaries:

Benefit Plans Administrative Services, LLC (“BPA”), a provider of defined benefit contribution plan administration services;

Benefit Plans Administrative Services, LLC (“BPA”), a provider of defined contribution plan administration services;

Northeast Retirement Services, LLC (“NRS”), a provider of institutional transfer agency, master recordkeeping services, fund administration, trust and retirement plan services;

3 unchanged sentences

BPA owns one subsidiary, Fringe Benefits Design of Minnesota, Inc.

("FBD"), a provider of retirement plan administration and benefit consulting services.

(“FBD”), a provider of retirement plan administration and benefit consulting services.

NRS owns one subsidiary, Global Trust Company, Inc.

10 unchanged sentences

(“OneGroup”), OneGroup Wealth Partners, Inc.

("Wealth Partners") and Oneida Preferred Funding II LLC (“OPFC II”).

(“Wealth Partners”), Oneida Preferred Funding II LLC (“OPFC II”) and E.S.B.

(“ESB Realty”).

OneGroup is a full-service insurance agency offering personal and commercial lines of insurance and other risk management products and services.

PFC and OPFC II primarily act as investors in residential and commercial real estate activities.

PFC, ESB Realty and OPFC II primarily act as investors in residential and commercial real estate activities.

TMC provides cash management, investment, and treasury services to the Bank.

8 unchanged sentences

(1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE.

The Company’s VIE’s are described in more detail in Note T to the consolidated financial statements.

The Company’s VIEs are described in more detail in Note S to the consolidated financial statements.

Critical Accounting Estimates in the Preparation of Financial Statements

12 unchanged sentences

The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required credit loss allowances, and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.

The extent to which the ongoing coronavirus pandemic ("COVID-19") impacts the Company's business and financial results depends on numerous evolving factors including, but not limited to:

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

The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of December 31, 2021 and through the date of this Annual Report on Form 10-K.

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

Revenue Recognition

6 unchanged sentences

Deposit Service Fees

Deposit service fees consist of account activity fees, monthly service fees, check orders, debit and credit card income, ATM fees, merchant services income and other revenues from processing wire transfers, bill pay service, cashier’s checks and foreign exchange.

Deposit service fees consist of account activity fees, monthly service fees, overdraft fees, check orders, debit and credit card income, ATM fees, merchant services income and other revenues from processing wire transfers, bill pay service, cashier’s checks and foreign exchange.

Debit and credit card income is primarily comprised of interchange fees earned at the time the Company’s debit and credit cards are processed through card payment networks such as Visa.

61 unchanged sentences

Held-to-maturity securities are those for which the Company has the positive intent and ability to hold until maturity, and are reported at cost, which is adjusted for amortization of premiums and accretion of discounts.

The Company did not use the held-to-maturity classification in 2021 or 2020.

Available-for-sale debt securities are reported at fair value with net unrealized gains and losses reflected as a separate component of shareholders’ equity, net of applicable income taxes.

12 unchanged sentences

Accrued interest receivable on held-to-maturity securities is excluded from the estimate of credit losses.

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it more likely than not that it will be required to sell the security before recovery of its amortized cost basis.

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

7 unchanged sentences

Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 15.8 million and $ 13.3 million at December 31, 2021 and 2020, respectively, and is excluded from the estimate of credit losses.

Prior to the adoption of ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020, all debt securities in an unrealized loss position were assessed for other-than-temporary impairment (“OTTI”) and an OTTI loss was recognized in income for any debt security in an unrealized loss position if there was intent to sell the security or was more likely than not the Company was required to sell the security prior to recovery of its amortized cost basis.

Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 19.3 million and $ 15.8 million at December 31, 2022 and 2021, respectively.

Accrued interest receivable on held-to-maturity securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 4.7 million at December 31, 2022.

These amounts are excluded from the estimate of credit losses.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of allowance for credit losses.

24 unchanged sentences

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 level, 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.

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 the following classes that allow management to monitor risk and performance:

● Business lending is comprised of general purpose commercial and industrial loans including, but not limited to, agricultural-related and dealer floor plans, loans to not-for-profit enterprises, as well as mortgages on commercial property and Paycheck Protection Program ("PPP") loans.

The portfolio segment is further broken into portfolio classes based on risks associated with the collateral supporting the loans.

1 unchanged sentence

Business lending loans are generally higher dollar loans and a large portion are risk rated at least annually.

● Consumer mortgages consist primarily of fixed rate residential instruments, typically 10 - 30 years in contractual term, secured by first liens on real property.

FICO scores are used to monitor higher risks related to this type of lending with FICO AB referring to higher tiered loans with FICO scores greater than or equal to 720 as compared to FICO CDE with lower FICO scores less than 720 and potentially higher risk.

● Consumer mortgages consist primarily of fixed rate residential instruments, typically 10 to 30 years in contractual term, secured by first liens on real property.

FICO credit scores are used to monitor higher risks related to this type of lending with the Company segmenting consumer mortgages into “FICO AB” and “FICO CDE”.

FICO AB refers to higher tiered loans with FICO scores greater than or equal to 720 as compared to FICO CDE with FICO scores less than 720 and potentially higher risk.

● Consumer indirect consists primarily of installment loans originated through selected dealerships and are generally secured by automobiles, marine and other recreational vehicles.

58 unchanged sentences

The vintage loss rate method calculates annual loss rates by origination year.

The results of this model are then applied to outstanding balances, which correspond to the origination period for each annual loss rate.

The results of this model are then applied to current outstanding balances by vintage, which correspond to the origination period for each annual loss rate.

In addition to the risk characteristics noted above, management considers the portion of acquired loans to the overall segment balance, as well as current delinquency and charge-off trends compared to historical time periods.

8 unchanged sentences

An additional allowance for credit loss is recorded for the excess of the balance outstanding as of the reporting period over the expected principal payments allocated to that balance.

Prior to the adoption of ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020, the allowance for credit losses reflected management’s best estimate of probable losses inherent in the loan portfolio.

Troubled Debt Restructuring

A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a troubled debt restructuring ("TDR").

A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a troubled debt restructuring (“TDR”).

The allowance for credit loss on a TDR is measured using the same method as all other loans, except when the value of a concession cannot be measured using a method other than the discounted cash flow method.

When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.

Refer to Note D:

Loans for the Company's policy regarding COVID-19 related financial hardship payment deferrals.

Allowance for Credit Losses - Off-balance-sheet credit exposures

15 unchanged sentences

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

Prior to the adoption of ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020, acquired loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments were accounted for as impaired loans under ASC 310-30.

Acquired impaired loans were initially recorded at fair value with no initial allowance for credit losses recorded at acquisition.

Non-Purchased Credit Deteriorated (“non-PCD”) Loans

6 unchanged sentences

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.

Prior to the adoption of ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020, acquired loans that did not meet the requirements under ASC 310-30 were considered acquired non-impaired loans and were accounted for in accordance with ASC 310-20.

Acquired non-impaired loans were initially recorded at fair value with no initial allowance for credit losses recorded at acquisition.

Intangible Assets

16 unchanged sentences

Maintenance and repairs are charged to expense as incurred.

Premises and equipment designated as held for sale is included in other assets on the consolidated statements of condition and are carried at the lower of cost or fair value, less estimated costs to sell.

The Company occupies certain offices and uses certain equipment under non-cancelable operating lease agreements.

15 unchanged sentences

Operating costs associated with the properties are charged to expense as incurred.

At December 31, 2021 and 2020, other real estate totaled $ 0.7 million and $ 0.9 million, respectively, and is included in other assets.

