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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-09 · 309 added, 363 removed, 357 unchanged (65% of the section changed)

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

(the “Company” or “CBSI”) as of and for the three and nine months ended September 30, 2022 and 2021, although in some circumstances the second and first quarters of 2022 are also discussed in order to more fully explain recent trends.

(the “Company” or “CBSI”) as of and for the three months ended March 31, 2023 and 2022, although in some circumstances the fourth quarter of 2022 is also discussed in order to more fully explain recent trends.

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

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

Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2022, “last year” and equivalent terms refer to calendar year 2021, “third quarter” refers to the three months ended September 30, 2022, “YTD” refers to the nine months ended September 30, 2022, and earnings per share (“EPS”) figures refer to diluted EPS.

Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2023, “last year” and equivalent terms refer to calendar year 2022, “first quarter” refers to the three months ended March 31, and earnings per share (“EPS”) figures refer to diluted EPS.

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

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Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption “Forward-Looking Statements” on page 48.

Critical Accounting Policies

Critical Accounting Policies and Estimates

As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations.

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Management believes that the critical accounting estimates include the allowance for credit losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation, the carrying value of goodwill and other intangible assets, and acquired loan valuations.

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

A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on pages 12-13 of this Form 10-Q.

A summary of the accounting policies used by management is disclosed in the MD&A on pages 31-33 and Note A, “Summary of Significant Accounting Policies” on pages 76-87 of the most recent Form 10-K (fiscal year ended December 31, 2022) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2023, and there have been no material changes.

A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on page 11 of this Form 10-Q.

Supplemental Reporting of Non-GAAP Results of Operations

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

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

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

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

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

Earnings per share were $0.90 in the third quarter of 2022, up $0.07, or 8.4%, from the third quarter of 2021.

Diluted adjusted net earnings per share, a non-GAAP measure, were $0.94 in the third quarter of 2022, compared to $0.87 in the third quarter of 2021, a $0.07 per share, or 8.0%, increase.

Adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, was $1.25 per weighted average diluted share in the third quarter of 2022, up $0.21, or 20.2%, from the third quarter of 2021.

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

Although adjusted pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the impact of CECL and helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions.

Diluted earnings per share were $0.11 in the first quarter of 2023, compared to $0.86 in the first quarter of 2022, a decrease of $0.75, or 87.2%.

Diluted adjusted net earnings per share, a non-GAAP measure, were $0.90 in the first quarter of 2023, compared to $0.91 in the first quarter of 2022, a decrease of $0.01, or 1.1%.

Adjusted pre-tax, pre-provision net revenue per share, a non-GAAP measure, was $1.16 in the first quarter of 2023, up $0.04, or 3.6%, from the first quarter of 2022.

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

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and the performance of recently acquired businesses.

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

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

In connection with the merger, the Company added eight full-service offices to its branch service network and acquired approximately $579.0 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.

Preliminary goodwill of $45.8 million was recognized as a result of the merger.

Third quarter net income increased compared to last year’s third quarter by $3.4 million, or 7.4%, while YTD net income decreased compared to the equivalent 2021 timeframe by $10.6 million, or 7.2%.

Earnings per share of $0.90 for the third quarter of 2022 was $0.07 more than the third quarter of 2021, whereas 2022 YTD earnings per share of $2.49 was $0.19 lower than 2021 YTD earnings per share.

The increases in net income and earnings per share between the quarters were due to increases in net interest income and noninterest revenues and a decrease in fully-diluted average shares outstanding, offset, in part, by higher noninterest expenses and increases in the provision for credit losses and income taxes.

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

Third quarter and YTD net income adjusted to exclude acquisition expenses, acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, litigation accrual expenses and the unrealized gain (loss) on equity securities (“operating net income”), a non-GAAP measure, increased $3.7 million, or 8.1%, as compared to the third quarter of 2021 and decreased $3.5 million, or 2.4%, compared to September YTD 2021.

Earnings per share adjusted to exclude acquisition expenses, acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, litigation accrual expenses and the unrealized gain (loss) on equity securities (“operating earnings per share”), a non-GAAP measure, of $0.90 for the third quarter of 2022 increased $0.07 compared to the third quarter of 2021.

Operating earnings per share of $2.62 for the first nine months of 2022 decreased $0.06 compared to the prior year period.

2021 results were enhanced by a net benefit recorded in the provision for credit losses and higher Paycheck Protection Program (“PPP”)-related revenues than the comparable periods of 2022, which, net of tax, were responsible for a $0.14 decrease in fully-diluted operating earnings per share between the comparable quarters and a $0.45 decrease between the comparable YTD periods.

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

Net income adjusted to exclude income taxes, provision for credit losses, acquisition expenses, acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue”), a non-GAAP measure, of $67.9 million for the third quarter increased $11.4 million, or 20.1%, as compared to the third quarter of 2021.

Adjusted pre-tax, pre-provision net revenue of $190.1 million for the first nine months of 2022 increased $16.3 million, or 9.4%, as compared to the first nine months of 2021.

Earnings per share adjusted to exclude income taxes, provision for credit losses, acquisition expenses, acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue per share”), a non-GAAP measure, of $1.25 for the third quarter of 2022 was $0.21 higher than the third quarter of 2021, and 2022 YTD adjusted pre-tax, pre-provision net revenue per share of $3.49 was $0.30 higher than the prior YTD period as the increases in revenues outpaced the increase in operating expenses between the periods.

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

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

The yield on average interest-earning assets increased 35 basis points compared to the prior year third quarter as the yields on average investments including cash equivalents and average loans both increased, while on a YTD basis the yield on average interest-earning assets increased four basis points as the yield on average investments including cash equivalents increased while the yield on average loans decreased.

The yield on average investments, including cash equivalents, increased 50 basis points compared to the prior year’s third quarter and increased 33 basis points compared to the prior YTD, as the Company meaningfully shifted the composition of earning assets away from cash equivalents that were earning a low yield in the prior year to higher yielding investment securities between the periods.

The yield on average loans for the third quarter increased by seven basis points compared to the third quarter of 2021 and decreased 14 basis points on a YTD basis.

The yield on average loans included a decline in PPP-related interest income between the periods, which declined $3.9 million on a quarterly basis and $11.9 million on a YTD basis.

The Company’s total cost of funds for the first nine months of 2022 remained consistent with the year earlier period, as the decrease in the Company’s deposit funding cost was offset by an increase in the rate on borrowings from the prior year period.

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

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

The provision for credit losses of $5.1 million for the third quarter and $12.0 million for YTD 2022 were up $6.0 million and $23.0 million from the comparable prior year periods, respectively.

The third quarter and YTD 2022 provision for credit losses was reflective of a weaker economic forecast and an increase in loans outstanding, partially offset by continued low levels of net charge-offs, delinquent loans and nonperforming loans.

The second quarter provision for credit losses included $3.9 million of acquisition-related provision for credit losses due to the Elmira acquisition.

Comparatively, at the end of the third quarter of 2021, economic forecasts reflected a post-vaccine economic recovery and included the continuation of elevated real estate and vehicle collateral values, resulting in a release of reserves for the quarter and on a YTD basis.

Net charge-offs were $0.4 million for the third quarter and $1.3 million for the first nine months of 2022, compared to net charge-offs of $1.4 million for the prior year third quarter and $1.1 million for the first nine months of 2021.

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

First quarter net income decreased $41.3 million as compared to the first quarter of 2022 and earnings per share of $0.11 for the first quarter of 2023 decreased $0.75 from the first quarter of 2022.

The decrease in net income and earnings per share for the quarter was primarily the result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale investment securities during the quarter in connection with a balance sheet repositioning executed in order to reduce overnight borrowings and improve net interest income and net interest margin.

The sales were completed in January and February 2023 and were unrelated to the negative developments in the banking industry that occurred in March 2023.

In addition, increases in the provision for credit losses and operating expenses were offset by increases in net interest income and noninterest revenues, lower income taxes and a decrease in fully-diluted shares outstanding.

First quarter net income adjusted to exclude the realized loss on sales of investment securities, gain on debt extinguishment, acquisition expenses and unrealized gains and losses on equity securities (“operating net income”), a non-GAAP measure, decreased $0.5 million as compared to the first quarter of 2022.

Earnings per share adjusted to exclude the realized loss on sales of investment securities, gain on debt extinguishment, acquisition expenses and unrealized gains and losses on equity securities (“operating earnings per share”), a non-GAAP measure, of $0.86 for the first quarter decreased $0.01 compared to the first quarter of 2022.

The Company’s deposit base and liquidity position continues to be strong, as the Company maintained total immediately available liquidity sources of $4.69 billion at the end of the first quarter of 2023, over double its estimated uninsured deposits, net of collateralized deposits, which represent less than 20% of the same quarter’s ending total deposits.

Since the Federal Reserve began raising the federal funds rate on March 17, 2022 in the current hiking cycle in an effort to combat inflation, the cycle-to-date deposit beta for the Company was 5% and the cycle-to-date total funding beta was 8%, reflective of a high proportion of non-interest bearing deposits, representing over 30% of total deposits, and the composition and stability of the customer base.

In addition, 74% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the first quarter.

The Company does not currently utilize brokered or wholesale deposits and total deposits increased approximately 1% from the end of the prior quarter.

Fully tax-equivalent net interest margin increased 47 basis points between the first quarter of 2022 and the first quarter of 2023.

Loans increased on both an average and ending basis as compared to the prior year first quarter, reflective of continued strong organic loan growth along with the second quarter 2022 acquisition of Elmira Savings Bank (“Elmira”).

Deposits decreased on both an average and ending basis as compared to the first quarter of 2022 due in part to outflows driven by the continued spend down of funds accumulated during the pandemic with higher customer expenditure levels in the inflationary environment.

While deposits also declined on an average basis as compared to the fourth quarter of 2022, deposits increased on an ending basis over the same period due to growth in public fund deposits.

The yield on average interest earning assets increased 82 basis points compared to the prior year first quarter as the yield on average loans and yield on average investments both improved.

The yield on average loans for the first quarter increased 60 basis points compared to the first quarter of 2022, driven by market-related increases in interest rates on new loans, a significant increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and a high level of new loan originations.

The yield on average investments, including cash equivalents, increased 49 basis points compared to the prior year, which also benefitted from rising market interest rates as well as a change in the mix of investment securities and cash equivalents.

The Company’s total cost of funds increased 35 basis points from the year earlier period, as the rate paid on interest-bearing deposits increased 34 basis points and the rate paid on borrowings increased 245 basis points, impacted by the Company transitioning to an overnight wholesale borrowing position between the periods to meet its funding needs.

In order to reduce the amount of overnight wholesale borrowings bearing rising and comparatively high variable interest rates and provide the Company with greater flexibility in managing balance sheet growth and deposit funding, the Company executed a balance sheet repositioning in the first quarter of 2023.

The Company sold certain lower-yielding available-for-sale debt securities with a book value of $786.1 million and recognized a $52.3 million pre-tax realized loss on the sale that negatively impacted earnings by $0.75 per share.

Proceeds from the sale of $733.8 million were redeployed entirely towards paying off existing wholesale borrowings with a cost of funds that was approximately 320 basis points higher than the yield earned on the securities that were sold.

The Company estimates that the loss will be recouped within approximately two years.

The first quarter 2023 provision for credit losses of $3.5 million was $2.6 million higher than the provision for credit losses of $0.9 million during the first quarter of 2022, reflective of a weaker economic outlook combined with an increase in loans outstanding.

Comparatively, in the first quarter of 2022, economic forecasts remained generally stable and loans outstanding grew at a slower rate.

Asset quality remained strong as first quarter 2023 nonperforming and delinquent loan ratios decreased in comparison to the first quarter of 2022, while net charge-offs of $1.5 million remained low at an annualized 0.07% of average loans, but were $1.0 million higher than the $0.5 million in the first quarter of 2022.

Banking noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, were down $0.6 million as compared to the prior year’s first quarter, as the Company implemented certain deposit fee changes, including the elimination of consumer nonsufficient and unavailable funds fees, late in the fourth quarter of 2022.

These changes ensure that the Company continues to provide customers with affordable and competitive banking options.

Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, were up $0.5 million as compared to the prior year’s first quarter, due to a $1.1 million increase in insurance services revenues that were partially offset by declines in employee benefit services and wealth management services revenues.

Noninterest expenses increased $14.2 million, or 14.3%, between the first quarter of 2022 and the first quarter of 2023, primarily due to a $9.8 million increase in salaries and employee benefits driven by increases in merit, severance and incentive-related employee wages, including minimum wage-related compression on the lower end of the Company’s pay scale, acquisition-related and other additions to staffing, higher payroll taxes and higher employee benefit-related expenses.

The remaining net increase in other expense categories were due to various factors including inflationary pressures and incremental expenses associated with operating an expanded franchise subsequent to the Elmira acquisition in the second quarter of 2022.

Net Income and Profitability

As shown in Table 1, net income for the third quarter and September YTD of $48.7 million and $135.6 million, respectively, increased $3.4 million, or 7.4%, as compared to the third quarter of 2021 and decreased $10.6 million, or 7.2%, compared to September YTD 2021.

Earnings per share of $0.90 for the third quarter was $0.07 higher than the third quarter of 2021, while earnings per share for the first nine months of 2022 of $2.49 was $0.19 lower than the first nine months of 2021.

The increases in net income and earnings per share between the quarters were due to increases in net interest income and noninterest revenues and a decrease in fully-diluted average shares outstanding, partially offset by higher noninterest expenses and increases in the provision for credit losses and income taxes.

Operating net income, a non-GAAP measure, of $49.0 million and $142.6 million for the third quarter and September YTD, respectively, increased $3.7 million, or 8.1%, as compared to the third quarter of 2021 and decreased $3.5 million, or 2.4%, compared to September YTD 2021.

Operating earnings per share, a non-GAAP measure, of $0.90 for the third quarter was up $0.07 compared to the third quarter of 2021, while operating earnings per share of $2.62 for the first nine months of 2022 was down $0.06 compared to the first nine months of 2021.

2021 results were enhanced by a net benefit recorded in the provision for credit losses and higher PPP-related revenues than the comparable periods of 2022, which, net of tax, were responsible for a $0.14 decrease in fully-diluted operating earnings per share between the comparable quarters and a $0.45 decrease between the comparable YTD periods.

As shown in Table 1, net income for the first quarter of $5.8 million decreased $41.3 million, or 87.7%, as compared to the first quarter of 2022.

Earnings per share of $0.11 for the first quarter of 2023 decreased $0.75 compared to the first quarter of 2022.

The decrease in earnings per share was primarily due to the impact of the previously mentioned strategic balance sheet repositioning executed during the quarter to provide the Company with greater flexibility in managing balance sheet growth and deposit funding.

During the quarter but prior to the negative developments in the banking industry that occurred in March 2023, the Company sold certain available-for-sale investment securities and used the proceeds to pay down overnight borrowings with rising and comparatively high variable interest rates.

As a result, a $52.3 million pre-tax realized loss on the investment securities sales was recognized during the quarter which negatively impacted GAAP earnings per share by $0.75.

Operating net income, a non-GAAP measure, of $46.8 million for the first quarter decreased $0.5 million, or 1.0%, as compared to the first quarter of 2022.

Operating earnings per share, a non-GAAP measure, of $0.86 for the first quarter was down $0.01 compared to the first quarter of 2022.

See Table 11 for Reconciliation of GAAP to Non-GAAP Measures.

As reflected in Table 1, third quarter net interest income of $110.4 million was up $17.8 million, or 19.2%, from the comparable prior year period.

Net interest income for the first nine months of 2022 increased $29.7 million, or 10.7%, versus the first nine months of 2021.

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

The provision for credit losses for the third quarter and September YTD increased $6.0 million and $23.0 million as compared to the third quarter and first nine months of 2021, respectively.

The second quarter provision for credit losses included $3.9 million of acquisition-related provision for credit losses due to the Elmira acquisition.

Third quarter and year-to-date noninterest revenues were $65.2 million and $195.0 million, respectively, up $0.9 million, or 1.5%, from the third quarter of 2021 and up $12.7 million, or 7.0%, from the first nine months of 2021.

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

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

Noninterest expenses of $108.2 million and $318.4 million for the third quarter and September YTD periods, respectively, reflected an increase of $7.8 million, or 7.7%, from the third quarter of 2021 and an increase of $31.2 million, or 10.9%, from the first nine months of 2021.

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

The YTD increase in noninterest expenses was due to increases in salaries and benefits, acquisition expenses, other expenses, business development and marketing expenses, data processing and communications expenses, legal and professional fees, amortization of intangible assets, acquisition-related contingent consideration adjustments, occupancy and equipment expenses and the absence of a negative litigation accrual expense adjustment.

Excluding acquisition expenses, acquisition-related contingent consideration adjustments and litigation accrual expenses, 2022 operating expenses were $7.3 million, or 7.3%, higher for the third quarter and $26.2 million, or 9.1%, higher for the year-to-date timeframe, in part due to the acquisition of Elmira Savings Bank in the second quarter of 2022 and financial services acquisitions.

The effective income tax rates were 22.0% and 21.6% for the third quarter and YTD 2022, respectively, as compared to 21.1% and 20.9% for the comparable prior year periods.

The effective tax rate in the third quarter of 2021 was driven down by a decrease in the Company’s full year effective tax rate projection.

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

The effective tax rates adjusted to exclude stock-based compensation tax benefits for both YTD periods were 22.0%.

As reflected in Table 1, first quarter net interest income of $111.0 million was up $16.2 million, or 17.0%, from the comparable prior year period.

The improvement was a result of an increase in the tax equivalent yield on average interest-earning assets partially offset by a decrease in average interest-earning assets and increases in the cost and average balance of interest-bearing liabilities.

The provision for credit losses of $3.5 million for the first quarter of 2023 increased $2.6 million as compared to the $0.9 million provision for credit losses in the first quarter of 2022, a result of an increase in loans outstanding between the periods and weaker economic forecasts.

First quarter noninterest revenues were $13.5 million, down $52.2 million, or 79.5%, from the first quarter of 2022.

The decrease was primarily due to the recognition of the previously mentioned $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities associated with the Company’s first quarter 2023 balance sheet repositioning.

Total revenues excluding net realized and unrealized securities gains and losses and gain on debt extinguishment were $176.6 million in the first quarter of 2023, an increase of $16.1 million, or 10.0%, from the prior year’s first quarter.

This increase was driven by a $16.2 million, or 17.0%, increase in net interest income and a $0.5 million, or 1.1%, increase in financial services business revenues, offset, in part, by a $0.6 million, or 3.6%, decrease in banking noninterest revenues.

Noninterest expenses of $114.0 million for the first quarter reflected an increase of $14.2 million, or 14.3%, from the first quarter of 2022.

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

Income tax expense decreased $11.6 million between comparable quarters as pre-tax income decreased $52.9 million, due primarily to the realized loss on the sale of certain available-for-sale securities previously mentioned.

A condensed income statement is as follows:

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Three Months Ended

Nine Months Ended

September 30,

(000’s omitted, except per share data)

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Provision for credit losses

Noninterest revenues

Loss on sales of investment securities

Noninterest revenues excluding loss on sales of investment securities

Noninterest expenses

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Net Interest Income

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

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

As shown in Table 2a, net interest income (with nontaxable income converted to a fully tax-equivalent basis) for the third quarter was $111.5 million, an increase of $18.1 million, or 19.4%, compared to the same period last year.

This was driven by a 35 basis point increase in the average yield on interest-earnings assets and a $1.08 billion increase in average interest-earning assets, partially offset by a nine basis point increase in the average rate paid on interest-bearing liabilities and a $724.5 million increase in average interest-bearing liabilities in comparison to the third quarter of 2021.