At December 31, 2022 and 2021, other real estate totaled $ 0.5 million and $ 0.7 million, respectively, and is included in other assets in the Company’s consolidated statements of condition.

Mortgage Servicing Rights

17 unchanged sentences

The Company’s ownership interest in these limited partnerships ranges from 5.00 % to 99.99 % as of December 31, 2022.

These investments are made directly in Low Income Housing Tax Credit, or LIHTC, partnerships formed by third parties.

These investments are made directly in Low Income Housing Tax Credit (“LIHTC”) partnerships formed by third parties.

As a limited partner in these operating partnerships, the Company receives tax credits and tax deductions for losses incurred by the underlying properties.

2 unchanged sentences

The standard permits an entity to amortize the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense.

The Company has unfunded commitments of $ 0.2 million at December 31, 2021 related to qualified affordable housing project investments, which will be funded in 2022.

The Company has no unfunded commitments at December 31, 2022 related to qualified affordable housing project investments.

There were no impairment losses during the year resulting from the forfeiture or ineligibility of tax credits related to qualified affordable housing project investments.

11 unchanged sentences

Expense under these plans is charged to current operations and consists of several components of net periodic benefit cost based on various actuarial assumptions regarding future experience under the plans, including discount rate, rate of future compensation increases and expected return on plan assets.

Derivative Financial Instruments and Hedging Activities

The Company accounts for derivative financial instruments at fair value.

If certain conditions are met, a derivative may be specifically designated as (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”), (2) a hedge of the exposure to variable cash flows of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”).

For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change.

For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings.

Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest revenues.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged.

Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest revenues.

Cash flows on hedges are classified in the consolidated statement of cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions at the inception of the hedging relationship.

This documentation includes linking the fair value or cash flow hedges to specific assets and liabilities on the statement of condition or to specific commitments or forecasted transactions.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded in noninterest revenues.

When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability.

When a cash flow hedge is discontinued, but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Assets Under Management or Administration

30 unchanged sentences

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No.

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

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

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

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

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

In December 2019, the FASB issued ASU No.

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

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

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

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

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

In March 2020, the FASB issued ASU No.

2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848) .

The updated guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments in this guidance apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

The FASB issued ASU 2022-06 in December 2022, which deferred the expiration date of ASC 848 from December 31, 2022 to December 31, 2024, which allows more transition time after the intended cessation of LIBOR on June 30, 2023.

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

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

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

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

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

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

5 unchanged sentences

33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants .

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

The amendments in this update were effective upon addition to the FASB Codification in 2022 and the Company determined that this guidance does not have a material impact on the Company’s consolidated financial statements.

New Accounting Pronouncements

In March 2020, the FASB issued ASU No.

2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848) .

This new guidance is effective as of March 12, 2020 through December 31, 2022.

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

The Company has not yet fully adopted this standard.

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

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

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

As the Company's exposure to LIBOR-based loans and financial instruments is insignificant, the Company does not expect the adoption of this standard will have a material impact on the Company's consolidated financial statements.

Pending Acquisition

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.

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.

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

Current and Prior Period Acquisitions

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

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

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

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

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

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

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

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

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

The Company adopted the standard on January 1, 2023.

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.

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

Revenues of approximately $ 0.1 million and direct expenses of approximately $ 0.1 million were included in the consolidated statements of income for the year ended December 31, 2022.

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

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

In connection with the acquisition, the Company 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.

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

The Company also recognized a $ 3.9 million acquisition-related provision for credit losses for loans acquired in the transaction.

Revenues of approximately $ 12.1 million and direct expenses of approximately $ 3.1 million from the Elmira branch network, which may not include certain shared expenses, were included in the consolidated statements of income for the year ended December 31, 2022.

The Company incurred certain transaction-related costs in 2022 in connection with the Elmira acquisition.

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.

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

Revenues of approximately $ 0.9 million and direct expenses of approximately $ 0.4 million were included in the consolidated statements of income for the year ended December 31, 2022.

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

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

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

Revenues of approximately $ 0.6 million and direct expenses of approximately $ 0.6 million from TGA were included in the consolidated income statement for the year ended December 31, 2021.

Revenues of approximately $ 3.1 million and $ 0.6 million and direct expenses of approximately $ 1.8 million and $ 0.6 million from TGA were included in the consolidated income statements for the years ended December 31, 2022 and 2021, respectively.

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

Amounts are payable in two payments, the first of which is two years after the acquisition date, and the second three years after the acquisition date.

Amounts are payable in two payments, the first of which is two years after the acquisition date, and the second is three years after the acquisition date.

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

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

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

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

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

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

The contingent consideration related to the TGA acquisition was revalued at December 31, 2022.

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

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

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

On July 1, 2021, the Company, through its subsidiary BPA, completed its acquisition of Fringe Benefits Design of Minnesota, Inc.

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

Key assumptions include (1) a discount rate range of 5.87 % to 6.21 % applied to present value the payments and (2) probability adjusted level of retained revenue between $ 3.1 million and $ 3.2 million.

A revaluation was previously performed at June 30, 2022, resulting in a $ 0.5 million adjustment to the fair value of the contingent consideration.

Based on the results of the December revaluation, the Company recorded a reduction of $ 0.3 million acquisition-related contingent consideration adjustment as of December 31, 2022 in the consolidated statements of income related to the TGA acquisition.

The total net adjustment for 2022 was $ 0.2 million, for an adjusted fair value of $ 1.7 million at December 31, 2022.

On July 1, 2021, the Company, through its subsidiary BPA, completed its acquisition of FBD for $ 15.4 million in cash plus contingent consideration with a fair value at acquisition date of $ 1.4 million.

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

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

Revenues of approximately $ 2.8 million and direct expenses of approximately $ 2.5 million from FBD were included in the consolidated income statement for the year ended December 31, 2021.

Revenues of approximately $ 3.5 million and $ 2.8 million and direct expenses of approximately $ 4.1 million and $ 2.5 million from FBD were included in the consolidated income statements for the years ended December 31, 2022 and 2021, respectively.

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

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The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between zero and $ 2.7 million.

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

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

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

The fair value of the contingent consideration recognized on the acquisition date of $ 1.4 million was estimated by applying the income approach, a measure that is based on significant Level 3 inputs not readily observable in the market.

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

The contingent consideration related to the FBD acquisition was revalued at December 31, 2022.

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

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

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

Key assumptions include (1) a discount rate of 6.09 % applied to present value the payment, and (2) probability adjusted level of retained revenue between $ 4.9 million and $ 5.1 million.

A revaluation was previously performed at June 30, 2022, resulting in a $ 0.1 million adjustment to the fair value of the contingent consideration.

Based on the results of the December revaluation, the Company recorded an additional $ 0.4 million acquisition-related contingent consideration adjustment in the consolidated statements of income related to the FBD acquisition.

The total adjustment for 2022 was $ 0.5 million, for an adjusted fair value of $ 1.1 million at December 31, 2022.

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

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

Revenues of approximately $ 0.7 million and direct expenses of approximately $ 0.6 million from NuVantage were included in the consolidated income statement for the year ended December 31, 2021.

Revenues of approximately $ 1.3 million and $ 0.7 million and direct expenses of approximately $ 1.3 million and $ 0.6 million from NuVantage were included in the consolidated income statements for the years ended December 31, 2022 and 2021, respectively.

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

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

Revenues, excluding interest income on acquired investments, interest income on acquired consumer indirect loans, and revenues associated with acquired loans and deposits consolidated into the legacy branch network, of approximately $ 13.1 million and $ 7.7 million, and direct expenses, which may not include certain shared expenses, of approximately $ 5.1 million and $ 2.6 million from Steuben were included in the consolidated income statement for the years ended December 31, 2021 and 2020, respectively.