As reflected in Table 3, net interest income was favorably impacted by $12.5 million due to the increase in the average yield on interest-earning assets and $8.1 million due to the volume increase in interest-earning assets, partially offset by the unfavorable impacts on net interest income of $2.2 million due to an increase in the average rate paid on interest-bearing liabilities and $0.3 million due to the volume increase in interest-bearing liabilities.

September YTD net interest income (with nontaxable income converted to a fully tax-equivalent basis), as reflected in Table 2b, of $311.4 million, increased $30.1 million, or 10.7%, from the year-earlier period.

The September YTD increase resulted from a $1.24 billion increase in average interest-earning assets and a four basis point increase in the average yield on interest-earning assets, partially offset by an $825.3 million increase in average interest-bearing liabilities and a one basis point increase in the average rate paid on interest-bearing liabilities.

As reflected in Table 3, for September YTD, the volume increase in interest-earning assets and the increase in the average yield on interest-earning assets had favorable impacts on net interest income of $27.6 million and $3.8 million, respectively, partially offset by the volume increase in interest-bearing liabilities and the increase in the average rate paid on interest-bearing liabilities having unfavorable impacts on net interest income of $0.9 million and $0.4 million, respectively.

The net interest margin of 3.03% for the third quarter of 2022 was 29 basis points higher as compared to the third quarter of 2021.

The increase was the result of a 35 basis point increase in the interest-earning asset yield, partially offset by a nine basis point increase in the rate on interest-bearing liabilities.

The net interest margin of 2.88% for the first nine months of 2022 was three basis points higher than the comparable period of 2021.

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

The 35 basis point increase in the average yield on interest-earning assets for the quarter was the result of increases in the average yield on investments and cash equivalents and the average yield on loans.

For the third quarter, the average yield on investments, including cash equivalents, increased 50 basis points and the average yield on loans increased by seven basis points compared to the prior year.

The four basis point increase in the yield on interest-earning assets for the first nine months of 2022 was the result of a 33 basis point increase in the average yield on investments, including cash equivalents, partially offset by a 14 basis point decrease in the average yield on loans as compared to the prior year.

The changes in the loan yields included declines in PPP-related interest income between the periods.

During the third quarter of 2022, the Company recorded $0.5 million of PPP-related interest income, a decrease of $3.9 million from the prior year’s third quarter, while during the first nine months of 2022, the Company recorded $3.2 million of PPP-related interest income, a decrease of $11.9 million from the first nine months of 2021.

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

The average rate on interest-bearing liabilities increased by nine basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits increased four basis points and the average rate paid on external borrowings increased 95 basis points from the comparable prior year period.

For the first nine months of 2022, the average rate on interest-bearing liabilities increased by one basis point from the comparable prior year period as the average rate on interest-bearing deposits decreased one basis point, while the average rate on external borrowings increased 27 basis points.

The changes in the average rates paid on interest-bearing deposits were driven by increases in the interest rates paid on interest checking and money market deposits, while the interest rate paid on time deposits decreased.

The increases in the average cost of borrowings were primarily the result of higher market interest rates and the Company entering into an overnight borrowing position during in the second quarter of 2022.

The third quarter and YTD average balance of investments, including cash equivalents, increased $16.0 million and $742.7 million, respectively, as compared to the corresponding prior year periods.

Investment security maturities, calls and principal payments outpaced purchases during the third quarter while investment security purchases outpaced maturities, calls and principal payments during the YTD period.

The cash equivalents component of average earning assets decreased $2.05 billion and $1.47 billion for the third quarter and YTD periods, respectively, compared to the prior year periods.

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

Average loan balances increased $1.06 billion for the quarter and $496.7 million YTD as compared to the prior year, driven by organic and acquired growth during both periods, including the Elmira acquisition in May 2022, despite declines in average PPP loan balances.

The change in average loan balances for the quarter and YTD periods included a $215.4 million and $300.1 million decrease in average PPP loans, respectively.

Average interest-bearing deposits increased $479.9 million compared to the prior year quarter and $733.7 million compared to the prior YTD period.

The quarterly increase in average interest-bearing deposits was due to increases in all deposit categories, due primarily to large inflows of government stimulus-related deposit funding and the Elmira acquisition in May 2022.

The YTD increase in average interest-bearing deposits was due to increases in savings, interest checking and money market deposits, while time deposits declined.

The average borrowing balance, including borrowings at the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), overnight borrowings at the Federal Reserve Bank of New York (“Federal Reserve”) and FHLB, subordinated notes payable, subordinated debt held by unconsolidated subsidiary trusts and securities sold under agreement to repurchase (customer repurchase agreements), increased $244.5 million and $91.5 million for the quarter and YTD periods, respectively.

The increases in average borrowings from the prior year quarter and YTD periods were primarily due to increases in average overnight borrowings and customer repurchase agreements.

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

Interest income and yields are on a fully tax-equivalent basis (“FTE”) using a marginal income tax rate of 24.1% and 24.2% in 2022 and 2021, respectively.

As shown in Table 2, net interest income (with nontaxable income converted to a fully tax-equivalent basis) for the first quarter was $112.1 million, a $16.4 million, or 17.2%, increase from the same period last year.

The increase resulted from an 82 basis point increase in the yield on average interest-earning assets partially offset by a 50 basis point increase in the rate paid on average interest-bearing liabilities, a $31.8 million decrease in average interest-earnings assets and a $223.5 million increase in average interest-bearing liabilities in comparison to the first quarter of 2022.

As reflected in Table 3, the favorable net interest income impact of the increase in the yield on average interest-earning assets of $28.7 million was partially offset by the unfavorable impacts of the increase in the rate paid on average interest-bearing liabilities of $12.0 million, the volume decrease in average interest-earning assets of $0.2 million and the volume increase in average interest-bearing liabilities of $0.1 million.

The net interest margin of 3.20% for the first quarter of 2023 was 47 basis points higher than the comparable period of 2022.

The higher yield on average interest-earning assets for the quarter was the result of increases in both the yield on average loans and the yield on average investments, including cash equivalents.

The yield on average loans for the first quarter increased by 60 basis points compared to the first quarter of 2022, reflective of market-related increases in interest rates on new loans, a significant increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and a high level of new loan originations.

The first quarter of 2023 yield on average investments, including cash equivalents, increased 49 basis points compared to the prior year, as market interest rates increased, while the average balance of cash equivalents decreased significantly due in part to the funding of strong organic loan growth.

The current quarter’s yield on average investments, excluding cash equivalents, increased 27 basis points, while the yield on average cash equivalents increased 330 basis points compared to the first quarter of 2022.

The first quarter of 2023 rate on average interest-bearing liabilities increased 50 basis points compared to the prior year quarter due to a 34 basis point increase in the rate paid on average interest-bearing deposits, as interest rates on certain interest-bearing deposits were raised in response to market conditions, and a 245 basis point increase in the rate paid on average borrowings.

The increase in the rate paid on average borrowings was primarily the result of the utilization of comparatively higher rate overnight borrowings to fund loan growth, as well as the increase in the rates paid on customer repurchase agreements in response to market conditions.

The Company expects deposit costs to continue to increase to reflect the rapid changes in market interest rates that have occurred over the past year and that the deposit beta will increase over current levels.

The expected increase in deposit beta is reflective of the Company’s strategy to maintain a strong core deposit base and continue to provide competitive offerings to customers.

The Company has been and will be proactive in managing customer relationships with depositors, particularly larger consumer, commercial and municipal customers, as a key component of this strategy.

In addition, the Company expects funding costs to increase due to higher deposit costs and potentially a greater reliance on higher cost wholesale borrowings.

The average book balance of investments in the first quarter, including cash equivalents, decreased $1.53 billion as compared to the corresponding prior year period primarily due to a $903.1 million decrease in average cash equivalents due in part to the funding of strong organic loan growth.

Investment sales, maturities, calls and principal payments outpaced purchases during the first quarter of 2023 as the Company executed a balance sheet repositioning as described previously.

Average loan balances were $1.49 billion greater than the prior year’s first quarter balances with increases in all five loan portfolios due to high levels of organic growth and the impact of the Elmira acquisition.

Average interest-bearing deposits decreased $176.1 million between the first quarter of 2022 and the first quarter of 2023 with declines in money market and interest checking deposits, partially offset by increases in savings and time deposits.

The average borrowing balance, including borrowings at the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), subordinated notes payable and securities sold under agreement to repurchase (customer repurchase agreements), increased $399.6 million compared to the prior year quarter primarily due to a $362.5 million increase in average overnight borrowings to meet the Company’s funding needs.

Overnight borrowings ended the first quarter at $58.4 million, with the significant decrease being attributable to the aforementioned balance sheet repositioning executed by the Company.

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

Interest income and yields are on a fully tax-equivalent basis (“FTE”) using a marginal income tax rate of 24.3% in both 2023 and 2022.

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

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

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

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

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

Quarterly Average Balance Sheet

1 unchanged sentence

Three Months Ended

September 30, 2022

September 30, 2021

(000’s omitted except yields and rates)

Interest-earning assets:

Cash equivalents

Taxable investment securities (1)

Nontaxable investment securities (1)

Loans (net of unearned discount) (2)

Total interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities:

Interest checking, savings, and money market deposits

Time deposits

Customer repurchase agreements

Overnight borrowings

FHLB borrowings

Subordinated notes payable

Total interest-bearing liabilities

Noninterest-bearing liabilities:

Noninterest checking deposits

Other liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest earnings

Net interest spread

Net interest margin on interest-earning assets

Fully tax-equivalent adjustment (3)

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

(2) Includes nonaccrual loans.

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

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

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

Year-to-Date Average Balance Sheet

Nine Months Ended

September 30, 2022

September 30, 2021

March 31, 2023

March 31, 2022

(000’s omitted except yields and rates)

13 unchanged sentences

Subordinated notes payable

Subordinated debt held by unconsolidated subsidiary trusts

Total interest-bearing liabilities

13 unchanged sentences

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

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

Three months ended September 30, 2022

Nine months ended September 30, 2022

versus September 30, 2021

Increase (Decrease) Due to Change in (1)

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

Three months ended March 31, 2023

versus March 31, 2022

Increase (Decrease) Due to Change in (1)

4 unchanged sentences

Nontaxable investment securities

Loans (net of unearned discount)

Total interest-earning assets (2)

5 unchanged sentences

FHLB borrowings

Subordinated debt held by unconsolidated subsidiary trusts

Subordinated notes payable

Total interest-bearing liabilities (2)

6 unchanged sentences

1) general banking services related to loans, including mortgage banking, deposits and other core customer activities typically provided through the branch network and digital banking channels (performed by CBNA);

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

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

3) wealth management services, comprised of trust services (performed by the trust unit within CBNA), broker-dealer and investment advisory products and services (performed by Community Investment Services Inc.

2 unchanged sentences

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

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

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

Noninterest Revenues

Three Months Ended

Nine Months Ended

September 30,

(000’s omitted)

6 unchanged sentences

Other banking revenues

Unrealized (loss) gain on equity securities

Loss on sales of investment securities

Gain on debt extinguishment

Unrealized gain on equity securities

Total noninterest revenues

Noninterest revenues/total revenues

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

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

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

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

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

See Table 11 for Reconciliation of GAAP to Non-GAAP Measures.

As displayed in Table 4, noninterest revenues, excluding unrealized gain (loss) on equity securities, were $65.3 million for the third quarter of 2022 and $195.0 million for the first nine months of 2022.

This represents an increase of $0.9 million, or 1.5%, for the quarter and an increase of $12.8 million, or 7.0%, for the YTD period in comparison to the equivalent 2021 periods.

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

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

Banking noninterest revenue of $18.5 million for the third quarter and $52.9 million for the first nine months of 2022 increased $1.6 million, or 9.7%, and increased $4.8 million, or 10.0%, respectively, as compared to the corresponding prior year periods.

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

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

The Company expects to make modifications to its deposit service charges and fees over the next several quarters in order to better align with industry trends and to ensure the Company continues to provide customers with affordable and competitive banking options.

Employee benefit services revenue decreased $2.0 million, or 6.8%, but increased $2.5 million, or 2.9%, for the three and nine months ended September 30, 2022, respectively, as compared to the equivalent prior year periods.

The decline in quarterly revenues was driven by decreases in employee benefit trust and custodial fees, reflecting the adverse impact from market-related headwinds, while the growth on a YTD basis was primarily driven by incremental revenues from the acquisition of Fringe Benefits Design of Minnesota, Inc.

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

Insurance services revenue was up $2.2 million, or 23.5%, and $6.0 million, or 23.4%, for the third quarter and YTD periods, respectively, driven by organic expansion, as well as the second quarter 2021 acquisition of a Florida-based personal lines insurance agency, the third quarter 2021 acquisition of a Boston-based specialty-lines insurance broker and the first quarter 2022 acquisitions of three other insurance agencies.

Wealth management services revenue was down $0.8 million, or 9.9%, for the third quarter of 2022 and $0.5 million, or 1.9%, for September 2022 YTD as compared to the same time periods of 2021, primarily driven by more challenging investment market conditions.

The ratio of noninterest revenues to operating revenues (FTE basis), as defined in footnote 1 of Table 4 above, was 37.2% for the quarter and 38.8% for the nine months ended September 30, 2022, respectively, versus 41.0% and 39.6% for the comparable periods of 2021.

The decrease for the year-to-date period is a function of a 7.0% increase in adjusted noninterest revenues while adjusted net interest income (FTE basis) increased 10.7%.

The decrease for the quarterly periods is reflective of a 1.5% increase in adjusted noninterest revenues while adjusted net interest income (FTE basis) increased 19.2%.

As displayed in Table 4, noninterest revenues were $13.5 million in the first quarter of 2023.

This represents a decrease of $52.2 million, or 79.5%, for the quarter in comparison to the same 2022 timeframe.

The decrease was primarily a result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities in connection with a strategic balance sheet repositioning executed during the quarter to provide the Company with greater flexibility in managing balance sheet growth and deposit funding.

Additionally, there were decreases in banking noninterest revenue, wealth management services revenue and employee benefit services revenue, partially offset by an increase in insurance services revenue and a gain on debt extinguishment recognized during the first quarter in connection with the early redemption of the Company’s remaining subordinated notes payable with a carrying value of $3.2 million.

Banking noninterest revenue of $16.4 million for the first quarter of 2023 decreased $0.6 million, or 3.6% as compared to the corresponding prior year period.

This year-over-year decrease was primarily driven by decreases in debit interchange and ATM fees and deposit service charges and fees, reflective of fluctuations in annual card-related promotional income and the Company’s implementation of certain deposit fee changes, including the elimination of consumer nonsufficient and unavailable funds fees late in the fourth quarter of 2022, partially offset by increases in other banking revenues and mortgage banking revenues.

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

Employee benefit services revenue decreased $0.2 million, or 0.7%, as compared to the prior year first quarter primarily related to a decline in asset-based fees reflecting the impact from lower financial market valuations.

Wealth management services revenue was down $0.4 million, or 4.5%, as compared to the prior year first quarter primarily driven by more challenging investment market conditions.

Insurance services revenue was up $1.1 million, or 10.7%, for the first quarter of 2023 as compared to the first quarter of 2022, driven primarily by a strong premium market and organic expansion, along with acquired growth between the periods.

The ratio of noninterest revenues to total revenues was 10.8% for the first quarter of 2023, compared to 40.9% for the prior year’s first quarter.

The decrease was primarily the result of the $52.2 million, or 79.5%, decrease in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities, while net interest income increased 17.0%, driven by net interest margin expansion.

The ratio of noninterest revenues to operating revenues (FTE basis), a non-GAAP measure as defined in the table above, was 37.1% for the quarter ended March 31, 2023 versus 40.9% for the equivalent period of 2022.

The decrease is due to a 17.2% increase in adjusted net interest income (FTE basis) driven primarily by net interest margin expansion, while adjusted noninterest revenues decreased 0.1% driven by the factors noted above.

Noninterest Expenses

2 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(000’s omitted)

Salaries and employee benefits

Occupancy and equipment

Data processing and communications

Occupancy and equipment

Amortization of intangible assets

1 unchanged sentence

Business development and marketing

Litigation accrual

Acquisition expenses

Acquisition-related contingent consideration adjustment

Total noninterest expenses

Noninterest expenses/average assets

Operating expenses (1) /average assets

Efficiency ratio (2)

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

Efficiency ratio (GAAP)

Efficiency ratio (non-GAAP) (2)

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

See Table 11 for Reconciliation of GAAP to Non-GAAP Measures.

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

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

See Table 11 for Reconciliation of GAAP to Non-GAAP Measures.

As shown in Table 5, the Company recorded noninterest expenses of $108.2 million and $318.4 million for the third quarter and YTD periods of 2022, respectively, representing increases of $7.8 million, or 7.7%, and $31.2 million, or 10.9%, from the prior year periods, respectively.

Acquisition expenses and acquisition-related contingent consideration adjustments of $0.4 million and $5.1 million are included in third quarter and YTD 2022 noninterest expenses, respectively.

Salaries and employee benefits increased $3.3 million, or 5.3%, and $14.8 million, or 8.3%, for the third quarter and YTD periods of 2022, respectively, as compared to the corresponding periods of 2021.

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

The remaining change to noninterest expenses are attributed to occupancy and equipment (up $0.5 million for the quarter and up $0.3 million YTD), data processing and communications (up $1.2 million for the quarter and $2.3 million YTD), amortization of intangible assets (up $0.1 million for the quarter and $1.1 million YTD), legal and professional fees (down $0.2 million for the quarter and up $1.3 million YTD), business development and marketing (up $1.2 million for the quarter and $2.9 million YTD) and other expenses (up $1.1 million for the quarter and $3.4 million YTD).

Noninterest expenses were generally up due to the increase in the level of business activities and incremental expenses due to the end of most pandemic-related restrictions as well as the costs associated with operating an expanded franchise subsequent to the Elmira and financial services acquisitions, including increases in business development and marketing expenses, insurance and travel-related expenses.

As shown in Table 5, the Company recorded noninterest expenses of $114.0 million for the first quarter of 2023, representing an increase of $14.2 million, or 14.3%, from the prior year’s first quarter.

The increase in operating expenses was attributable to a $9.8 million, or 16.0%, increase in salaries and employee benefits, a $2.4 million, or 58.4%, increase in other expenses, a $1.6 million, or 43.8%, increase in legal and professional fees, a $0.5 million, or 3.7%, increase in data processing and communications expenses, a $0.1 million, or 5.8%, increase in business development and marketing and a $0.1 million, or 0.7%, increase in occupancy and equipment expenses.

The increases in these expenses were partially offset by a $0.1 million, or 1.7%, decrease in the amortization of intangible assets and a $0.2 million decrease in acquisition-related expenses.

The increase in salaries and benefits expense was driven by increases in merit, severance and incentive-related employee wages, including minimum wage-related compression on the lower end of the Company’s pay scale, acquisition-related and other additions to staffing, higher payroll taxes and higher employee benefit-related expenses.

Other expenses were up due to increases in insurance and travel-related expenses along with general inflationary pressures and the incremental expenses associated with operating an expanded franchise subsequent to the Elmira acquisition in the second quarter of 2022.

The higher insurance costs included in other expenses reflected larger FDIC insurance expenses due in part to an increase in the base assessment rate effective beginning on January 1, 2023.

Legal and professional fees were up primarily due to an increase in certain legal fees including increases in legal and professional fees associated with anticipated product launches in the employee benefit services business.

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

The slight increase in occupancy and equipment expense was driven by inflationary pressures, partially offset by branch office consolidations between the periods.

The Company’s efficiency ratio (as defined in the table above) was 59.3% for the third quarter, 2.4 percentage points favorable to the comparable quarter of 2021.

This resulted from operating expenses (as described above) increasing 7.5%, while operating revenues (as described above) increased 11.8%.

The efficiency ratio of 60.0% for the first nine months of 2022 was 0.1 percentage point favorable compared to the first nine months of 2021 due to 9.0% higher operating expenses (as described above), while operating revenues (as described above) increased by 9.3%.