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

On September 18, 2019, the Company, through its subsidiary, 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.

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

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 and $ 40.0 million in goodwill.

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

Revenues, excluding interest income on acquired investments, of approximately $ 11.8 million, $ 16.3 million, and $ 10.6 million and direct expenses, which may not include certain shared expenses, of approximately $ 7.1 million, $ 7.4 million, and $ 4.7 million from Kinderhook were included in the consolidated income statements for the years ended December 31, 2021, 2020, and 2019, respectively.

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

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

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

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

The carrying amount of other assets associated with the FBD acquisition increased by $ 0.02 million as a result of an adjustment to other assets.

Goodwill associated with the FBD acquisition decreased by $ 0.02 million as a result of this adjustment.

Revenues, excluding interest income on acquired investments, interest income on acquired consumer indirect loans, and revenues associated with acquired loans and deposits consolidated into the legacy branch network, of approximately $ 11.4 million, $ 13.1 million and $ 7.7 million and direct expenses, which may not include certain shared expenses, of approximately $ 4.8 million, $ 5.1 million and $ 2.6 million from Steuben were included in the consolidated income statements for the years ended December 31, 2022, 2021 and 2020, respectively.

The Company incurred certain transaction-related costs in connection with the Steuben acquisition.

During 2022, the carrying amount of other liabilities associated with the FBD acquisition was adjusted as a result of an adjustment to working capital based on the purchase agreement, for a total net increase to goodwill of $ 0.1 million.

During the third quarter of 2022, the carrying amount of premises and equipment, other assets, and other liabilities related to the Elmira acquisition were adjusted upon receipt of new information as a result of adjustments to fair value and deferred income taxes.

The adjustments resulted in a net decrease of $ 4.9 million to goodwill recognized from the Elmira acquisition at September 30, 2022.

During the fourth quarter of 2022, the carrying amount of loans, other assets and other liabilities related to the Elmira acquisition were adjusted upon receipt of new information as a result of adjustments to loan escrow balances, deferred income taxes and benefits accruals.

The adjustments resulted in a net decrease to goodwill of $ 3.6 million.

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

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Other Federal Home Loan Bank borrowings

Subordinated notes payable

Subordinated debt held by unconsolidated subsidiary trusts

Total identifiable assets, net

(1) Includes amounts related to the Kinderhook and both CISI acquisitions completed in 2019.

(2) Acquisition-related allowance for credit losses on purchased credit deteriorated ("PCD") loans applicable beginning in 2020.

Under ASC 310-30, acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments were aggregated by comparable characteristics and recorded at fair value without a carryover of the related allowance for credit losses.

Cash flows for each loan were determined using an estimate of credit losses and rate of prepayments.

Projected monthly cash flows were then discounted to present value using a market-based discount rate.

The excess of the undiscounted expected cash flows over the estimated fair value is referred to as the “accretable yield” and is recognized into interest income over the remaining lives of the acquired loans.

On January 1, 2020, the Company adopted ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326) which replaces the ASC 310-30 acquired impaired loans methodology described above with the purchased credit deteriorated ("PCD") methodology discussed in Note A:

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

(2) Includes amounts for TGA, FBD, and NuVantage acquisitions completed in 2021.

The Company acquired loans from Elmira for which there was not evidence of a more-than-insignificant deterioration in credit quality since origination (non-PCD loans) with an unpaid principal balance of $ 455.7 million at the acquisition date.

Total fair value adjustments for non-PCD loans resulted in a net discount of $ 20.8 million.

The Company acquired loans from Elmira for which there was evidence of a more-than-insignificant deterioration in credit quality since origination (PCD loans as described in Note A:

Summary of Significant Accounting Policies).

The Company has acquired loans from Steuben for which there was evidence of a more-than-insignificant deterioration in credit quality since origination.

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

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

(000s omitted)

Par value of PCD loans at acquisition

Allowance for credit losses at acquisition

Non-credit discount at acquisition

Fair value of PCD loans at acquisition

The Company acquired non-PCD loans from Steuben with an unpaid principal balance of $ 313.0 million at the acquisition date.

Total fair value adjustments for non-PCD loans resulted in a net premium of $ 2.5 million.

The Company has acquired loans from Steuben classified as PCD loans.

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

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Fair value of PCD loans at acquisition

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

(000s omitted)

Non-PCD Loans

Contractually required principal and interest at acquisition

Contractual cash flows not expected to be collected

Expected cash flows at acquisition

Interest component of expected cash flows

Fair value of non-PCD loans at acquisition

The following is a summary of the loans acquired from Kinderhook at the date of acquisition:

(000s omitted)

Contractually required principal and interest at acquisition

Contractual cash flows not expected to be collected

Expected cash flows at acquisition

Interest component of expected cash flows

Fair value of acquired loans

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

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

The fair value of subordinated notes payable was estimated using discounted cash flows and interest rates being offered on similar securities.

Subordinated notes payable assumed with the Kinderhook acquisition included $ 3.0 million of subordinated notes with a fixed interest rate of 6.0 % maturing in February 2028 and $ 10.0 million of subordinated notes with a fixed interest rate of 6.375 % maturing in November 2025 .

The core deposit intangibles and other intangibles related to the NuVantage acquisition, Steuben acquisition, both acquisitions completed by CISI in 2019, and the Kinderhook acquisition are being amortized using an accelerated method over their estimated usefu l life of eight years .

Borrowings assumed with the Elmira acquisition included FHLB borrowings with a fair value of $ 17.6 million, with maturity dates ranging from January 2023 through March 2027 and a weighted average interest rate of 2.48 %.

The core deposit intangibles related to the Elmira and Steuben acquisitions and other intangibles related to the NuVantage acquisition and three of the OneGroup acquisitions completed in 2022 are being amortized using an accelerated method over an estimated useful life of eight years .

The other intangibles associated with the fourth remaining OneGroup acquisition completed in 2022 are being amortized using an accelerated method over their estimated useful life of ten years .

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

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

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

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

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

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

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

Direct costs related to the acquisitions were expensed as incurred.

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Supplemental Pro Forma Financial Information (Unaudited)

The following unaudited condensed pro forma information assumes the Steuben acquisition had been completed as of January 1, 2019 for the years ended December 31, 2020 and 2019 and the Kinderhook acquisitions had been completed as of January 1, 2018 for the year ended December 31, 2019.

The pro forma information does not include amounts related to the NuVantage, FBD, or TGA acquisitions completed in 2021, or the two acquisitions completed by CISI in 2019, as the amounts were immaterial.

The following unaudited condensed pro forma information assumes the Elmira acquisition had been completed as of January 1, 2021 for the years ended December 31, 2022 and 2021, and the Steuben acquisition had been completed as of January 1, 2019 for the year ended December 31, 2020.

The pro forma information does not include amounts related to the OneGroup acquisitions completed in 2022 or the NuVantage, FBD, and TGA acquisitions completed in 2021 as the amounts were immaterial.

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

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

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

Acquisition expenses related to the Steuben transaction totaling $ 4.8 million for the year ended December 31, 2020 were included in the pro forma information as if they were incurred in 2019.

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

Acquisition expenses related to the Elmira transaction totaling $ 5.0 million for the year ended December 31, 2022 were included in the pro forma information as if they were incurred in 2021.

Acquisition expenses related to the Steuben transaction totaling $ 4.8 million for the year ended December 31, 2020 were adjusted in the pro forma information as if they were incurred in 2019.