Current year operating expenses, excluding amortization of intangible assets, acquisition expenses, acquisition-related contingent consideration adjustments and litigation accrual expenses, as a percentage of average assets increased 0.10 percentage points versus the prior year quarter and increased 0.07 percentage points versus the prior year-to-date period as operating expenses (as defined above) increased at a faster rate than average assets.

Operating expenses (as defined above) increased 7.5% for the quarter and increased 9.0% for the year-to-date period, while average assets increased 3.5% for the quarter and increased 6.1% for the year-to-date period as the strong growth of the book value of earning assets was partially offset by a significant decline in the pre-tax market value adjustment on the investment portfolio.

The third quarter and YTD 2022 effective income tax rates were 22.0% and 21.6%, respectively, as compared to 21.1% and 20.9% for the comparable periods of 2021.

The effective tax rate in the third quarter of 2021 was driven down by a decrease in the Company’s full year effective tax rate projection.

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

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

The effective tax rates adjusted to exclude stock-based compensation tax benefits for the third quarter and YTD 2022 were both 22.0%, as compared to 21.1% and 22.0%, for the comparable periods of 2021, respectively.

Investment Securities

The carrying value of investment securities (including unrealized gains and losses) was $5.23 billion at the end of the third quarter, an increase of $248.2 million from December 31, 2021 and $823.9 million higher than September 30, 2021.

The carrying value of cash equivalents was $30.0 million at the end of the third quarter, a decrease of $1.69 billion from December 31, 2021 and $2.07 billion from September 30, 2021.

The book value of investment securities (excluding unrealized gains and losses) of $6.19 billion at the end of the third quarter increased $1.17 billion from December 31, 2021 and increased $1.74 billion from September 30, 2021.

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

Treasury and agency securities with an average yield of 1.62%, $34.6 million of government agency mortgage-backed securities with an average yield of 2.75%, and $182.0 million of obligations of state and political subdivisions with an average yield of 3.96%.

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

These additions were partially offset by $212.4 million of investment maturities, calls and principal payments during the first nine months of 2022.

Additionally, there was $14.8 million of net accretion on investment securities during the first nine months of 2022.

The effective duration of the investment securities portfolio was 6.5 years at the end of the third quarter of 2022, as compared to 7.5 years at the end of 2021 and 7.6 years at the end of the third quarter of 2021.

The Company’s GAAP efficiency ratio was 91.6% for the first quarter of 2023, 29.4 percentage points unfavorable to the comparable quarter of 2022.

This resulted from total revenues decreasing 22.4%, primarily due to a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the quarter, while total noninterest expenses increased 14.3% due to the factors noted above.

Annualized current quarter noninterest expenses as a percentage of average assets increased 41 basis points versus the first quarter of the prior year as noninterest expenses increased 14.3% due to the factors noted above and average assets decreased 1.5% primarily due to the aforementioned sale of certain available-for-sale securities during the quarter.

The Company’s non-GAAP efficiency ratio (as defined in the table above) was 62.5% for the first quarter of 2023, 2.9 percentage points unfavorable to the comparable quarter of 2022.

This resulted from operating expenses (a non-GAAP measure as described above) increasing 15.2%, while operating revenues (a non-GAAP measure as described above) increased by a lesser 10.0%.

Current year operating expenses, excluding intangible amortization and acquisition expenses, as a percentage of average assets increased 42 basis points versus the prior year first quarter.

First quarter operating expenses (as defined above) increased 15.2% year-over-year, while average assets decreased 1.5% primarily due to the aforementioned sale of certain available-for-sale securities during the quarter.

The first quarter 2023 effective income tax rate was 16.9%, compared to 21.4% for the first quarter of 2022.

The decrease in the rate is primarily attributable to a higher proportion of benefit derived from stock based compensation activity in relation to total income taxes during the first quarter of 2023.

The Company recorded a $0.3 million and $0.6 million reduction in income tax expense associated with stock-based compensation tax benefits for the first quarter of 2023 and 2022, respectively, while total income tax expense was $1.2 million and $12.8 million for the same respective periods.

The effective tax rates excluding the stock-based compensation tax benefits were 21.4% for the first quarter of 2023 and 22.3% for the first quarter of 2022, a decrease of 0.9 percentage points primarily due to a decrease in the full-year 2023 pre-tax income projection as a result of the loss on investment security sales recognized in the first quarter of 2023 in connection with the Company’s balance sheet repositioning.

The carrying value of investment securities (including unrealized gains and losses on available-for-sale securities) was $4.63 billion at the end of the first quarter, a decrease of $684.1 million, or 12.9%, from December 31, 2022 and $1.20 billion, or 20.6%, lower than March 31, 2022.

The carrying value of cash equivalents was $28.3 million at the end of the first quarter, an increase of $9.9 million, or 54.0%, from December 31, 2022 and a decrease of $812.3 million from March 31, 2022, as the Company shifted the composition of earning assets from cash equivalents to loans between the periods.

The book value (excluding unrealized gains and losses) of investment securities decreased $821.9 million from December 31, 2022 and decreased $1.22 billion from March 31, 2022.

During the first quarter of 2023, the Company purchased $3.3 million of government agency mortgage-backed securities with an average yield of 5.17%, which the Company classified as held-to-maturity.

These additions were offset by proceeds of $733.8 million from the sale of certain available-for-sale U.S.

Treasury securities associated with the first quarter of 2023 balance sheet repositioning and $20.5 million from investment maturities, calls, and principal payments during the first three months of 2023.

Additionally, there was $10.3 million of net accretion on investment securities during the first quarter of 2023.

The effective duration of the investment securities portfolio was 6.8 years at the end of the first quarter of 2023, as compared to 6.3 years at the end of 2022 and 6.9 years at the end of the first quarter of 2022.

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

At September 30, 2022, the portfolio had a $964.9 million net unrealized loss, as compared to a $44.9 million net unrealized loss at December 31, 2021 and a $47.5 million net unrealized loss at September 30, 2021.

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

At March 31, 2023, the investment portfolio (excluding held-to-maturity investment securities) had a $385.0 million net unrealized loss, a $137.7 million increase in value from the $522.7 million net unrealized loss at December 31, 2022 and an $18.7 million increase in value from the $403.7 million net unrealized loss at March 31, 2022.

These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases, sales, maturities and reclassifications that have occurred over the past 12 months and the recognition of the loss on sales of available-for-sale investment securities related to the aforementioned balance sheet repositioning.

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

Investment Securities

September 30,

(000’s omitted)

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Total available-for-sale portfolio

Held-To-Maturity Portfolio:

Treasury and agency securities

Government agency mortgage-backed securities

Total held-to-maturity portfolio

Equity and Other Securities:

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Total investments

Loans ended the third quarter at $8.54 billion, an increase of $1.26 billion, or 17.3%, from one year earlier and an increase of $1.17 billion, or 15.9%, from the end of 2021.

The increase during the last twelve months was driven by increases in all loan categories, including consumer mortgage, business lending, consumer indirect, home equity and consumer direct loans, due to the Elmira acquisition and net organic growth, despite a $156.2 million decrease in PPP loans due to loan forgiveness activities.

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

The business lending portfolio increased $402.2 million, or 13.0%, from September 30, 2021 and increased $418.5 million, or 13.6%, from December 31, 2021, including $125.3 million of loans acquired from Elmira in the second quarter of 2022.

The increase in the business lending portfolio was driven by the Elmira acquisition and organic growth despite decreases in PPP loans of $156.2 million from September 30, 2021 and $82.0 million from December 31, 2021.

Loans ended the first quarter at $8.98 billion, $172.9 million, or 2.0%, higher than December 31, 2022 ending loans and $1.56 billion, or 21.0%, higher than March 31, 2022.

The business lending portfolio increased $645.4 million, or 20.8%, from March 31, 2022, driven by net organic growth and $125.3 million of loans acquired from Elmira.

The portfolio increased $102.3 million, or 2.8%, from December 31, 2022, which reflected further organic growth.

Growth in commercial mortgages drove the majority of the increase between both periods, in particular commercial real estate non-owner occupied and commercial real estate multi-family followed by commercial real estate owner occupied, along with increases in commercial and industrial loans and lines of credit.

The increases in these segments are reflective of continued demand for multi-family housing, expansion of internal resources and proactive business development in the Company’s market areas.

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

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

Consumer mortgages increased $504.5 million, or 20.4%, from one year ago and increased $419.4 million, or 16.4%, from December 31, 2021, including $271.4 million of loans acquired from Elmira in the second quarter of 2022.

In addition to the Elmira acquisition, the increase in consumer mortgages was driven by refinance activities late last year and early this year, the Company’s competitive product offerings and business development efforts, in addition to strong housing demand throughout the past twelve months.

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

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

Home equity loans increased $37.6 million, or 9.5%, from one year ago, and increased $35.0 million, or 8.8%, from December 31, 2021, including $18.4 million of loans acquired from Elmira in the second quarter of 2022.

Consumer installment loans, both those originated directly in the branches (referred to as “consumer direct”) and indirectly in automobile, marine and other recreational vehicle dealerships (referred to as “consumer indirect”), increased $316.7 million, or 23.9%, from one year ago and increased $297.1 million, or 22.1%, from December 31, 2021, including $21.9 million of loans acquired from Elmira in the second quarter of 2022.

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

Consumer mortgages increased $427.1 million, or 16.5%, from one year ago, driven by organic growth and $271.4 million of loans acquired from Elmira, and increased $7.2 million, or 0.2%, from December 31, 2022, reflective of further organic growth.

Over the past year the Company produced net organic growth in the consumer mortgage segment due to refinancing activities in early 2022, combined with the Company’s competitive product offerings and business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets.

Home equity loans increased $33.7 million, or 8.5%, from one year ago, including $18.4 million of loans acquired from Elmira, and decreased $2.0 million, or 0.5%, from December 31, 2022, with rising prime rates having some impact on utilization of lines of credit.

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine and recreational vehicle dealerships (referred to as “consumer indirect”), increased $453.8 million, or 34.2%, from one year ago, including $21.9 million of loans acquired from Elmira, and increased $65.4 million, or 3.8%, from December 31, 2022.

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

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

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

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

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

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

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

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

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

The allocation is not indicative of the specific amount of future net charge-offs that will be incurred in each of the loan categories, nor should it be taken as an indicator of future loss trends.

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

As shown in Table 7, the total allowance for credit losses at the end of the third quarter was $60.4 million, an increase of $10.9 million, or 21.9%, from one year earlier and an increase of $10.5 million, or 21.0%, from the end of 2021, driven primarily by significant loan growth during the intervening period.

As shown in Table 7, total allowance for credit losses at the end of the first quarter was $63.2 million, up $13.0 million, or 26.0%, from one year earlier and up $2.1 million, or 3.5%, from the end of 2022.

Allowance for Credit Losses by Loan Type

September 30, 2022

March 31, 2023

December 31, 2022

September 30, 2021

March 31, 2022

(000’s omitted except for ratios)

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Consumer direct

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

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

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

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

The unallocated allowance of $1.0 million at March 31, 2023 was consistent with December 31, 2022 and March 31, 2022.

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

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

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

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

September 30,

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

Allowance for credit losses/total loans

7 unchanged sentences

Consumer direct

Net charge-offs during the third quarter of 2022 were $0.4 million, a decrease of $1.0 million compared to the third quarter of 2021.

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

The total net charge-off ratio (net charge-offs annualized as a percentage of average loans outstanding for the quarter) for the third quarter was 0.02%, seven and five basis points lower than the ratios for the fourth and third quarters of 2021, respectively.

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

Other real estate owned (“OREO”) at September 30, 2022 was $0.5 million.

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

At September 30, 2022, OREO consisted of eight residential properties with a total value of $0.5 million.

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

Approximately 15% of the nonperforming loans at September 30, 2022 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type.

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

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

These borrowers had successfully restored all past due payment to current status, resumed their pre-forbearance payment obligations for a period of at least nine months, and demonstrated sufficient repayment capacity and cash reserves to be reclassified to accruing status.

Approximately 77% of nonperforming loans at September 30, 2022 were comprised of consumer mortgages.

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

Additionally, strong economic conditions prior to COVID-19 and the generally positive economic recovery following, including low unemployment levels, have positively impacted consumers and resulted in generally more favorable nonperforming consumer mortgage ratios throughout the past few years.

The net charge-offs during the first quarter of 2023 were $1.5 million, $1.0 million higher than the first quarter of 2022.

All portfolios with the exception of consumer mortgage experienced higher charge-off levels in the first quarter of 2023 compared to the first quarter of 2022.

The total net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the first quarter of 2023 was 0.07%, four basis points higher than the first quarter of 2022, but two basis points below the 0.09% for the fourth quarter of 2022.

Net charge-off ratios for the first quarter of 2023 for the business lending, consumer mortgage and home equity portfolios were below the Company’s average for the trailing eight quarters, while the net charge-off ratio for the consumer indirect and consumer direct portfolios were above the Company’s average for the trailing eight quarters.

Economic conditions, while weaker, are relatively stable with the unemployment rate in particular remaining low and supporting the continued historically low levels of net charge-offs experienced by the Company.

Other real estate owned (“OREO”) at March 31, 2023 was $0.5 million.

This is consistent with the amount at December 31, 2022 and $0.1 million higher than the balance as of March 31, 2022.

At March 31, 2023, OREO consisted of eight residential properties with a total value of $0.5 million.

This compares to seven residential properties with a total value of $0.5 million at December 31, 2022, and five residential properties with a total value of $0.4 million at March 31, 2022.

Approximately 13% of the nonperforming loans at March 31, 2023 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type.

The level of nonperforming business loans decreased from the prior year as certain business lending relationships returned to accrual status, due in part to the stabilization of business conditions within the recreational and lodging industry within the Company’s market area.

Approximately 79% of nonperforming loans at March 31, 2023 were comprised of consumer mortgages.

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

Although economic forecasts are weaker, the unemployment rate remains low and these conditions have contributed to strong credit performance in the consumer mortgage loan segment.

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

The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 186% at the end of the third quarter, as compared to 110% at year-end 2021 and 73% at September 30, 2021.

The increase in this ratio between the annual quarterly periods was primarily driven by the decrease in nonperforming business loans noted above combined with a $10.9 million increase in the allowance for credit losses.

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

The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 187% at the end of the first quarter, as compared to 183% at year-end 2022 and 139% at March 31, 2022.

The increase in this ratio between the annual quarterly periods was primarily driven by a higher allowance for credit losses due to growth in total loan balances and a weaker economic forecast, combined with a decrease in nonperforming business loan levels.

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

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

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

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

Delinquent loans (30 days past due through nonaccruing) as a percent of total loans was 0.71% at the end of the third quarter, 29 basis points below the 1.00% at year-end 2021 and 57 basis points below the 1.28% at September 30, 2021.

The business lending delinquency ratio at the end of the third quarter of 0.17% was 80 basis points below the level of 0.97% at December 31, 2021 and 155 basis points below the level of 1.72% at September 30, 2021, largely attributable to the reclassification of certain business loans’ status from nonaccrual to accruing during the fourth quarter of 2021 and first quarter of 2022.

The delinquency ratio for the home equity portfolio decreased as compared to the levels at both December 31, 2021 and September 30, 2021, while consumer installment and consumer mortgage increased slightly relative to those same periods.

Prediction of future delinquency and credit loss performance is difficult, because although, until recently, economic growth had been above average for most of 2021 and the unemployment rate remains low, there continues to be uncertainty regarding the economic fallout created by supply chain constraints and inflationary pressures, as well as a rising interest rate environment.

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

The Company recorded a $5.1 million provision for credit losses in the third quarter of 2022, including a $0.1 million net benefit related to off-balance sheet credit exposures.

The third quarter provision for credit losses was $6.0 million higher than the equivalent prior year period’s net benefit in the provision for credit losses of $0.9 million, which was reflective of an economic recovery related to the cessation of most pandemic-related restrictions and included the continuation of elevated real estate and vehicle collateral values, resulting in a release of reserves in that quarter.

The allowance for credit losses of $60.4 million as of September 30, 2022 increased $10.5 million compared to December 31, 2021 and increased $10.9 million compared to September 30, 2021, due in part to increases in non-PPP loans outstanding, including $437.0 million of loans acquired from Elmira in the second quarter of 2022, combined with weaker economic forecasts during the third quarter of 2022.

The allowance for credit losses to total loans ratio was 0.71% at September 30, 2022, an increase of three basis points from the levels at both December 31, 2021 and September 30, 2021.

Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 0.73% at the end of the first quarter of 2023, 16 basis points below the year-end 2022 ratio of 0.89% and 11 basis points below the March 31, 2022 ratio of 0.84%.

The business lending delinquency ratio at the end of the first quarter was 14 basis points below the level at December 31, 2022 and 41 basis points below the level at March 31, 2022, due to the aforementioned return of certain business lending relationships to accrual status amid a stable business environment in the Company’s market area.

The delinquency rates for the consumer mortgage, consumer indirect, consumer direct and home equity portfolios all increased as compared to the levels at March 31, 2022, however, all portfolio segments decreased as compared to their levels at December 31, 2022.

The Company recorded a $3.5 million provision for credit losses in the first quarter of 2023.

The first quarter provision for credit losses was $2.6 million higher than the equivalent prior year period’s provision for credit losses of $0.9 million, which was mostly driven by a stable economic forecast and smaller level of net loan growth during that period.

The allowance for credit losses of $63.2 million as of March 31, 2023 increased $13.0 million from the level one year ago.

The current quarter provision for credit losses is reflective of weaker economic forecasts and an increase in loan balances.

The allowance for credit losses to total loans ratio was 0.70% at March 31, 2023, two basis points higher than the level at March 31, 2022 and one basis point higher than the level at December 31, 2022.

Refer to Note E:

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

As of September 30, 2022, the net purchase discount related to the $1.28 billion of remaining non-PCD acquired loan balances was approximately $25.6 million, or 1.99% of that portfolio.

As shown in Table 9, average deposits of $13.33 billion in the third quarter were $830.9 million, or 6.6%, higher than the third quarter of 2021, primarily due to larger than anticipated net inflows of funds related to government stimulus and PPP programs in 2021 and the addition of acquired Elmira deposit liabilities during the second quarter of 2022.

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

Total average deposit balances increased $502.8 million, or 3.9%, from the fourth quarter of last year, primarily due to the addition of acquired Elmira deposit liabilities between the periods.

Average noninterest checking deposits as a percentage of average total deposits was 31.4% in the third quarter compared to 30.7% in the third quarter of 2021 and the fourth quarter of last year.

Non-maturity deposits (noninterest checking, interest checking, savings and money markets) represent 92.8% of the Company’s average deposit funding base during the third quarter of 2022, while time deposits represent 7.2% of total average deposits.

The quarterly average cost of deposits was 0.11% for the third quarter of 2022, compared to 0.08% for the fourth quarter of 2021 and 0.09% in the third quarter of 2021, reflective of increases in the interest rates paid on interest checking and money market deposits, while the interest rate paid on time deposits decreased.

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

Average nonpublic fund deposits for the third quarter of 2022 increased $839.6 million, or 7.5%, versus the fourth quarter of 2021 and increased $983.5 million, or 8.9%, versus the year-earlier period.

Average public fund deposits for the third quarter decreased $336.8 million, or 20.2%, from the fourth quarter of 2021 and decreased $152.6 million, or 10.3%, from the third quarter of 2021.

Average public fund deposits as a percentage of total average deposits decreased from 11.9% in the third quarter of 2021 to 10.0% in the third quarter of 2022 .

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

As of March 31, 2023, the net purchase discount related to the $1.17 billion of remaining non-PCD loan balances acquired from prior period acquisitions was approximately $23.4 million, or 2.0% of that portfolio.

As shown in Table 9, average deposits of $12.97 billion in the first quarter were $100.8 million, or 0.8%, lower than the first quarter of 2022.