Pro Forma (Unaudited)

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Total equity and other securities

Held-to-Maturity Portfolio:

Treasury and agency securities

Total held-to-maturity portfolio

In the fourth quarter of 2022, the Company transferred $ 1.08 billion of U.S.

Treasury securities, at fair value, from available-for-sale to held-to-maturity.

The securities were reclassified at fair value at the time of the transfer and the transfer represented a non-cash transaction.

Accumulated other comprehensive loss at December 31, 2022 included pretax unrealized losses of $ 341.2 million related to the transfer.

These unrealized losses will be amortized, consistent with the amortization of the discount on these securities, over the remaining life as an adjustment of yield, resulting in no impact to net interest income or net income.

A summary of investment securities that have been in a continuous unrealized loss position for less than or greater than twelve months is as follows:

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Total available-for-sale investment portfolio

Held-to-Maturity Portfolio:

U.S Treasury and agency securities

Total held-to-maturity portfolio

As of December 31, 2021

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Total available-for-sale investment portfolio

The unrealized losses reported pertaining to securities issued by the U.S.

The unrealized losses reported pertaining to available-for-sale securities issued by the U.S.

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

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

The Company holds one corporate debt security in an unrealized loss position which is currently rated A- or better and the issuer of the security shows a low risk of default.

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

The Company holds two corporate debt securities in an unrealized loss position and based on an analysis done by the Company the issuers of the securities show a low risk of default.

Timely principal and interest payments continue to be made on the securities.

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Accordingly, there is no allowance for credit losses on the Company’s available-for-sale portfolio as of December 31, 2022 and 2021.

Securities classified as held-to-maturity are included under the CECL methodology.

Calculation of expected credit loss under CECL is done on a collective (“pooled”) basis, with assets grouped when similar risk characteristics exist.

The Company notes that at December 31, 2022 all securities in the held-to-maturity classification are U.S.

Treasury securities;

therefore, they share the same risk characteristics and can be evaluated on a collective basis.

The expected credit loss on these securities is evaluated based on historical credit losses of this security type and the expected possibility of default in the future.

Treasury securities often receive the highest credit rating by rating agencies and the Company has concluded that the possibility of default is considered remote.

Treasury securities held by the Company in the held-to-maturity category carry an AA+ rating from Standard & Poor’s, Aaa from Moody’s Investor Services, and AAA from Fitch.

The Company concludes that the long history with no credit losses for U.S.

Treasury securities (adjusted for current conditions and reasonable and supportable forecasts) indicates an expectation that nonpayment of the amortized cost basis is zero.

Management has concluded that there is no prepayment risk and it is expected to recover the recorded investment.

Accordingly, there is no allowance for credit losses on the Company’s held-to-maturity portfolio as of December 31, 2022 and 2021.

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

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

Held-to-Maturity

Available-for-Sale

(000’s omitted)

Amortized Cost

Due in one year or less

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

During 2019, the Company sold $ 590.2 million of U.S.

Treasury and agency securities, recognizing $ 5.0 million of gross realized gains and $ 0.1 million of gross realized losses.

There were no sales of investment securities in 2021 and 2020.

LOANS AND ALLOWANCE FOR CREDIT LOSSES

The segments of the Company’s loan portfolio at December 31 are summarized as follows:

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Balance at end of year

The following table presents the aging of the amortized cost basis of the Company’s past due loans, including purchased credit deteriorated (“PCD”) loans, by segment as of December 31, 2021 and 2020:

The following table presents the aging of the amortized cost basis of the Company’s past due loans by segment as of December 31, 2022 and 2021:

90+ Days Past

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Consumer direct

The delinquency status for loans on payment deferment due to COVID-19 financial hardship were reported at December 31, 2021 and 2020 based on their delinquency status at the execution date of the payment deferment, unless subsequent to the execution date of the payment deferment, the borrower made all required past due payments to bring the loan to current status.

No interest income on nonaccrual loans was recognized during the years ended December 31, 2022 or 2021.

For the year ended December 31, 2021, an immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income.

The Company wrote off $ 1.5 million of accrued interest on nonaccrual loans by reversing interest income in 2020 primarily due to the reversal of accrued interest on business lending loans of certain commercial borrowers, which primarily operate in the hospitality, travel and entertainment industries, who requested and were granted further extensions of existing loan repayment forbearance due to the continued pandemic-related financial hardship they were experiencing, which were reclassified from accruing to nonaccrual status.

For the years ended December 31, 2022 and 2021, an immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income.

Approximately $ 1.9 million of interest income on loans that returned to accrual status in 2022 was recognized for the year ended December 31, 2022.

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The Company’s primary credit quality indicator for its business lending portfolio is an internal credit risk rating system that categorizes loans as “pass”, “special mention”, “classified”, or “doubtful”.

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

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

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

Credit risk ratings are applied to loans individually based on a case-by-case evaluation.

In general, the following are the definitions of the Company’s credit quality indicators:

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Special Mention

The condition of the borrower has deteriorated although the loan performs as agreed.

The condition of the borrower has deteriorated and the loan has potential weaknesses, although the loan performs as agreed.

Loss may be incurred at some future date if conditions deteriorate further.

The condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate and incur loss, if deficiencies are not corrected.

The condition of the borrower has significantly deteriorated and the loan has a well-defined weakness or weaknesses.

The performance of the loan could further deteriorate and incur loss if deficiencies are not corrected.

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

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Total business lending

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

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

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

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Total home equity

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

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

Term Loans Amortized Cost Basis by Origination Year

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Total home equity

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

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

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

Business lending loans greater than $ 0.5 million that are on nonaccrual are individually assessed and, if necessary, a specific allocation of the allowance for credit losses is provided.

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

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Terms may be modified to fit the ability of the borrower to repay in line with its current financial standing and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

In accordance with clarified guidance issued by the OCC, loans that have been discharged in Chapter 7 bankruptcy but not reaffirmed by the borrower, are classified as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified.

In accordance with clarified guidance issued by the Office of the Comptroller of the Currency (“OCC”), loans that have been discharged in Chapter 7 bankruptcy but not reaffirmed by the borrower, are classified as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified.

The Company’s lien position against the underlying collateral remains unchanged.

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The amount of loss incurred in 2022, 2021 and 2020 was immaterial.

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

Commercial loans greater than $ 0.5 million are individually assessed, and if necessary, a specific allocation of the allowance for credit losses is provided.

With regard to determination of the amount of the allowance for credit losses, troubled debt restructured loans are considered to be impaired.

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

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

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

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

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

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

As of December 31, 2021, the Company had 5 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.

These forbearances were comprised of 4 business borrowers representing $ 4.1 million in outstanding loan balances and 1 consumer borrower representing approximately $ 0.1 million in outstanding loan balances.

Information regarding TDRs as of December 31, 2022, 2021 and 2020 is as follows:

December 31, 2022

(000’s omitted)

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

December 31, 2021

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Consumer direct

December 31, 2020

(000’s omitted)

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

The following table presents information related to loans modified in a TDR during the years ended December 31, 2022, 2021 and 2020.

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December 31, 2021

December 31, 2020

(000’s omitted)

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Allowance for Credit Losses

The following presents by segment the activity in the allowance for credit losses during 2021 and 2020:

The following presents by loan segment the activity in the allowance for credit losses during 2022, 2021 and 2020:

Year Ended December 31, 2022

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Consumer direct

Purchased credit deteriorated

Allowance for credit losses – loans

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Consumer direct

Purchased credit deteriorated

Allowance for credit losses – loans

Liabilities for off-balance-sheet credit exposures

Total allowance for credit losses

Year Ended December 31, 2020

(000’s omitted)

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

Acquired impaired

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Total allowance for credit losses

The allowance for credit losses to total loans ratio of 0.68 % at December 31, 2021 was 14 basis points lower than the level at December 31, 2020.

This decrease was primarily due to improvements in the economic forecasts and improvements in non-economic qualitative adjustments resulting from lower levels of delinquencies, deferrals, and chargeoffs than in the prior year.

The allowance for credit losses increased to $ 61.1 million at December 31, 2022 compared to $ 49.9 million at December 31, 2021, driven by organic loan growth and the Elmira acquisition, as well as weakening economic forecasts.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 25.1 million and $ 16.7 million at December 31, 2022 and 2021, respectively, and is excluded from the estimate of credit losses and amortized cost basis of loans.

Under ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326) , also referred to as CECL, the Company utilizes the historical loss rate on its loan portfolio as the initial basis for the estimate of credit losses using the cumulative loss, vintage loss and line loss methods which is derived from the Company’s historical loss experience from January 1, 2012 to December 31, 2020.

2016-13, Financial Instruments – Credit Losses (Topic 326) , also referred to as CECL, as adopted by the Company on January 1, 2020, the Company utilizes the historical loss rate on its loan portfolio as the initial basis for the estimate of credit losses using the cumulative loss, vintage loss and line loss methods which is derived from the Company’s historical loss experience.

Adjustments to historical loss experience were made for differences in current loan-specific risk characteristics and to address current period delinquencies, charge-off rates, risk ratings, lack of loan level data through an entire economic cycle, changes in loan sizes and underwriting standards as well as the addition of acquired loans which were not underwritten by the Company.

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

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

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

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

For qualitative macroeconomic adjustments, the Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that were weighted based on guidance from the third party provider, with forecasts available as of December 31, 2021.

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

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

In addition to the economic forecast, the Company also considered additional qualitative adjustments as a result of COVID-19 and the impact on all industries, loan deferrals, delinquencies and downgrades.

For qualitative macroeconomic adjustments, the Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that are weighted, with forecasts available as of December 31, 2022.

These forecasts were factored into the qualitative portion of the calculation of the estimated credit losses and include the impact of a decline in residential real estate and vehicle prices as well as inflation.

The scenarios utilized forecast stable unemployment levels offset by deterioration in GDP growth, auto values, residential real estate and median household income, a result of inflationary pressures.

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

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

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

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

● Business lending – real estate:

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● Consumer direct:

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

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

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

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

All the sales of consumer mortgages during the year ended December 31, 2021 were sales of secondary market eligible residential mortgage loans.

The sales of business loans during the year ended December 31, 2021 includes three business lending loans under two relationships.

All purchases of loans were from the acquisition of Elmira.

All sales of consumer mortgages during the year ended December 31, 2022 were sales of secondary market eligible residential mortgage loans.

PREMISES AND EQUIPMENT

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Premises and equipment, net

As of December 31, 2022, the Company had $ 5.4 million of premises and equipment held for sale, comprised of $ 2.5 million of land and land improvements and $ 2.9 million of bank premises, recorded in other assets in the consolidated statements of condition.

GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

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(000’s omitted)

Goodwill, net

The Company performed a qualitative assessment for evaluating impairment of goodwill and other intangibles as of December 31, 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 results of the qualitative analysis indicated that there was no goodwill impairment at December 31, 2022 and therefore a quantitative analysis 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.

During 2021, the Company performed quarterly qualitative analyses of goodwill impairment and performed a quantitative assessment of its banking and financial services businesses during the fourth quarter of 2021 by comparing the fair value of the reporting unit with its carrying amount.

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

During 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.

Results of the quarterly and annual analyses indicate there was no goodwill impairment in 2021 or 2020.

Results of the analyses indicate there was no goodwill impairment in 2021.

Mortgage Servicing Rights

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Subordinated notes payable, includes premium of $ 249 and $ 277 , respectively

Subordinated debt held by unconsolidated subsidiary trusts

Securities sold under agreement to repurchase, short term

Other FHLB borrowings

Overnight borrowings

Other FHLB borrowings, includes discount of $ 319 and $ 0 , respectively

Total borrowings

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January 3, 2023

January 17, 2023

February 8, 2023

October 23, 2023

January 29, 2024

January 7, 2025

January 29, 2025

February 28, 2025

October 1, 2025

March 1, 2027

February 28, 2028

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The weighted-average interest rate on borrowings for the years ended December 31, 2022 and 2021 was 1.61 % and 0.48 %, respectively.

The Bank has unused lines of credit of $ 25 .0 million at December 31, 2022.

The Bank has unused borrowing capacity of approximately $ 1.08 billion through collateralized transactions with the FHLB and $ 490.5 million through collateralized transactions with the Federal Reserve.

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

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Provision for income taxes

Components of the net deferred tax liability, included in other liabilities, as of December 31 are as follows:

Components of the net deferred tax asset, included in other assets, as of December 31, 2022 and of the net deferred tax liability, included in other liabilities, as of December 31, 2021 are as follows:

(000’s omitted)

Investment securities

Allowance for credit losses

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Deferred tax liability

Net deferred tax liability

Net deferred tax asset (liability)

The Company has determined that no valuation allowance is necessary as it is more likely than not that the gross deferred tax assets will be realized through future reversals of existing temporary differences and through future taxable income.

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It is reasonably possible that the amount of unrecognized tax benefits could change in the next twelve months as a result of various examinations and expiration of statutes of limitations on prior tax returns.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as part of income taxes in the consolidated statement of income.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as part of income taxes in the consolidated statements of income.

The accrued interest related to tax positions was immaterial.

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New York State income tax returns for years after 2017 may still be examined by the New York Department of Taxation and Finance.

The Company is currently under examination by the Massachusetts Department of Revenue in connection with tax years 2018 to 2019 and the New York Department of Taxation and Finance in connection with tax years 2015 to 2017, and has not received any notices of proposed adjustments.

The Company is currently under examination by the New York Department of Taxation and Finance in connection with tax years 2015 to 2017, and has not received notice of proposed adjustments.

It is not possible to estimate if and when those examinations may be completed.

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In addition to the capital requirements discussed below, the circumstances under which the Bank may pay dividends are limited by federal statutes, regulations, and policies.

For example, as a national bank, the Bank must obtain the approval of the Office of the Comptroller of the Currency (“OCC”) for payments of dividends if the total of all dividends declared in any calendar year would exceed the total of the Bank’s net profits, as defined by applicable regulations, for that year, combined with its retained net profits for the preceding two years.

For example, as a national bank, the Bank must obtain the approval of the OCC for payments of dividends if the total of all dividends declared in any calendar year would exceed the total of the Bank’s net profits, as defined by applicable regulations, for that year, combined with its retained net profits for the preceding two years.

Furthermore, the Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts, as defined by applicable regulations.

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Furthermore, such loans and extensions of credit are required to be collateralized in specific amounts.

BENEFIT PLANS

PENSION AND OTHER BENEFIT PLANS

Pension and post-retirement plans

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The benefit obligation for the defined benefit pension plan was $ 137.3 million and $ 163.1 million as of December 31, 2022 and 2021, respectively, and the fair value of plan assets as of December 31, 2022 and 2021 was $ 244.3 million and $ 290.7 million, respectively.

The defined benefit pension plan was amended effective December 31, 2020 to transfer certain obligations from the Company’s deferred compensation plan and Restoration Plan (as defined below) into the qualified defined benefit pension plan.

Effective December 31, 2020, the Steuben Trust Company Pension Plan was merged into the Community Bank System, Inc.

Pension Plan and the combined plan was revalued resulting in an additional unamortized actuarial gain of approximately $ 1.1 million, due primarily to a gain on plan assets as of the valuation date.

The defined benefit pension plan was amended effective December 31, 2022 to transfer certain obligations from the Company’s non-qualified supplemental pension plan, deferred compensation plan and Restoration Plan (as defined below) into the qualified defined benefit pension plan.

The Company has unfunded supplemental pension plans for certain key active and retired executives.

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The Company has a non-qualified deferred compensation plan for certain employees (“Restoration Plan”) whose benefits under tax-qualified retirement plans are restricted by the Internal Revenue Code Section 401(a)(17) limitation on compensation.

The Restoration Plan was amended effective December 31, 2020 to transfer certain obligations into the Company’s qualified defined benefit pension plan.

The projected benefit obligation for the unfunded Restoration Plan was $ 0.03 million for 2021 and $ 0.03 million for 2020, respectively.

The projected benefit obligation for the unfunded Restoration Plan was immaterial for 2022 and $ 0.3 million for 2021.

Effective December 31, 2009, the Company terminated its post-retirement medical program for current and future employees.

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4.00 % for 2022,

3.50 % for 2024

3.50 % for 2023

Interest crediting rates

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Expected return on plan assets

Rate of compensation increase

Rate of compensation

4.00 % for 2022,

3.50 % for 2023

Interest crediting rates

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A decrease in the discount rate would increase the Company’s obligation and future expense while an increase would have the opposite effect.

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

Based on the Company’s anticipation of future experience under the defined benefit pension plan, the mortality tables used to determine future benefit obligations under the plan were updated as of December 31, 2021 to the sex-distinct Pri-2012 Mortality Tables for employees, healthy annuitants and contingent survivors, adjusted for mortality improvements using Scale MP-2021 mortality improvement scale on a generational basis.

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.

The mortality tables used to determine future benefit obligations under the plan as of December 31, 2021 were the sex-distinct Pri-2012 Mortality Tables for employees, healthy annuitants and contingent survivors, adjusted for mortality improvements using Scale MP-2021 mortality improvement scale on a generational basis.

The appropriateness of the assumptions are reviewed annually.

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Equity securities:

U.S mid/small cap

mid/small cap

CBU common stock

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Equity securities:

U.S mid/small cap

mid/small cap

CBU common stock

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Excludes dividends and interest receivable totaling $ 0.6 million and $ 0.4 million at December 31, 2022 and 2021, respectively.

Excludes certain investments that were measured at net asset value per share (or its equivalents) totaling $ 1.4 million at December 31, 2020.

The valuation techniques used to measure fair value for the items in the table above are as follows:

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The Company makes contributions to its funded qualified pension plan as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected return on such assets, and the value of the accumulated benefit obligation.

The Company made a $ 3.5 million contribution to the Steuben Trust Company Pension Plan in 2020.

The Company made a $ 0.1 million and $ 2.9 million contribution to its defined benefit pension plan in 2022 and 2021, respectively.

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The expense recognized for this interest credit contribution for the years ended December 31, 2022, 2021, and 2020 was $ 1.4 million, $ 1.1 million, and $ 0.9 million, respectively.

The Company acquired The National Union Bank of Kinderhook 401(k) Savings Plan with the Kinderhook acquisition and The Steuben Trust Company 401(k) Plan with the Steuben acquisition.

Effective November 9, 2020 and January 1, 2021, The National Union Bank of Kinderhook 401(k) Savings Plan and The Steuben Trust Company 401(k) Plan were merged into and became part of the Community Bank System, Inc.

The Company acquired Fringe Benefits Design of Minnesota, Inc.

401(k) Profit Sharing Plan with the FBD acquisition and The Steuben Trust Company 401(k) Plan with the Steuben acquisition.

Effective January 1, 2022 and January 1, 2021, the Fringe Benefits Design of Minnesota, Inc.

401(k) Profit Sharing Plan and the Steuben Trust Company 401(k) Plan were merged into and became part of the Community Bank System, Inc.

401(k) Employee Stock Ownership Plan, respectively.

10 unchanged sentences

The expense recognized under the plan for the years ended December 31, 2022, 2021 and 2020, was $ 0.2 million, $ 0.2 million, and $ 0.2 million, respectively.

The Company acquired deferred compensation plans for certain non-employee directors and trustees of Merchants.

The Company acquired deferred compensation plans for certain non-employee directors and trustees of Merchants Bancshares, Inc.

(“Merchants”).

Under the terms of these acquired deferred compensation plans, participating directors could elect to have all, or a specified percentage, of their Merchants director’s fees for a given year paid in the form of cash or deferred in the form of restricted shares of Merchants’ common stock.

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Under this program, the Company initially authorized four million shares of Company common stock for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and retroactive stock appreciation rights.

The long-term incentive program was amended effective May 25, 2011, May 14, 2014 and May 17, 2017 to authorize an additional 900,000 shares, 1,000,000 shares and 1,000,000 shares of Company common stock, respectively, for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and retroactive stock appreciation rights.

The long-term incentive program was amended effective May 25, 2011, May 14, 2014 and May 17, 2017 to authorize an additional 900,000 shares, 1,000,000 shares and 1,000,000 shares respectively, for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and retroactive stock appreciation rights.

Effective May 18, 2022 a new plan was put in place that authorized 600,000 shares of Company common stock for the same purpose.

As of December 31, 2022, the Company has authorization to grant up to approximately 1 .0 million additional shares of Company common stock for these instruments.

Nonqualified Stock Options

The Company recognized stock-based compensation expense related to non-qualified stock options of $ 2.9 million, $ 2.6 million and $ 2.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

A related income tax benefit was recognized of $ 0.7 million, $ 0.6 million and $ 0.7 million for the 2022, 2021 and 2020 years, respectively.

The nonqualified (offset) stock options in its Director’s Stock Balance Plan vest and become exercisable immediately and expire one year after the date the director retires or two years in the event of death.

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The aggregate intrinsic value of outstanding and exercisable stock options at December 31, 2022 is $ 18.3 million and $ 16.6 million, respectively.

The Company recognized stock-based compensation expense related to non-qualified stock options of $ 2.6 million, $ 2.7 million and $ 2.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

A related income tax benefit was recognized of $ 0.6 million, $ 0.7 million and $ 0.5 million for the 2021, 2020 and 2019 years, respectively.

Compensation expense related to restricted stock vesting recognized in the income statement for 2021, 2020 and 2019 was approximately $ 3.3 million, $ 3.3 million and $ 2.8 million, respectively.

Management estimated the fair value of options granted using the Black-Scholes option-pricing model .

2 unchanged sentences

The Black-Scholes model requires several assumptions, which management developed based on historical trends and current market observations.

Expected volatilities are based on historical volatilities of the Company’s common stock.

The Company uses historical data to estimate option exercise and post-vesting termination behavior.

The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable.

The risk-free interest rate for the expected term of the option is based on the U.S.

Treasury yield curve in effect at the time of the grant.

Weighted-average Fair Value of Options Granted

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The total intrinsic value of options exercised during 2022, 2021 and 2020 were $ 2.0 million, $ 10.3 million and $ 6.6 million, respectively.

Restricted Stock Awards

Compensation expense is recognized over the vesting period of the awards based on the fair value of the Company’s stock at grant date.

The Company recognized stock-based compensation expense related to restricted stock vesting recognized in the income statement for 2022, 2021 and 2020 was approximately $ 3.8 million, $ 2.8 million and $ 2.7 million, respectively.

The fair value of restricted stock awards is based on the end-of-day share price of the Company’s stock on the grant date.

Restricted stock awards granted prior to 2022 vest ratably over a five-year period and restricted stock awards granted in 2022 and thereafter vest ratably over a three-year period.

During the forfeiture period, shares that have not been forfeited have the right to vote and the right to receive dividends.

A summary of the status of the Company’s unvested restricted stock awards as of December 31, 2022, and changes during the twelve months ended December 31, 2022 and 2021, is presented below:

4 unchanged sentences

Unvested at December 31, 2022

Unrecognized stock-based compensation expense related to unvested restricted stock totaled $ 7.1 million at December 31, 2021, which will be recognized as expense over the next five years .

Unrecognized stock-based compensation expense related to unvested restricted stock totaled $ 6.4 million at December 31, 2022, which will be recognized as expense over the next three or five years according to the awards vesting schedule.

The weighted-average period over which this unrecognized expense would be recognized is 2.4 years.

The total fair value of restricted stock vested during 2022, 2021, and 2020 were $ 3.1 million, $ 2.5 million and $ 2.7 million, respectively.

Performance Awards

The long-term incentive program provides for the issuance of shares of performance award restricted stock to officers and key employees.

There are two sets of performance criteria based on the individual award;

(1) based on the Company’s cumulative three year Relative Total Shareholder Return (“TSR”) ranking compared to the constituents of the KBW Regional Bank Index, and continued employment weighted at 50 %;

and (2) three year Average Relative Return on Average Core Tangible Common Equity (“Core ROATCE”) Relative Total Performance Goal weighted at 50 % .

Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.

Management estimated the fair value of the stock granted under performance criteria (1) using the Monte Carlo Simulation and stock granted under performance criteria (2) using the grant date fair value.

Performance shares cliff vest based on performance results for a three year period.

Compensation cost is estimated based on the probability that the performance conditions will be achieved.

As of December 31, 2022, the compensation cost is estimated at 90 % payout under the terms of the plan for the different performance sets.

At each reporting period, the Company will reassess the likelihood of achieving the performance criteria and will adjust compensation expense as needed.

The shares have voting rights.

Upon vesting of the performance shares, any dividends declared during the vesting period will be paid based on the shares vested.

Total shares issuable under the plan are 31,999 at December 31, 2022 and all shares were issued in 2022.

Weighted-average

grant date fair value

Unvested at December 31, 2020

Unvested at December 31, 2021

Unvested at December 31, 2022

Unrecognized stock-based compensation expense related to unvested performance restricted stock totaled $ 0.7 million at December 31, 2022, which will be recognized as expense over the next three years .

The weighted-average period over which this unrecognized expense would be recognized is 2.0 years .

The total fair value of restricted stock vested during 2022, 2021, and 2020 were $ 0.02 million, $ 0.01 million and $ 0.1 million, respectively.

EARNINGS PER SHARE

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

There were approximately 0.1 million, 0.6 million and 0.5 million weighted-average anti-dilutive stock options outstanding at December 31, 2021, 2020 and 2019, respectively, which were not included in the computation below.

At December 31, 2022 weighted-average anti-dilutive stock options outstanding were immaterial and were 0.1 million and 0.6 million at December 31, 2021 and 2020, respectively, which were not included in the computation below.

The following is a reconciliation of basic to diluted earnings per share for the years ended December 31, 2022, 2021 and 2020.

12 unchanged sentences

Stock Repurchase Program

At its December 2020 meeting, the Board approved a stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,680,000 shares of the Company’s common stock, in accordance with securities and banking laws and regulations, during the twelve-month period starting January 1, 2021.

There were 67,500 shares repurchased pursuant to the 2021 stock repurchase program in the fourth quarter of 2021.

At its December 2022 meeting, the Board approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,697,000 shares of the Company’s common stock, in accordance with securities and banking laws and regulations, during the twelve-month period starting January 1, 2023.

1 unchanged sentence

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

At its December 2021 meeting, the Board approved a stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,697,000 shares of the Company’s common stock, in accordance with securities and banking laws and regulations, during the twelve-month period starting January 1, 2022.

There were 250,000 shares of treasury stock purchases made under this authorization in 2022.

COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS

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Standby letters of credit

The Bank has unused lines of credit of $ 25.0 million at December 31, 2021.

The Bank has unused borrowing capacity of approximately $ 1.71 billion through collateralized transactions with the FHLB and $ 247.7 million through collateralized transactions with the Federal Reserve.

The Company is typically required to maintain a reserve balance, as established by the FRB.

Effective on March 26, 2020, the FRB reduced this cash reserve requirement to zero percent to help support lending to households and businesses as a result of the impacts of the COVID-19 pandemic.

Effective on March 26, 2020, the FRB reduced this cash reserve requirement to zero percent.

As a result, the Company had no required reserve as of December 31, 2022 and 2021.

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

As of December 31, 2021, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position.

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

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

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

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

For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements.

To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable.

To the extent such matters could result in exposure in excess of that liability, the amount of such excess is not currently estimable.

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

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

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

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

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

53 unchanged sentences

Less imputed interest

As of December 31, 2021, the Company has an immaterial amount of additional operating leases for offices and equipment that have not yet commenced.

As of December 31, 2022, the Company has four additional operating leases for office spaces that have not yet commenced with a weighted average lease term of 11.9 years.

Upon commencements, lease right-of-use assets and lease liabilities of approximately $ 11.5 million will be recorded in the consolidated statements of condition.

REGULATORY MATTERS

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Other comprehensive (loss) income, net of tax:

Changes in other comprehensive income (loss) related to pension and other post retirement obligations

Changes in other comprehensive (loss) income related to unrealized (losses) gains on available-for-sale securities

Changes in other comprehensive (loss) income related to pension and other post retirement obligations

Changes in other comprehensive (loss) income related to unrealized (losses) gains on investment securities

Other comprehensive (loss) income

Comprehensive income

Comprehensive (loss) income

The statements of cash flows of the parent company for the years ended December 31 is as follows:

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(Capital contributions to)/Return of capital from

Net cash (used in)/provided by investing activities

Net cash used in investing activities

Financing activities:

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Common stock issued for acquisition

Accounting standards allow entities an irrevocable option to measure certain financial assets and financial liabilities at fair value.

Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.

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

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

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

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

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Equity securities

Mortgage loans held for sale

Commitments to originate real estate loans for sale

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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 all significant inputs, such as reported trades, trade execution data, LIBOR swap yield curve, market prepayment speeds, credit information, market spreads, and security’s terms and conditions, are observable.

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 all significant inputs, such as reported trades, trade execution data, interest rate swap yield curves, market prepayment speeds, credit information, market spreads, and security’s terms and conditions, are observable.

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

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

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

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

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

There were no mortgage loans held for sale at December 31, 2021.

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

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

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

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The changes in Level 3 assets measured at fair value on a recurring basis are immaterial.

Assets and liabilities measured on a non-recurring basis:

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

December 31, 2022

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Impairment is recognized through a valuation allowance.

There is a valuation allowance of approximately $ 0.7 million at December 31, 2022.

There was no valuation allowance at December 31, 2021.

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

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

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The Company did not recognize an impairment charge during 2022 or 2021.

The Company determines fair values based on quoted market values, where available, estimates of present values, or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including, but not limited to, the discount rate and estimates of future cash flows.

In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument.

The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis as of December 31, 2022 are as follows:

Significant Unobservable

(000’s omitted)

(000's omitted, except per loan data)

(Weighted Average)

Individually assessed loans

Fair value of collateral

Estimated cost of disposal/market adjustment

9.0 % - 43.1 % ( 43.1 %)

Other real estate owned

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Significant Unobservable

(000’s omitted)

(000's omitted, except per loan data)

(Weighted Average)

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Adequate compensation

The Company determines fair values based on quoted market values, where available, estimates of present values, or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including, but not limited to, the discount rate and estimates of future cash flows.

In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument.

Certain financial instruments and all nonfinancial instruments are excluded from fair value disclosure requirements.

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

Contingent consideration

Discounted cash flow

Discount rate

1.4 % - 1.7 % ( 1.5 %)

Probability adjusted level of retained revenue

$ 3 .0 million - $ 5.8 million

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

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The weighted average of the discount rate for the contingent consideration was calculated by adding the discount rates used for the calculation of the fair value of each payment of contingent consideration, weighted by the amount of the payment as part of the total fair value of contingent consideration.

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

Certain financial instruments and all nonfinancial instruments are excluded from fair value disclosure requirements.

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

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

December 31, 2022

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Financial assets:

Held-to-maturity securities

Financial liabilities:

Overnight borrowings

Securities sold under agreement to repurchase, short-term

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Subordinated notes payable

Subordinated debt held by unconsolidated subsidiary trusts

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

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

Held-to-maturity securities have been classified as a Level 1 valuation.

The fair values of held-to-maturity investment securities are based upon quoted prices, if available.

If quoted prices are not available, fair values are measured using quoted market prices for similar securities or model-based valuation techniques.

Deposits have been classified as a Level 2 valuation.

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

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

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

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

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

Borrowings and subordinated notes payable have been classified as a Level 2 valuation.

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

Fair values for other Federal Home Loan Bank borrowings and subordinated notes payable are estimated using discounted cash flows and interest rates currently being offered on similar securities.

The difference between the carrying values of subordinated notes payable, and their fair values, are not material as of the reporting dates.

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

The fair values of each approximate the respective carrying values because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.

DERIVATIVE INSTRUMENTS

The Company is party to derivative financial instruments in the normal course of its business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest rates.

These financial instruments have been limited to interest rate swap agreements, commitments to originate real estate loans held for sale and forward sales commitments.

The Company does not hold or issue derivative financial instruments for trading or other speculative purposes.

The Company enters into forward sales commitments for the future delivery of residential mortgage loans, and interest rate lock commitments to fund loans at a specified interest rate.

The forward sales commitments are utilized to reduce interest rate risk associated with interest rate lock commitments and loans held for sale.

Changes in the estimated fair value of the forward sales commitments and interest rate lock commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

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

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

The effect of the changes to these derivatives for the years then ended was also immaterial.

The Company acquired interest rate swaps in 2017 with notional amounts with certain commercial customers which totaled $ 0.5 million at December 31, 2021 and $ 14.4 million at December 31, 2020.

In order to minimize the Company’s risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps (pay fixed/receive floating swaps) with the Company’s counterparty totaling $ 0.5 million at December 31, 2021 and $ 14.4 million at December 31, 2020.

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

At December 31, 2020, the weighted average receive rate of these interest rate swaps was 2.10 %, the weighted average pay rate was 4.44 % and the weighted average maturity was 5.2 years.

Hedge accounting has not been applied for these derivatives.

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

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

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

At December 31, 2020, the weighted average receive rate of these interest rate swaps was 1.42 %, the weighted average pay rate was 3.11 % and the weighted average maturity was 12.5 years.

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

The effects of fair value accounting in the consolidated statements of income for the years ended December 31, 2021 and 2020 is immaterial.

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

(000’s omitted)

Cumulative Amount of Fair Value Hedging

Line Item in the Consolidated

Carrying Amount of the Hedged

Adjustment Included in the Carrying

Statement of Condition in Which

Amount of the Hedged Assets

the Hedged Item Is Included

December 31, 2021

December 31, 2020

December 31, 2021

December 31, 2020

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

(000’s omitted)

December 31, 2021

Derivative Assets

Derivative Liabilities

Consolidated Statement of

Consolidated Statement of Condition

Condition Location

Derivatives designated as hedging instruments under Subtopic 815-20

Interest rate swaps

Derivatives not designated as hedging instruments under Subtopic 815-20

Interest rate swaps

Accrued interest and other liabilities

Commitments to originate real estate loans for sale

Forward sales commitments

Total derivatives

Fair values of derivative instruments as of December 31, 2020 are as follows:

(000’s omitted)

December 31, 2020

Derivative Assets

Derivative Liabilities

Consolidated Statement of

Consolidated Statement of Condition

Condition Location

Derivatives designated as hedging instruments under Subtopic 815-20

Interest rate swaps

Derivatives not designated as hedging instruments under Subtopic 815-20

Interest rate swaps

Accrued interest and other liabilities

Commitments to originate real estate loans for sale

Forward sales commitments

Total derivatives

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

Information about the fair value of derivative financial instruments can be found in Note R to these consolidated financial statements.

VARIABLE INTEREST ENTITIES

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Acquisition expenses

Acquisition-related contingent consideration adjustment

Other operating expenses

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Entities do not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date.

Such events and transactions were evaluated through the date these consolidated financial statements were available to be issued and the Company determined that no such events had occurred.

Such events and transactions were evaluated through the date these consolidated financial statements were available to be issued and the Company determined such an event had occurred.

In the first quarter of 2023, the Company executed the sale of $ 786.1 million in book value of its lower-yielding available-for-sale debt securities as part of a balance sheet repositioning.

The sale resulted in a pre-tax realized loss of approximately $ 52.3 million, and the proceeds of $ 733.8 million were redeployed towards paying off existing wholesale borrowings.

The balance sheet repositioning is a non-recognized subsequent event and will be reflected in the first quarter 2023 consolidated financial statements.

Report on Internal Control Over Financial Reporting

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note D to the consolidated financial statements, the Company changed the manner in which it accounts for the allowance for credit losses as of January 1, 2020.

Basis for Opinions

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses – Qualitative Macroeconomic Adjustments

Allowance for Credit Losses – Qualitative Macroeconomic Adjustment for Consumer Mortgages

As described in Notes A and D to the consolidated financial statements, management estimates the allowance for credit losses using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

As of December 31, 2021, the allowance for credit losses was $49.9 million on loans of $7.4 billion.

As of December 31, 2022, the allowance for credit losses for consumer mortgages was $14.3 million on consumer mortgages of $3.0 billion.

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

For qualitative macroeconomic adjustments, management uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios.

The principal considerations for our determination that performing procedures relating to qualitative macroeconomic adjustments to the allowance for credit losses is a critical audit matter are (i) the significant judgment by management in determining the macroeconomic qualitative adjustments, which led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating related evidence;

The principal considerations for our determination that performing procedures relating to the qualitative macroeconomic adjustment to the allowance for credit losses for consumer mortgages is a critical audit matter are (i) the significant judgment by management in determining the macroeconomic qualitative adjustment for consumer mortgages, which led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating related evidence;

and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the Company’s allowance for credit losses estimation process, including controls over qualitative macroeconomic adjustments.

These procedures also included, among others, testing management’s process for determining qualitative macroeconomic adjustments to the allowance for credit losses, including evaluating the appropriateness of management’s methodology, testing data used in the qualitative macroeconomic adjustments, and evaluating the determination of the impact of forecasted macroeconomic conditions.

These procedures included testing the effectiveness of controls relating to the Company’s allowance for credit losses estimation process, including controls over the qualitative macroeconomic adjustment for consumer mortgages.

These procedures also included, among others, testing management’s process for determining the qualitative macroeconomic adjustment to the allowance for credit losses for consumer mortgages, including evaluating the appropriateness of management’s methodology and testing data used in the qualitative macroeconomic adjustment for consumer mortgages.

Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the qualitative macroeconomic adjustments.

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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 8. Financial Statements and Supplementary Data