Total average deposit balances decreased $211.5 million, or 1.6%, from the fourth quarter of last year, while on an ending basis total deposits increased $98.4 million, or 0.8%, from December 31, 2022.

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

Average noninterest checking deposits as a percentage of average total deposits was 31.2% in the first quarter compared to 30.4% in the first quarter of 2022 and 31.9% in the fourth quarter of last year.

Average non-maturity deposits (noninterest checking, interest checking, savings and money markets) represented 92.6% of the Company’s average deposit funding base in the first quarter of 2023, while time deposits represented 7.4% of total average deposits.

The quarterly average cost of deposits was 0.31% for the first quarter of 2023, compared to 0.08% in the first quarter of 2022, reflective of the increase in the average interest rate paid on interest bearing deposits as interest rates on certain interest-bearing deposits were raised in response to market conditions.

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

The Company’s deposit base is well diversified across customer segments, which as of March 31, 2023 is comprised of approximately 63% consumer, 25% business and 12% municipal, and broadly dispersed with an average consumer deposit account balance of approximately $12,000 and average business deposit relationship of approximately $60,000, while the Company’s total average deposit account balance is under $20,000.

In addition, at the end of the quarter, 74% of the Company’s total deposit balances were in checking and savings accounts and the weighted-average age of the Company’s non-maturity deposit accounts was approximately 15 years.

As of March 31, 2023, the Company’s total uninsured deposits, net of collateralized deposits, is estimated at approximately $2.2 billion .

Average nonpublic fund deposits for the first quarter of 2023 decreased $301.2 million, or 2.5%, versus the fourth quarter of 2022 and increased $188.8 million, or 1.7%, versus the year-earlier period.

Average public fund deposits for the first quarter increased $89.7 million, or 6.7%, from the fourth quarter of 2022 primarily due to the seasonal receipt of taxes and decreased $289.6 million, or 16.8%, from the first quarter of 2022, due in part to municipalities deploying elevated federal funding received during the pandemic.

Average public fund deposits as a percentage of total average deposits decreased from 13.2% in the first quarter of 2022 to 11.0% in the first quarter of 2023.

Quarterly Average Deposits

September 30,

(000’s omitted)

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Total deposits

Borrowings, excluding securities sold under agreement to repurchase, at the end of the third quarter of 2022 totaled $142.5 million.

This was $137.4 million higher than borrowings at December 31, 2021 and $136.3 million above the level at the end of the third quarter of 2021.

The increases were primarily due to an increase in overnight borrowings of $119.8 million to support the funding of strong loan growth and $17.6 million of FHLB borrowings acquired from the Elmira acquisition during the second quarter of 2022.

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

Customer repurchase agreements were $352.8 million at the end of the third quarter of 2022, an increase of $28.1 million and $36.0 million from their levels at December 31, 2021 and September 30, 2021, respectively.

Borrowings, excluding securities sold under agreement to repurchase, at the end of the first quarter of 2023 totaled $75.7 million.

This was $715.4 million, or 90.4%, lower than borrowings at December 31, 2022 and $70.5 million above the level at the end of the first quarter of 2022.

The increase from the prior year first quarter was primarily due to an increase in overnight borrowings of $58.4 million to support the funding of loan growth and an increase in other FHLB borrowings of $15.4 million primarily related to borrowings assumed in the Elmira acquisition during the second quarter of 2022.

The decrease from the fourth quarter of 2022 was primarily related to a decrease in overnight borrowings of $710.0 million, as the Company utilized proceeds from its first quarter balance sheet repositioning to pay down these borrowings.

Additionally, there was a decrease in other FHLB borrowings of $2.2 million and the early redemption of the remaining acquired subordinated notes payable that had a carrying value of $3.2 million.

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

Customer repurchase agreements were $304.6 million at the end of the first quarter of 2023, $42.0 million lower than December 31, 2022 and $4.1 million higher than March 31, 2022.

Shareholders’ Equity and Regulatory Capital

Total shareholders’ equity was $1.46 billion at the end of the third quarter, down $639.6 million from the balance at December 31, 2021.

The decrease was driven by $695.7 million of other comprehensive loss, net of tax, dividends declared of $70.2 million and common stock repurchased of $16.4 million, partially offset by net income of $135.6 million, net activity under the Company’s employee stock plan of $1.6 million, and $5.5 million recognized from employee stock options earned.

The other comprehensive loss, net of tax, was comprised of a $696.5 million decrease in the after-tax market value adjustment on the available-for-sale investment portfolio due to a significant amount of securities being purchased and a meaningful upward movement in market interest rates between the periods, partially offset by a positive $0.8 million adjustment to the funded status of the Company’s retirement plans.

Over the past 12 months, total shareholders’ equity decreased $608.8 million, as a decrease in the market value adjustment on investments, dividends declared and common stock repurchase activity more than offset net income, the issuance of common stock in association with the employee stock plan and the Company’s benefit plans, and the change in the funded status of the Company’s defined benefit pension and other postretirement plans.

The dividend payout ratio (dividends declared divided by net income) for the first nine months of 2022 was 51.8%, compared to 46.8% for the nine months ended September 30, 2021.

Dividends declared for the first nine months of 2022 increased 2.7% compared to the first nine months of 2021, as the Company’s quarterly dividend per share was raised from $0.43 to $0.44 in the third quarter of 2022, while net income decreased 7.2% versus the equivalent year-to-date period due to increases in the provision for credit losses, acquisition-related provision for credit losses and noninterest expenses, including a $4.9 million increase in acquisition-related noninterest expenses, partially offset by increases in net interest income and noninterest revenues.

Total shareholders’ equity of $1.63 billion at the end of the first quarter of 2023 represents an increase of $82.3 million from the balance at December 31, 2022.

The increase was driven by $108.4 million of other comprehensive income, net of tax, net income of $5.8 million, $2.3 million recognized from employee stock options earned and net activity under the Company’s employee stock plans of $0.4 million, partially offset by dividends declared of $23.7 million and common stock repurchased of $10.9 million.

The other comprehensive income, net of tax, was comprised of a $108.7 million increase in the net unrealized loss on investments securities primarily related to increases in the after-tax market value adjustment on the available-for-sale investment portfolio as medium and long-term market interest rates decreased between the periods, partially offset by a negative $0.3 million adjustment to the funded status of the Company’s retirement plans.

Over the past 12 months, total shareholders’ equity decreased $218.1 million, as a decrease in the after-tax market value adjustment on investments, dividends declared, common stock repurchase activity and the change in the funded status of the Company’s defined benefit pension and other postretirement plans more than offset net income and the issuance of common stock in association with the employee stock plans.

The dividend payout ratio (dividends declared divided by net income) for the first quarter of 2023 was 409.1%, compared to 49.4% for the first quarter of 2022.

Excluding the after-tax impact of the loss on sales of investment securities, the first quarter of 2023 dividend payout ratio was 50.5%.

First quarter dividends declared increased 2.1% versus one year earlier, as the Company’s quarterly dividend per share was raised from $0.43 to $0.44 in the third quarter of 2022, while net income decreased 87.7% over the prior year period, primarily due to the loss on investment security sales recognized in the first quarter of 2023.

The 2022 dividend increase marked the Company’s 30 th consecutive year of increased dividend payouts to common shareholders.

Additionally, the number of common shares outstanding decreased 0.4% over the last twelve months, as common stock repurchases outweighed issuance activity in the Company’s employee stock plans.

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

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

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

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

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

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

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

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

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

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

The required capital conservation buffer is 2.5% as of March 31, 2023 and December 31, 2022.

Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer as of March 31, 2023 and December 31, 2022, the Company and the Bank must maintain:

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

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

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

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

September 30, 2022

As of March 31, 2023 and December 31, 2022, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”.

As of March 31, 2023 and December 31, 2022, the regulatory capital ratios for the Company and Bank are presented below.

Regulatory Ratios

March 31, 2023

December 31, 2022

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Common equity Tier 1 capital ratio

The Company’s Tier 1 leverage ratio was 8.78% at the end of the third quarter, down 31 basis points from year-end 2021 and 44 basis points below its level one year earlier.

The decrease in the Tier 1 leverage ratio in comparison to December 31, 2021 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income, increasing 1.2%, as the impact of net earnings retention outweighed the intangible assets added from the Elmira acquisition and share repurchases, while average assets, excluding intangibles and the market value adjustment on investments, increased 4.8%, primarily due to strong organic loan growth and the Elmira acquisition.

The Tier 1 leverage ratio decreased compared to the prior year’s third quarter as shareholders’ equity, excluding intangibles and other comprehensive income, increased 2.9%, as the impact of earnings retention outweighed Elmira acquisition-related intangible assets and share repurchases, while average assets excluding intangibles and the market value adjustment on investments, increased 8.1% primarily due to continued inflows of customer deposits, organic loan growth and the acquisition of Elmira.

The net tangible equity-to-assets ratio (a non-GAAP measure) of 4.08% decreased 4.61 percentage points from December 31, 2021 and decreased 4.51 percentage points versus September 30, 2021 (See Table 10 for Reconciliation of Quarterly GAAP to Non-GAAP Measures).

The decrease in the net tangible equity to net tangible assets ratio (non-GAAP) from one year prior was primarily driven by a $644.8 million, or 51.8%, decrease in tangible equity due to the decline in the after-tax market value adjustment on available-for-sale investment securities and a $41.1 million net increase in intangible assets due primarily to the Elmira acquisition and a $227.5 million, or 1.6%, increase in tangible assets due to the Elmira acquisition and net inflows of deposits.

The decrease in the net tangible equity to net tangible assets ratio (non-GAAP) from the fourth quarter of 2021 was driven by a $679.8 million decrease in tangible equity due to the impact of the Elmira acquisition, the purchase of securities in late 2021 and early 2022 and higher market interest rates on the after-tax market value adjustment on available-for-sale investment securities, while tangible assets increased $1.7 million.

The Company’s Tier 1 leverage ratio, a primary measure of regulatory capital for which 5% is the requirement to be “well-capitalized”, was 9.06% at the end of the first quarter, up 27 basis points from December 31, 2022 and 3 basis points below its level one year earlier.

The increase in the Tier 1 leverage ratio in comparison to December 31, 2022 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income or loss items, decreasing 1.8%, primarily as a result of an increase in common share repurchases, while average assets, excluding intangibles and the market value adjustment on investments, decreased 4.7%, primarily due to the impact from the Company’s first quarter balance sheet repositioning.

The Tier 1 leverage ratio decreased compared to the prior year’s first quarter as shareholders’ equity, excluding intangibles and other comprehensive income or loss items, increased 0.1% as the impact of net earnings retention outweighed the intangible assets added from the Elmira acquisition and share repurchases, while average assets, excluding intangibles and the market value adjustment, increased 0.4% primarily due to strong organic loan growth and the Elmira acquisition.

The shareholders’ equity-to-assets ratio was 10.71% at the end of the first quarter of 2023 compared to 9.80% at December 31, 2022 and 11.85% at March 31, 2022.

The tangible equity-to-assets ratio (a non-GAAP measure) of 5.41% increased 0.77 percentage points from December 31, 2022 and decreased 1.57 percentage points versus March 31, 2022 (see Table 11 for Reconciliation of Quarterly GAAP to Non-GAAP Measures).

The decrease in the tangible equity-to-net assets ratio (non-GAAP) from one year prior was primarily driven by a $254.6 million, or 24.6%, decrease in tangible equity due to the decline in accumulated other comprehensive income related to the Company’s investment securities portfolio and a $37.9 million net increase in intangible assets primarily driven by the Elmira acquisition, partially offset by a $406.4 million, or 2.7%, decrease in tangible assets due primarily to the sale of $786.1 million of available-for-sale investment securities.

The increase in the net tangible equity-to-net assets ratio (non-GAAP) from December 31, 2022 was driven by an $83.5 million, or 12.0%, increase in tangible equity due to the impact of lower market interest rates on the after-tax market value adjustment on available-for-sale investment securities, while tangible assets decreased $578.5 million, or 3.9%, primarily due to the reduction in investment securities and borrowings resulting from the Company’s first quarter balance sheet repositioning.

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

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

The primary source of non-deposit funds are FHLB or Federal Reserve overnight advances, of which there were $119.8 million of outstanding borrowings at September 30, 2022.

The primary source of non-deposit funds are FHLB or Federal Reserve overnight advances, of which there were $58.4 million of outstanding borrowings at March 31, 2023.

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

At September 30, 2022, the Bank had $247.4 million of cash and cash equivalents of which $30.0 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks.

The Company also had $1.76 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and had $487.7 million of funding availability at the Federal Reserve’s discount window.

Additionally, the Company has $2.57 billion of unencumbered securities that could be pledged at the FHLB or Federal Reserve to obtain additional funding.

At March 31, 2023, the Bank had $189.3 million of cash and cash equivalents of which $28.3 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks.

Cash and cash equivalents, net of float, that were readily available for liquidity purposes was $109.7 million at March 31, 2023.

The Company also had $1.84 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and had $1.54 billion of funding availability at the Federal Reserve’s discount window.

Additionally, at the Company had approximately $1.21 billion of unencumbered securities that could be sold or pledged at the FHLB or Federal Reserve to obtain additional funding.

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

The Company’s available sources of immediately available liquidity of $4.69 billion at the end of the first quarter of 2023 represent over 200% of the Company’s estimated uninsured deposits, net of collateralized deposits, estimated at approximately $2.2 billion and are exclusive of any potential benefits from utilization of the Federal Reserve Bank’s Bank Term Funding Program announced on March 12, 2023.

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

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

As of September 30, 2022, this ratio was 15.1% for 30-days and 15.3% for 90-days, excluding the Company’s capacity to borrow additional funds from the FHLB and other sources.

As of March 31, 2023, this ratio was 13.8% for 30-days and 12.6% for 90-days, excluding the Company’s capacity to borrow additional funds from the FHLB and other sources.

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

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

As of September 30, 2022, there is more than enough liquidity available during the next year to cover projected cash outflows.

As of March 31, 2023, there is more than enough liquidity available during the next year to cover projected cash outflows.

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

The results of the stress tests as of September 30, 2022 indicate the Company has sufficient sources of funds for the next year in all simulated stressed scenarios.

The results of the stress tests as of March 31, 2023 indicate the Company has sufficient sources of funds for the next year in all simulated stressed scenarios.

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

This five-year measure reflects ample liquidity for loan and other asset growth over the next five years.

Though remote, the possibility of a funding crisis exists at all financial institutions.

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

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

Accordingly, management has addressed this issue by formulating a Liquidity Contingency Plan, which has been reviewed and approved by both the Company’s Board of Directors (the “Board”) and the Company’s ALCO.

The plan addresses the actions that the Company would take in response to both a short-term and long-term funding crisis.

A short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly short-term funding operations.

Such a crisis would likely be temporary in nature and would not involve a change in credit ratings.

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

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

These trigger points are not by themselves definitive indicators of insufficient liquidity, but rather a mechanism for management to monitor conditions and possibly provide advance warning which could avert or reduce the impact of a crisis.

Liquidity triggers are based on a variety of factors, including Company history, trends, and current operating performance, industry observations, and changes in internal and external economic factors.

Indicators include:

core liquidity and funding needs such as the core basic surplus, unencumbered securities to average assets, and free FHLB loan collateral to average assets;

heightened funding needs indicators such as average loans to average deposits, average public and nonpublic deposits to total funding, and average borrowings to total funding;

capital at risk indicators consisting mainly of regulatory ratios;

asset quality indicators;

and decrease in funds availability indicators which is a combination of internal and external factors such as increased restrictions on borrowing or downturns in the credit market.

The Company has established three risk levels for these liquidity triggers that define the response based on the severity of the circumstances.

Responses vary from an assessment of possible funding deficiencies with no impact on normal business operations to immediate action required due to impending funding problems.

For more information regarding the risk factor associated with the possibility of a funding crisis, refer to the discussion under the heading “Item 1A.

Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on March 1, 2023.

Forward-Looking Statements

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

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

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

(1) adverse developments in the banking industry related to recent bank failures and the potential impact of such developments on customer confidence and regulatory responses to these developments;

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

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

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

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

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

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

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

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

For more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to the discussion under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K filed with Securities and Exchange Commission (“SEC”) for the year ended December 31, 2021 and the Quarterly Report on Form 10-Q filed with the SEC on May 10, 2022 for the quarter ended March 31, 2022.

For more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to the discussion under the heading “Item 1A.

Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on March 1, 2023 and this Quarterly Report on Form 10-Q below.

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

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Three Months Ended

Nine Months Ended

September 30,

(000’s omitted)

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Acquisition expenses

Acquisition-related contingent consideration adjustment

Unrealized loss (gain) on equity securities

Litigation accrual

Loss on sales of investment securities

Gain on debt extinguishment

Unrealized gain on equity securities

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

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Acquisition expenses

Acquisition-related contingent consideration adjustment

Unrealized loss (gain) on equity securities

Litigation accrual

Loss on sales of investment securities

Gain on debt extinguishment

Unrealized gain on equity securities

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

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Subtotal (non-GAAP)

Acquisition-related contingent consideration adjustment

Tax effect of acquisition-related contingent consideration adjustment

Subtotal (non-GAAP)

Acquisition-related provision for credit losses

Tax effect of acquisition-related provision for credit losses

Loss on sales of investment securities

Tax effect of loss on sales of investment securities

Subtotal (non-GAAP)

Unrealized loss (gain) on equity securities

Tax effect of unrealized loss (gain) on equity securities

Gain on debt extinguishment

Tax effect of gain on debt extinguishment

Subtotal (non-GAAP)

Litigation accrual

Tax effect of litigation accrual

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Operating net income (non-GAAP)

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Adjusted net income (non-GAAP)

Three Months Ended

Nine Months Ended

September 30,

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Return on average assets

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Adjusted return on average assets (non-GAAP)

Three Months Ended

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Income statement data (continued)

Return on average equity

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Subtotal (non-GAAP)

Acquisition-related contingent consideration adjustment

Tax effect of acquisition-related contingent consideration adjustment

Subtotal (non-GAAP)

Acquisition-related provision for credit losses

Tax effect of acquisition-related provision for credit losses

Loss on sales of investment securities

Tax effect of loss on sales of investment securities

Subtotal (non-GAAP)

Unrealized loss (gain) on equity securities

Tax effect of unrealized loss (gain) on equity securities

Gain on debt extinguishment

Tax effect of gain on debt extinguishment

Subtotal (non-GAAP)

Litigation accrual

Tax effect of litigation accrual

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Operating earnings per share (non-GAAP)

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Acquisition expenses

Acquisition-related contingent consideration adjustment

Litigation accrual

Total adjusted noninterest expenses (non-GAAP)

Efficiency ratio

Noninterest expenses (GAAP) - numerator

Net interest income (GAAP)

Noninterest revenues (GAAP)

Total revenues (GAAP) - denominator

Efficiency ratio (GAAP)

Adjusted noninterest expenses (non-GAAP) - numerator

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Acquired non-PCD loan accretion

Unrealized loss (gain) on equity securities

Unrealized gain on equity securities

Loss on sales of investment securities

Gain on debt extinguishment

Operating revenues (non-GAAP) - denominator

Efficiency ratio (non-GAAP)

September 30,

(000’s omitted)

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Total tangible common equity (non-GAAP)

Net tangible equity-to-assets ratio at quarter end

Shareholder's equity-to-assets ratio

Total shareholders' equity (GAAP) - numerator

Total assets (GAAP) - denominator

Shareholders' equity-to-assets ratio (GAAP)

Tangible equity-to-assets ratio at quarter end

Total tangible common equity (non-GAAP) - numerator

Total tangible assets (non-GAAP) - denominator

Net tangible equity-to-assets ratio at quarter end (non-GAAP)

Tangible equity-to-assets ratio at quarter end (non-GAAP)

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis