COMMUNITY FINANCIAL SYSTEM, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Bank System, Inc. (the “Company” or “CBSI”) as of and for the three and six months ended June 30, 2023 and 2022, although in some circumstances the first quarter of 2023 is also discussed in order to more fully explain recent trends. The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that appear on pages 3 through 32. All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole. Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2023, “last year” and equivalent terms refer to calendar year 2022, “second quarter” refers to the three months ended June 30, 2023, “YTD” refers to the six months ended June 30, 2023, and earnings per share (“EPS”) figures refer to diluted EPS. This MD&A contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption “Forward-Looking Statements” on page 53. 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. The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could meaningfully differ from these estimates. Management believes that the critical accounting estimates include the allowance for credit losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation, the carrying value of goodwill and other intangible assets and acquired loan valuations. A summary of the accounting policies used by management is disclosed in 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 12 of this Form 10-Q. Supplemental Reporting of Non-GAAP Results of Operations The Company also provides supplemental reporting of its results on an “operating,” “adjusted” or “tangible” basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), accretion on acquired non-purchased credit deteriorated (“PCD”) loans, acquisition expenses, acquisition-related contingent consideration adjustment, acquisition-related provision for credit losses, 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 adjustment, 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. The Company also provides supplemental reporting of its net interest margin on a “fully tax-equivalent” basis, which includes an adjustment to net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable. Although fully tax-equivalent net interest margin is a non-GAAP measure, the Company’s management believes this information helps enhance comparability of the performance of assets that have different tax liabilities. Diluted earnings per share were $0.89 in the second quarter of 2023, up $0.16, or 21.9%, from the second quarter of 2022. Diluted adjusted net earnings per share, a non-GAAP measure, were $0.95 in the second quarter of 2023, compared to $0.89 in the second quarter of 2022, a $0.06 per share, or 6.7%, increase. Adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, was $1.17 per share in the second quarter of 2023, up $0.04, or 3.5%, from the second quarter of 2022. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 11. 33 Table of Contents Executive Summary The Company’s business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services, including benefits administration, insurance services and wealth management services, to retail, commercial, institutional and municipal customers. The Company’s banking subsidiary is Community Bank, N.A. (the “Bank” or “CBNA”). The Company’s Benefit Plans Administrative Services, Inc. (“BPAS”) subsidiary is a leading provider of employee benefits administration, trust services, collective investment fund administration, and actuarial consulting services to customers on a national scale. In addition, the Company offers comprehensive financial planning, trust administration and wealth management services through its Community Bank Wealth Management Group operating unit and insurance services through its OneGroup NY, Inc. (“OneGroup”) operating unit. The Company’s core operating objectives are: (i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies and divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and mitigate interest rate and liquidity risk and optimize net interest income generation, (iv) increase the noninterest component of total revenues through growth in existing banking, employee benefit, insurance and wealth management services business units, and the acquisition of additional financial services and banking businesses, and (v) utilize technology to deliver customer-responsive products and services and improve efficiencies. Significant factors reviewed by management to evaluate achievement of the Company’s operating objectives and its operating results and financial condition include, but are not limited to: net income and earnings per share; return on assets and equity; components of net interest margin; noninterest revenues; noninterest expenses; credit metrics; loan and deposit growth; capital management; performance of individual banking and financial services units; performance of specific product lines and customers; liquidity and interest rate sensitivity; enhancements to customer products and services and their underlying performance characteristics; technology advancements; market share; peer comparisons; and the performance of recently acquired businesses. Second quarter 2023 net income increased $8.5 million, or 21.3%, compared to the second quarter of 2022, while YTD net income decreased $32.8 million, or 37.7% compared to the equivalent 2022 timeframe. Earnings per share of $0.89 for the second quarter of 2023 was $0.16 more than the second quarter of 2022, while 2023 YTD earnings per share of $1.00 was $0.60 lower than 2022 YTD earnings per share. The increase in net income and earnings per share between the quarterly periods was due to increases in net interest income and noninterest revenues and decreases in the provision for credit losses and fully-diluted shares outstanding, partially offset by increases in operating expenses and income taxes. The YTD decrease in net income and earnings per share 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 first quarter of 2023 in connection with a balance sheet repositioning executed in order to reduce overnight borrowings and improve net interest income and margin. The sales were completed in January and February 2023 and preceded the negative developments in the banking industry that occurred in March 2023. On a YTD basis, excluding the realized losses recognized in the first quarter of 2023, increases in net interest income and noninterest revenues and decreases in income taxes, the provision for credit losses and fully-diluted shares outstanding more than offset increases in operating expenses. Second quarter and YTD net income adjusted to exclude acquisition expenses, acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, gain on debt extinguishment, realized loss on sales of investment securities and the unrealized gain (loss) on equity securities (“operating net income”), a non-GAAP measure, increased $2.8 million, or 6.0%, as compared to the second quarter of 2022 and increased $2.3 million, or 2.5%, compared to June YTD 2022. Earnings per share adjusted to exclude acquisition expenses, acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, gain on debt extinguishment, realized loss on sales of investment securities and the unrealized gain (loss) on equity securities (“operating earnings per share”), a non-GAAP measure, of $0.91 for the second quarter increased $0.06 compared to the second quarter of 2022. Operating earnings per share of $1.77 for the first six months of 2023 increased $0.05 compared to the prior year period. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 11. ​ The Company’s deposit base and liquidity position continues to be strong, as the Company maintained total immediately available liquidity sources of $4.27 billion at the end of the second quarter of 2023, more than double its estimated uninsured deposits, net of collateralized and intercompany deposits. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of second quarter ending total deposits. The Company’s deposit base is well diversified across customer segments, which as of June 30, 2023 is comprised of approximately 63% consumer, 26% business and 11% municipal, and broadly dispersed with an average deposit balance per account of under $20,000. Since the Federal Reserve began raising the federal funds rate on March 17, 2022 in an effort to combat inflation, the cycle-to-date deposit beta for the Company was 10% and the cycle-to-date total funding beta was 12%, reflective of a high proportion of non-interest bearing deposits, representing approximately 30% of total deposits, and the composition and stability of the customer base. In addition, more than 72% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the second quarter, and the Company does not currently utilize brokered or wholesale deposits. 34 Table of Contents Net interest margin increased 28 basis points between the second quarter of 2022 and the second quarter of 2023 and increased 38 basis points on a YTD basis. Fully tax-equivalent net interest margin (a non-GAAP measure) increased 29 basis points between the second quarter of 2022 and the second quarter of 2023 and increased 38 basis points on a YTD basis. Loan balances increased on both an average and ending basis as compared to the prior year second quarter and YTD period, primarily reflective of continued strong organic loan growth along with the second quarter 2022 acquisition of Elmira Savings Bank (“Elmira”) which favorably impacted the average balance growth. Deposit balances decreased on both an average and ending basis as compared to the second quarter of 2022 and YTD due in part to outflows driven by the continued spend down of funds accumulated during the pandemic and higher customer expenditure levels in the inflationary environment as well as rate competition from other banks and non-depository financial institutions. The yield on average interest earning assets increased 85 basis points compared to the prior year second quarter and 83 basis points compared to the prior YTD period, as the yield on average loans and yield on average investments both improved. The yield on average loans for the second quarter increased 70 basis points compared to the second quarter of 2022 and 65 basis points between comparable YTD periods, 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 35 basis points compared to the prior year’s second quarter and 42 basis points on a YTD basis, which also benefitted from rising market interest rates and reflected the impact of the sale of certain available-for-sale investment securities during the first quarter of 2023. The Company’s total cost of funds increased 58 basis points from last year’s second quarter and 46 basis points YTD, as the rate paid on interest-bearing deposits and the rate paid on borrowings both increased, impacted by the Company transitioning to an overnight wholesale borrowing position during the second quarter of 2022 to meet its funding needs. The provision for credit losses of $0.8 million for the second quarter and $4.3 million for YTD 2023 resulted in a $5.3 million and $2.7 million lower provision for credit losses than comparable prior year periods, respectively. The second quarter and YTD 2023 provision for credit losses were reflective of a stabilizing economic outlook combined with an increase in loans outstanding while the second quarter and YTD 2022 provision for credit losses was reflective of a moderate deterioration in the economic outlook, an increase in loans outstanding and $3.9 million of acquisition-related provision for credit losses due to the Elmira acquisition. Asset quality remained strong during the second quarter of 2023. The nonperforming loan ratio of 0.36% at June 30, 2023 improved 10 basis points from June 30, 2022 and two basis points from one quarter prior. The total delinquent loan ratio remained low at 0.83%, but increased slightly from 0.75% at the end of the second quarter of 2022 and 0.73% at the end of the prior quarter. Net charge-offs were $0.7 million, or an annualized 0.03% of average loans, for the second quarter and $2.2 million, or an annualized 0.05% of average loans, for the first six months of 2023, compared to net charge-offs of $0.4 million, or an annualized 0.02% of average loans, for the prior year second quarter and $0.9 million, or an annualized 0.02% of average loans, for the first six months of 2022. Banking noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, were up $0.5 million, or 2.7%, as compared to the prior year’s second quarter, but were down $0.1 million, or 0.4%, between the comparable YTD periods. The Company implemented certain deposit fee changes, including the elimination of nonsufficient and unavailable funds fees on personal accounts 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 $1.4 million, or 3.1%, as compared to the prior year’s second quarter and up $2.0 million, or 2.1%, compared to the prior YTD period, as increases in insurance services revenues due to both organic and acquired growth between the periods were partially offset by declines in employee benefit services and wealth management services revenues that were negatively impacted by more challenging investment market conditions. Noninterest expenses increased $2.6 million, or 2.4%, between the second quarter of 2022 and the second quarter of 2023 and increased $16.9 million, or 8.0%, between June YTD 2023 and June YTD 2022. The YTD increase was primarily due to a $12.5 million increase in salaries and employee benefits driven by increases in merit and severance-related employee wages, minimum wage-related escalation 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 general inflationary pressures, incremental expenses associated with operating an expanded franchise subsequent to the Elmira acquisition in the second quarter of 2022, larger FDIC insurance expenses due in part to an increase in the base assessment rate effective on January 1, 2023, higher legal and professional fees associated with product launches in the employee benefit services business and other various matters and an increase in data processing and communications expenses due to the Company’s continued investment in customer-facing and back office digital technologies. On July 26, 2023, the SEC finalized rules requiring registrants to disclose material cybersecurity incidents that they experience on Form 8-K and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. Annual disclosures will be required in CBSI’s Annual Report on Form 10-K for the year ended 2023. The Form 8-K disclosure requirements will become effective beginning on December 18, 2023. 35 Table of Contents Net Income and Profitability As shown in Table 1, net income for the second quarter and June YTD of $48.3 million and $54.1 million, respectively, increased $8.5 million, or 21.3%, as compared to the second quarter of 2022 and decreased $32.8 million, or 37.7%, compared to June YTD 2022. Earnings per share of $0.89 for the second quarter was $0.16 higher than the second quarter of 2022, while earnings per share for the first six months of 2023 of $1.00 was $0.60 lower than the first six months of 2022. The increase in net income and earnings per share for the quarter was the result of increases in net interest income and noninterest revenues and decreases in the provision for credit losses and fully-diluted shares outstanding, partially offset by increases in operating expenses and income taxes. The decrease in net income and earnings per share for the YTD period as compared to the prior year was the result of a decrease in noninterest revenues, primarily due to the impact of a $52.3 million pre-tax realized loss on sales of investment securities in the first quarter of 2023 as part of a balance sheet repositioning, as well as an increase in operating expenses, partially offset by an increase in net interest income and decreases in the provision for credit losses, income taxes and fully-diluted shares outstanding. Operating net income, a non-GAAP measure, of $49.1 million and $95.9 million for the second quarter and June YTD, respectively, increased $2.8 million, or 6.0%, as compared to the second quarter of 2022 and increased $2.3 million, or 2.5%, compared to June YTD 2022. Operating earnings per share, a non-GAAP measure, of $0.91 for the second quarter was up $0.06 compared to the second quarter of 2022, while operating earnings per share of $1.77 for the first six months of 2023 was up $0.05 compared to the first six months of 2022. See Table 11 for Reconciliation of GAAP to Non-GAAP Measures. As reflected in Table 1, second quarter net interest income of $109.3 million was up $6.1 million, or 6.0%, from the comparable prior year period. The quarterly improvement resulted from an increase in the yield on interest-earning assets and a decrease in interest-bearing liability balances, partially offset by a decrease in interest-earning asset balances and an increase in the rate paid on interest-bearing liabilities. Net interest income for the first six months of 2023 increased $22.3 million, or 11.3%, versus the first six months of 2022. The year-over-year improvement resulted from an increase in the tax equivalent yield on average interest-earning asset balances, partially offset by a decrease in average interest-earning asset balances and increases in the cost and average balance of interest-bearing liabilities. The provision for credit losses for the second quarter of $0.8 million and June YTD of $4.3 million decreased $5.3 million and $2.7 million as compared to the second quarter and first six months of 2022, respectively. The second quarter and YTD 2023 provision for credit losses was reflective of a stable economic outlook, continued low levels of net charge-offs, delinquent loans and nonperforming loans and an increase in loans outstanding. The second quarter and YTD 2022 provision for credit losses included $3.9 million of acquisition-related provision for credit losses due to the Elmira acquisition. Second quarter and year-to-date noninterest revenues were $66.0 million and $79.5 million, respectively, up $1.9 million, or 2.9%, from the second quarter of 2022 and down $50.3 million, or 38.8%, from the first six months of 2022. The increase compared to the prior year’s second quarter was a result of increases in insurance services revenue, other banking revenues and debit interchange and ATM fees, partially offset by decreases in deposit service charges and fees, employee benefit services revenues, wealth management services revenues, mortgage banking revenues and unrealized loss on equity securities. The YTD 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, as well as decreases in debit interchange and ATM fees, deposit service charges and fees, wealth management services revenues, employee benefit services revenues, mortgage banking revenues and unrealized loss on equity securities, partially offset by increases in insurance services revenue, other banking revenues and gain on debt extinguishment. Noninterest expenses of $113.0 million and $227.1 million for the second quarter and June YTD periods, respectively, reflected an increase of $2.6 million, or 2.4%, from the second quarter of 2022 and an increase of $16.9 million, or 8.0%, from the first six months of 2022. The increase in noninterest expenses for the quarter was due to increases in salaries and benefits, other expenses, business development and marketing expenses, data processing and communications expenses, acquisition-related contingent consideration adjustments and occupancy and equipment expenses, partially offset by decreases in acquisition expenses, legal and professional fees and amortization of intangible assets. The YTD increase in noninterest expenses was due to increases in salaries and benefits, other expenses, legal and professional fees, data processing and communications expenses, business development and marketing expenses, legal and professional fees, data processing and communications expenses, acquisition-related contingent consideration adjustments and occupancy and equipment expenses, partially offset by a decrease in acquisition expenses and amortization of intangible assets. Excluding acquisition expenses and acquisition-related contingent consideration adjustments, 2023 operating expenses were $6.0 million, or 5.6%, higher for the second quarter and $20.5 million, or 10.0%, higher for the year-to-date timeframe. The effective income tax rates were 21.4% and 21.0% for second quarter and YTD 2023, respectively, as compared to 21.6% and 21.5% for the comparable prior year periods. 36 Table of Contents A condensed income statement is as follows: Table 1: Condensed Income Statements ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (000’s omitted, except per share data) 2023 2022 2023 2022 Net interest income ​ $ 109,279 ​ $ 103,141 ​ $ 220,309 ​ $ 198,013 Provision for credit losses ​ ​ 752 ​ ​ 6,038 ​ ​ 4,252 ​ ​ 6,944 Loss on sales of investment securities ​ ​ 0 ​ ​ 0 ​ ​ (52,329) ​ ​ 0 Noninterest revenues excluding loss on sales of investment securities ​ 65,984 ​ 64,097 ​ 131,808 ​ 129,770 Noninterest expenses ​ ​ 113,038 ​ ​ 110,424 ​ ​ 227,090 ​ ​ 210,231 Income before income taxes ​ 61,473 ​ 50,776 ​ 68,446 ​ 110,608 Income taxes ​ 13,182 ​ 10,971 ​ 14,357 ​ 23,748 Net income ​ $ 48,291 ​ $ 39,805 ​ $ 54,089 ​ $ 86,860 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted weighted average common shares outstanding ​ 54,008 ​ 54,393 ​ 54,097 ​ 54,456 Diluted earnings per share ​ $ 0.89 ​ $ 0.73 ​ $ 1.00 ​ $ 1.60 ​ Net Interest Income Net interest income is the amount by which interest, dividends and fees on interest-earning assets (loans, investments and cash equivalents) exceeds the cost of funds, which consists primarily of interest paid to the Company’s depositors and interest paid on borrowings. Net interest margin is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities as a percentage of interest-earning assets. As shown in Table 2a, net interest income (with nontaxable income converted to a fully tax-equivalent basis) for the second quarter was $110.4 million, an increase of $6.2 million, or 6.0%, compared to the same period last year. This was driven by an 85 basis point increase in the yield on average interest-earnings assets and a $2.8 million decrease in average interest-bearing liabilities, partially offset by a $531.0 million decrease in average interest-earning assets and an 81 basis point increase in the rate paid on average interest-bearing liabilities in comparison to the second quarter of 2022. As reflected in Table 3 for the quarter, net interest income was favorably impacted by $29.6 million due to the increase in the yield on average interest-earning assets, partially offset by the unfavorable impacts on net interest income of $4.1 million due to the volume decrease in interest-earning assets and $19.3 million due to an increase in the rate paid on average interest-bearing liabilities. June YTD net interest income (with nontaxable income converted to a fully tax-equivalent basis), as reflected in Table 2b, of $222.5 million, increased $22.6 million, or 11.3%, from the year-earlier period. The June YTD increase resulted from an 83 basis point increase in the yield on average interest-earning assets, partially offset by a $109.7 million increase in average interest-bearing liabilities, a 66 basis point increase in the average rate paid on interest-bearing liabilities and a $282.8 million decrease in average interest-earning assets. As reflected in Table 3, for June YTD, the increase in the yield on average interest-earning assets had a favorable impact on net interest income of $58.1 million, partially offset by the unfavorable impacts on net interest income of $0.1 million due to the increase in average interest-bearing liabilities, $31.3 million due to the increase in the rate paid on average interest-bearing liabilities and $4.1 million due to the volume decrease in average interest-earning assets. Net interest margin of 3.14% for the second quarter of 2023 was 28 basis points higher as compared to the second quarter of 2022. The fully tax-equivalent net interest margin (non-GAAP) of 3.18% for the second quarter of 2023 was 29 basis points higher as compared to the second quarter of 2022. The increase was the result of an 85 basis point increase in the interest-earning asset yield, partially offset by an 81 basis point increase in the rate paid on average interest-bearing liabilities. Net interest margin of 3.16% for the first six months of 2023 was 38 basis points higher than the comparable period of 2022. The fully tax-equivalent net interest margin (non-GAAP) of 3.19% for the first six months of 2023 was 38 basis points higher than the comparable period of 2022. The yield on interest-earning assets increased 83 basis points, while the rate on interest-bearing liabilities increased by 66 basis points for the first six months of 2023 as compared to the prior year period. The decline in noninterest checking deposit balances also had an adverse impact on the fully tax-equivalent net interest margin (non-GAAP) for both periods. 37 Table of Contents The 85 basis point increase in the average yield on 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 second quarter increased by 70 basis points compared to the second quarter of 2022. The second quarter of 2023 yield on average investments, including cash equivalents, increased 35 basis points compared to the prior year. The 83 basis point increase in the yield on interest-earning assets for the first six months of 2023 was the result of a 65 basis point increase in the yield on average loans and a 42 basis point increase in the yield on average investments, including cash equivalents, compared to the prior YTD period. The increase in loan yields were 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 increase in investment yields were driven by market interest rate increases and the sales and maturities of certain available-for-sale investment securities during the first six months of 2023. The rate paid on average interest-bearing liabilities increased by 81 basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits increased 72 basis points and the average rate paid on external borrowings increased 216 basis points from the comparable prior period. For the first six months of 2023, the rate paid on average interest-bearing liabilities increased by 66 basis points from the comparable prior year period as the rate paid on average interest-bearing deposits increased 53 basis points and the rate paid on average external borrowings increased 232 basis points. The rate paid on average interest-bearing deposits increased as interest rates on certain interest-bearing deposits were raised in response to market conditions. The increase in the cost of average borrowings was primarily the result of the greater 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 cycle-to-date 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, as well as heightened competition for deposit funding in the higher rate environment. 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, in part due to the continued migration from noninterest and low rate products to higher rate products, and potentially a greater reliance on comparatively high cost wholesale borrowings. The second quarter and YTD average balance of investments, including cash equivalents, decreased $1.88 billion and $1.70 billion, respectively, as compared to the corresponding prior year periods, primarily due to strong organic loan growth and declines in the investment securities portfolio driven by scheduled maturities and the sales of certain available-for-sale investment securities in connection with the Company’s first quarter balance sheet repositioning. Investment security sales, maturities, calls and principal payments outpaced purchases during the second quarter and YTD periods. The cash equivalents component of average earning assets decreased $444.2 million and $672.4 million for the second quarter and YTD periods, respectively, compared to the prior year periods due in part to the funding of strong organic loan growth. Average loan balances increased $1.35 billion for the quarter and $1.42 billion YTD as compared to the prior year, due to high levels of organic growth and the impact of the Elmira acquisition. Average interest-bearing deposits decreased $215.7 million compared to the prior year quarter and $196.0 million compared to the prior YTD period. The quarterly decrease in average interest-bearing deposits was due to decreases in interest checking, money market and savings deposits, partially offset by an increase in time deposits. The YTD decrease in average interest-bearing deposits was driven by decreases in interest checking and money market deposits, while time and savings deposits increased. The decrease in deposit balances were due in part to outflows driven by the continued spend down of funds accumulated during the pandemic, including the impact from higher customer expenditure levels in the inflationary environment. 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 $212.9 million and $305.7 million for the quarter and YTD periods respectively. The increase in average borrowings from the prior year quarter and YTD periods was primarily due to an increase in overnight borrowings to meet the Company’s funding needs. Tables 2a and 2b below sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent basis (“FTE”) using a marginal income tax rate of 24.3% in 2023 and 24.2% in 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, 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. 38 Table of Contents Table 2a: Quarterly Average Balance Sheet ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Three Months Ended ​ ​ June 30, 2023 ​ ​ June 30, 2022 ​ ​ ​ ​ Avg. ​ ​ ​ Avg. ​ ​ ​ Average ​ ​ ​ Yield/Rate ​ Average ​ ​ ​ Yield/Rate ​ (000’s omitted except yields and rates) Balance Interest Paid ​ Balance Interest Paid ​ Interest-earning assets: ​ ​ ​ ​ ​ ​ ​ Cash equivalents ​ $ 28,491 ​ $ 303 4.27 % ​ $ 472,671 ​ $ 764 0.65 % Taxable investment securities (1) ​ 4,313,875 ​ 20,507 1.91 % ​ 5,760,399 ​ 24,135 1.68 % Nontaxable investment securities (1) ​ 525,314 ​ 4,447 3.40 % ​ 513,506 ​ 4,195 3.28 % Loans (net of unearned discount) (2) ​ 9,072,956 ​ 107,447 4.75 % ​ 7,725,107 ​ 78,089 4.05 % Total interest-earning assets ​ 13,940,636 ​ 132,704 3.82 % ​ 14,471,683 ​ 107,183 ​ 2.97 % Noninterest-earning assets ​ 1,209,365 ​ ​ ​ ​ ​ 981,029 ​ ​ ​ ​ Total assets ​ $ 15,150,001 ​ ​ ​ ​ ​ $ 15,452,712 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest checking, savings, and money market deposits ​ $ 7,874,095 ​ 12,449 0.63 % ​ $ 8,323,724 ​ 1,010 0.05 % Time deposits ​ 1,179,104 ​ 6,499 2.21 % ​ 945,135 ​ 1,681 0.71 % Customer repurchase agreements ​ 303,744 ​ 654 0.86 % ​ 294,704 ​ 214 0.29 % Overnight borrowings ​ ​ 202,565 ​ ​ 2,610 ​ 5.17 % ​ ​ 1,560 ​ ​ 7 ​ 1.75 % FHLB borrowings ​ 17,276 ​ 133 3.08 % ​ 11,142 ​ 83 3.00 % Subordinated notes payable ​ 0 ​ 0 0.00 % ​ 3,268 ​ 39 4.69 % Total interest-bearing liabilities ​ 9,576,784 ​ 22,345 0.94 % ​ 9,579,533 ​ 3,034 0.13 % Noninterest-bearing liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest checking deposits ​ 3,836,341 ​ ​ ​ ​ ​ 4,061,738 ​ ​ ​ ​ Other liabilities ​ 103,884 ​ ​ ​ ​ ​ 68,031 ​ ​ ​ ​ Shareholders’ equity ​ 1,632,992 ​ ​ ​ ​ ​ 1,743,410 ​ ​ ​ ​ Total liabilities and shareholders’ equity ​ $ 15,150,001 ​ ​ ​ ​ ​ $ 15,452,712 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest earnings ​ ​ ​ $ 110,359 ​ ​ ​ ​ ​ $ 104,149 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest spread ​ ​ ​ ​ 2.88 % ​ ​ ​ ​ 2.84 % Net interest margin on interest-earning assets ​ ​ ​ ​ 3.14 % ​ ​ ​ ​ 2.86 % Net interest margin on interest-earning assets (FTE) (non-GAAP) ​ ​ ​ ​ ​ ​ ​ 3.18 % ​ ​ ​ ​ ​ ​ ​ 2.89 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fully tax-equivalent adjustment (3) ​ ​ ​ $ 1,080 ​ ​ ​ ​ ​ $ 1,008 ​ (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 FTE 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. ​ 39 Table of Contents Table 2b: Year-to-Date Average Balance Sheet ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ Six Months Ended ​ ​ June 30, 2023 ​ ​ June 30, 2022 ​ ​ ​ Avg. ​ ​ ​ Avg. ​ Average ​ ​ ​ Yield/Rate ​ Average ​ ​ ​ Yield/Rate ​ (000's omitted except yields and rates) Balance Interest Paid ​ Balance Interest Paid ​ Interest-earning assets: ​ ​ ​ ​ ​ ​ Cash equivalents ​ $ 28,135 ​ $ 542 3.89 % ​ $ 700,511 ​ $ 1,191 0.34 % Taxable investment securities (1) ​ 4,535,749 ​ 42,206 1.88 % ​ 5,632,393 ​ 46,299 1.66 % Nontaxable investment securities (1) ​ 528,939 ​ 8,963 3.42 % ​ 463,664 ​ 7,472 3.25 % Loans (net of unearned discount) (2) ​ 8,979,081 ​ 207,966 4.67 % ​ 7,558,126 ​ 150,747 4.02 % Total interest-earning assets ​ 14,071,904 ​ 259,677 3.72 % ​ 14,354,694 ​ 205,709 2.89 % Noninterest-earning assets ​ 1,185,929 ​ ​ ​ ​ ​ 1,169,370 ​ ​ ​ ​ Total assets ​ $ 15,257,833 ​ ​ ​ ​ ​ $ 15,524,064 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest checking, savings, and money market deposits ​ $ 7,916,883 ​ 19,046 0.49 % ​ $ 8,255,651 ​ 1,831 0.04 % Time deposits ​ 1,072,847 ​ 9,830 1.85 % ​ 930,073 ​ 3,425 0.74 % Customer repurchase agreements ​ 319,024 ​ 1,124 0.71 % ​ 303,824 ​ 425 0.28 % Overnight borrowings ​ ​ 282,089 ​ ​ 6,892 ​ 4.93 % ​ ​ 784 ​ ​ 7 ​ 1.75 % FHLB borrowings ​ 17,494 ​ 267 3.07 % ​ 6,533 ​ 93 2.86 % Subordinated notes payable ​ 1,543 ​ 38 4.96 % ​ 3,271 ​ 77 4.71 % Total interest-bearing liabilities ​ 9,609,880 ​ 37,197 0.78 % ​ 9,500,136 ​ 5,858 0.12 % Noninterest-bearing liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest checking deposits ​ 3,939,345 ​ ​ ​ ​ ​ 4,015,226 ​ ​ ​ ​ Other liabilities ​ 103,598 ​ ​ ​ ​ ​ 117,397 ​ ​ ​ ​ Shareholders' equity ​ 1,605,010 ​ ​ ​ ​ ​ 1,891,305 ​ ​ ​ ​ Total liabilities and shareholders’ equity ​ $ 15,257,833 ​ ​ ​ ​ ​ $ 15,524,064 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest earnings ​ ​ $ 222,480 ​ ​ ​ ​ $ 199,851 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest spread ​ ​ ​ 2.94 % ​ ​ ​ 2.77 % Net interest margin on interest-earning assets ​ ​ ​ 3.16 % ​ ​ ​ 2.78 % Net interest margin on interest-earning assets (FTE) (non-GAAP) ​ ​ ​ ​ ​ ​ ​ 3.19 % ​ ​ ​ ​ ​ ​ ​ 2.81 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fully tax-equivalent adjustment (3) ​ ​ $ 2,171 ​ ​ ​ $ 1,838 ​ (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 FTE adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable. The adjustment attempts to enhance the comparability of the performance of assets that have different tax liabilities. ​ As discussed above and disclosed in Table 3 below, the change in net interest income (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. ​ 40 Table of Contents Table 3: Rate/Volume ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended June 30, 2023 ​ ​ Six months ended June 30, 2023 ​ ​ versus June 30, 2022 ​ ​ versus June 30, 2022 ​ ​ Increase (Decrease) Due to Change in (1) ​ Increase (Decrease) Due to Change in (1) (000’s omitted) Volume Rate Net Change Volume Rate Net Change Interest earned on: ​ ​ ​ ​ ​ ​ ​ ​ Cash equivalents ​ $ (1,296) ​ $ 835 ​ $ (461) ​ $ (2,149) ​ $ 1,500 ​ $ (649) Taxable investment securities ​ (6,592) ​ 2,964 ​ (3,628) ​ (9,724) ​ 5,631 ​ (4,093) Nontaxable investment securities ​ 98 ​ 154 ​ 252 ​ 1,092 ​ 399 ​ 1,491 Loans ​ 14,804 ​ 14,554 ​ 29,358 ​ 30,802 ​ 26,417 ​ 57,219 Total interest-earning assets (2) ​ (4,061) ​ 29,582 ​ 25,521 ​ (4,128) ​ 58,096 ​ 53,968 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest paid on: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest checking, savings and money market deposits ​ (58) ​ 11,497 ​ 11,439 ​ (78) ​ 17,293 ​ 17,215 Time deposits ​ 508 ​ 4,310 ​ 4,818 ​ 599 ​ 5,806 ​ 6,405 Customer repurchase agreements ​ 7 ​ 433 ​ 440 ​ 22 ​ 677 ​ 699 Overnight borrowings ​ ​ 2,565 ​ ​ 38 ​ ​ 2,603 ​ ​ 6,851 ​ ​ 34 ​ ​ 6,885 FHLB borrowings ​ 47 ​ 2 ​ 49 ​ 166 ​ 8 ​ 174 Subordinated notes payable ​ (19) ​ (19) ​ (38) ​ (43) ​ 4 ​ (39) Total interest-bearing liabilities (2) ​ (1) ​ 19,312 ​ 19,311 ​ 66 ​ 31,273 ​ 31,339 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest earnings (2) ​ $ (3,925) ​ $ 10,135 ​ $ 6,210 ​ $ (4,005) ​ $ 26,634 ​ $ 22,629 (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of such change in each component. (2) Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components. Noninterest Revenues The Company’s sources of noninterest revenues are of four primary types: 1) general banking services related to loans, including mortgage banking, deposits and other core customer activities typically provided through the branch network and digital banking channels (performed by CBNA); 2) employee benefit trust, collective investment fund, transfer agency, actuarial, 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. (“CISI”), OneGroup Wealth Partners, Inc. and The Carta Group, Inc.) and asset management services (performed by Nottingham Advisors, Inc.); and 4) insurance and risk management products and services (performed by OneGroup). Additionally, the Company has other transactions that impact noninterest revenues, including realized and unrealized gains or losses on investment securities and gain on debt extinguishment. ​ 41 Table of Contents Table 4: Noninterest Revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (000’s omitted) 2023 2022 2023 2022 ​ Employee benefit services ​ $ 28,565 ​ $ 28,921 ​ $ 57,949 ​ $ 58,501 ​ Insurance services ​ 11,860 ​ 9,780 ​ 23,382 ​ 20,189 ​ Wealth management services ​ ​ 7,858 ​ ​ 8,141 ​ ​ 16,103 ​ ​ 16,774 ​ Deposit service charges and fees ​ 9,078 ​ 9,610 ​ 18,250 ​ 18,960 ​ Debit interchange and ATM fees ​ 6,620 ​ 6,528 ​ 12,582 ​ 13,333 ​ Mortgage banking ​ 11 ​ 269 ​ 286 ​ 424 ​ Other banking revenues ​ 2,042 ​ 870 ​ 3,064 ​ 1,609 ​ Subtotal ​ 66,034 ​ ​ 64,119 ​ ​ 131,616 ​ ​ 129,790 ​ Loss on sales of investment securities ​ ​ 0 ​ ​ 0 ​ ​ (52,329) ​ ​ 0 ​ Gain on debt extinguishment ​ 0 ​ 0 ​ 242 ​ 0 ​ Unrealized loss on equity securities ​ (50) ​ (22) ​ (50) ​ (20) ​ Total noninterest revenues ​ $ 65,984 ​ $ 64,097 ​ $ 79,479 ​ $ 129,770 ​ Noninterest revenues/total revenues ​ ​ 37.6 % ​ 38.3 % ​ 26.5 % ​ 39.6 % Noninterest revenues/operating revenues (FTE basis) (1) ​ 37.6 % 38.3 % 37.4 % 39.6 % (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 FTE basis plus noninterest revenues, excluding loss on sales of investment securities, gain on debt extinguishment, unrealized loss 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 were $66.0 million for the second quarter of 2023 and $79.5 million for the first six months of 2023. This represents an increase of $1.9 million, or 2.9%, for the quarter and a decrease of $50.3 million, or 38.8%, for the YTD period in comparison to the equivalent 2022 periods. The increase for the quarterly period was driven by increases in insurance services revenue and banking noninterest revenue, partially offset by decreases in employee benefit services revenue and wealth management services revenue. The YTD 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 first quarter of 2023 to provide the Company with greater flexibility in managing balance sheet growth and deposit funding. Excluding the realized loss on sale of investment securities and gain on debt extinguishment recognized in the first quarter of 2023, noninterest revenues were up $1.8 million, or 1.4%, between June YTD 2023 and June YTD 2022 which was driven by an increase in insurance services revenue, partially offset by decreases in banking noninterest revenue, employee benefit services revenue and wealth management services revenue. Banking noninterest revenue of $17.8 million for the second quarter and $34.2 million for the first six months of 2023 increased $0.5 million, or 2.7%, and decreased $0.1 million, or 0.4%, respectively, as compared to the corresponding prior year periods. The quarterly increase was driven by an increase in other banking revenues and debit interchange and ATM fees, partially offset by decreases in deposit service charges and fees and mortgage banking revenues. The YTD decrease was driven by decreases in debit interchange and ATM fees, deposit service charges and fees and mortgage banking revenues, partially offset by an increase in other banking revenues. The decreases in deposit service charges and fees were reflective of the Company’s implementation of certain deposit fee changes, including the elimination of nonsufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022. The Company expects to continue to evaluate its deposit service charges and other fees for further modifications during 2023 in order to better serve the Company’s customers by offering an array of products and services designed to meet their particular type of banking needs. Employee benefit services revenue decreased $0.4 million, or 1.2%, and $0.6 million, or 0.9%, for the three and six months ended June 30, 2023, respectively, as compared to the equivalent prior year periods primarily related to a decline in certain cyclical administrative-related plan fees. Insurance services revenue was up $2.1 million, or 21.3%, and $3.2 million, or 15.8%, for the second quarter and YTD periods, respectively, driven primarily by a strong premium market and organic expansion, along with acquired growth between the periods. Wealth management services revenue was down $0.3 million, or 3.5%, for the second quarter of 2023 and $0.7 million, or 4.0%, for June 2023 YTD as compared to the same time periods of 2022, primarily driven by more challenging investment market conditions. 42 Table of Contents The ratio of noninterest revenues to total revenues was 37.6% for the second quarter of 2023 and 26.5% for June YTD 2023, compared to 38.3% for the prior year’s second quarter and 39.6% for June YTD 2022. The quarterly decrease was due to noninterest revenues increasing 2.9% while net interest income increased 6.0%. The YTD decrease was primarily the result of the $50.3 million, or 38.8%, decrease in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities, while net interest income increased 11.3%, driven by net interest margin expansion. The ratio of noninterest revenues to operating revenues (FTE basis, non-GAAP), as defined in footnote 1 of Table 4 above, was 37.6% for the quarter and 37.4% for the six months ended June 30, 2023, respectively, versus 38.3% and 39.6% for the comparable periods of 2022. The decrease between the quarterly periods was due to a 6.2% increase in adjusted net interest income (FTE basis) while adjusted noninterest revenues increased 3.0%. The year-to-date decrease was a function of an 11.3% increase in adjusted net interest income (FTE basis) while adjusted noninterest revenues increased 1.4%. Noninterest Expenses Table 5 below sets forth the quarterly and YTD results of the major noninterest expense categories for the current and prior year, as well as efficiency ratios (defined below), a standard measure of expense utilization effectiveness commonly used in the banking industry. Table 5: Noninterest Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (000’s omitted) 2023 2022 2023 2022 ​ Salaries and employee benefits $ 68,034 $ 65,398 $ 139,521 ​ $ 127,046 ​ Data processing and communications ​ 14,291 ​ 13,611 ​ 27,420 ​ 26,270 ​ Occupancy and equipment ​ 10,453 ​ 10,424 ​ 21,477 ​ 21,376 ​ Amortization of intangible assets ​ 3,705 ​ 3,851 ​ 7,372 ​ 7,583 ​ Legal and professional fees ​ 3,102 ​ 3,385 ​ 8,303 ​ 7,002 ​ Business development and marketing ​ 4,567 ​ 3,616 ​ 7,468 ​ 6,359 ​ Acquisition expenses ​ (1) ​ 3,960 ​ 56 ​ 4,259 ​ Acquisition-related contingent consideration adjustment ​ ​ 1,000 ​ ​ 400 ​ ​ 1,000 ​ ​ 400 ​ Other ​ 7,887 ​ 5,779 ​ 14,473 ​ 9,936 ​ Total noninterest expenses ​ $ 113,038 ​ $ 110,424 ​ $ 227,090 ​ $ 210,231 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest expenses/average assets ​ ​ 2.99 % ​ 2.87 % ​ 3.00 % ​ 2.73 % Operating expenses (1) /average assets ​ 2.87 % 2.65 % 2.89 % 2.57 % Efficiency ratio (GAAP) ​ ​ 64.5 % ​ 66.0 % ​ 75.8 % ​ 64.1 % Operating efficiency ratio (non-GAAP) (2) ​ 61.7 % 61.1 % 62.1 % 60.4 % (1) Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses, acquisition-related contingent consideration adjustment and amortization of intangibles. See Table 11 for Reconciliation of GAAP to Non-GAAP Measures. (2) Operating efficiency ratio a non-GAAP measure, is calculated as operating expenses as defined in footnote (1) above divided by net interest income on a FTE basis excluding acquired non-PCD loan accretion plus noninterest revenues excluding loss on sales of investment securities, gain on debt extinguishment and unrealized loss 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 $113.0 million and $227.1 million for the second quarter and YTD periods of 2023, respectively, representing an increase of $2.6 million, or 2.4%, and an increase of $16.9 million, or 8.0%, from the prior year periods. Second quarter and YTD 2023 noninterest expenses included $1.0 million and $1.1 million of acquisition expenses and acquisition-related contingent consideration adjustments, respectively, compared to $4.4 million and $4.7 million in second quarter and YTD 2022, respectively. Salaries and employee benefits increased $2.6 million, or 4.0%, and $12.5 million, or 9.8%, for the second quarter and YTD periods of 2023, respectively, as compared to the corresponding periods of 2022. The remaining change to noninterest expenses are attributed to data processing and communications (up $0.7 million for the quarter and $1.2 million YTD), amortization of intangible assets (down $0.1 million for the quarter and $0.2 million YTD), occupancy and equipment (consistent between the quarters and up $0.1 million YTD), legal and professional fees (down $0.3 million for the quarter and up $1.3 million YTD), business development and marketing (up $1.0 million for the quarter and $1.1 million YTD) and other expenses (up $2.1 million for the quarter and $4.5 million YTD). 43 Table of Contents The increase in salaries and benefits was driven by increases in merit and severance-related employee wages, minimum wage-related escalation 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 mid-second quarter 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 January 1, 2023. Legal and professional fees were up on a YTD basis primarily due to fees associated with product launches in the employee benefit services business and other various matters. 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. Business development and marketing expenses increased due to the Company’s investment in digital marketing automation technologies and higher levels of targeted advertisements intended to generate deposits. The Company’s GAAP efficiency ratio was 64.5% for the second quarter of 2023, 1.5 percentage points favorable to the comparable quarter of 2022. This resulted from total revenues increasing 4.8%, primarily due to higher net interest income as a result of net interest margin expansion, while total noninterest expenses increased 2.4% due to the factors noted above. The GAAP efficiency ratio of 75.8% for June YTD 2023 was 11.7 percentage points unfavorable to the 64.1% GAAP efficiency ratio for June YTD 2022. The increase in the GAAP efficiency ratio between the comparable YTD periods was the result of total revenues decreasing 8.5% primarily due to the $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the first quarter of 2023, while total noninterest expenses increased 8.0% due to the factors noted above. Annualized current quarter noninterest expenses as a percentage of average assets increased 0.12 percentage points versus the second quarter of the prior year as noninterest expenses increased 2.4% while average assets decreased 2.0%. On a YTD basis, annualized noninterest expenses as a percentage of average assets increased 0.27 percentage points as noninterest expenses increased 8.0% while average assets decreased 1.7%. Noninterest expenses increased between both periods due to the factors noted above and average assets decreased between both periods primarily due to the aforementioned sale of certain available-for-sale investment securities during the first quarter of 2023. The Company’s non-GAAP efficiency ratio (as defined in the table above) was 61.7% for the second quarter, 0.6 percentage points unfavorable to the comparable quarter of 2022. This resulted from operating expenses (as described above) increasing 6.0%, while operating revenues (as described above) increased 4.9%. The efficiency ratio of 62.1% for the first six months of 2023 was 1.7 percentage points unfavorable compared to the first six months of 2022 due to 10.4% higher operating expenses (as described above), while operating revenues (as described above) increased by 7.4%. Current year operating expenses (as described above) as a percentage of average assets increased 0.22 percentage points versus the prior year quarter and increased 0.32 percentage points versus the prior year-to-date period as operating expenses (as defined above) increased while average assets decreased on both a quarterly and YTD basis. Operating expenses (as defined above) increased 6.0% for the quarter and 10.4% for the year-to-date period, while average assets decreased 2.0% for the quarter and 1.7% for the year-to-date period. Income Taxes The second quarter and YTD 2023 effective income tax rates were 21.4% and 21.0%, respectively, as compared to 21.6% and 21.5% for the comparable periods of 2022. The decrease in the second quarter and YTD 2023 effective income tax rates are primarily attributable 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. The Company recorded a $0.3 million and $0.6 million reduction in income tax expense associated with stock-based compensation tax benefits for YTD 2023 and YTD 2022, respectively. The effective tax rates adjusted to exclude stock-based compensation tax benefits for both the second quarter and YTD 2023 were 21.4%, as compared to 21.6% and 22.0% for the comparable periods of 2022. Investment Securities The carrying value of investment securities (including unrealized gains and losses) was $4.23 billion at the end of the second quarter, a decrease of $1.08 billion, or 20.4%, from December 31, 2022 and $1.41 billion, or 25.0%, lower than June 30, 2022. The carrying value of cash equivalents was $34.6 million at the end of the second quarter, an increase of $16.2 million from December 31, 2022 and $14.3 million from June 30, 2022. The book value of investment securities (excluding unrealized gains and losses) of $4.67 billion at the end of the second quarter decreased $1.17 billion from December 31, 2022 and $1.64 billion from June 30, 2022. During the first six months of 2023, the Company purchased $9.8 million of government agency mortgage-backed securities with an average yield of 5.23%, 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 2023 balance sheet repositioning and $394.5 million of investment maturities, calls and principal payments during the first six months of 2023. Additionally, there was $20.4 million of net accretion on investment securities during the first six months of 2023. The effective duration of the investment securities portfolio was 7.2 years at the end of the second quarter of 2023, as compared to 6.3 years at the end of 2022 and 6.7 years at the end of the second quarter of 2022. 44 Table of Contents The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At June 30, 2023, the investment portfolio (excluding held-to-maturity investment securities) had a $435.0 million net unrealized loss, as compared to a $522.7 million net unrealized loss at December 31, 2022 and a $663.9 million net unrealized loss at June 30, 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 aforementioned balance sheet repositioning. The following table sets forth the carrying value of the Company’s investment securities portfolio: Table 6: Investment Securities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, December 31, ​ June 30, (000’s omitted) ​ 2023 ​ 2022 ​ ​ 2022 Available-for-Sale Portfolio: ​ ​ ​ ​ ​ ​ U.S. Treasury and agency securities ​ $ 2,189,845 ​ $ 3,243,537 ​ $ 4,615,546 Obligations of state and political subdivisions ​ 491,963 ​ 504,297 ​ ​ 527,155 Government agency mortgage-backed securities ​ 365,506 ​ 384,633 ​ ​ 425,357 Corporate debt securities ​ 7,097 ​ 7,114 ​ ​ 7,231 Government agency collateralized mortgage obligations ​ 10,459 ​ 12,270 ​ ​ 15,138 Total available-for-sale portfolio ​ ​ 3,064,870 ​ 4,151,851 ​ ​ 5,590,427 ​ ​ ​ ​ ​ ​ ​ ​ Held-to-Maturity Portfolio: ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Treasury and agency securities ​ ​ 1,094,267 ​ ​ 1,079,695 ​ ​ 0 Government agency mortgage-backed securities ​ ​ 9,753 ​ ​ 0 ​ ​ 0 Total held-to-maturity portfolio ​ ​ 1,104,020 ​ ​ 1,079,695 ​ ​ 0 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity and other Securities: ​ ​ ​ ​ ​ ​ ​ ​ Equity securities, at fair value ​ 369 ​ 419 ​ ​ 443 Federal Home Loan Bank common stock ​ 23,663 ​ 47,497 ​ ​ 13,199 Federal Reserve Bank common stock ​ 33,568 ​ 31,144 ​ ​ 35,323 Other equity securities, at adjusted cost ​ ​ 5,409 ​ ​ 4,282 ​ ​ 3,630 Total equity and other securities ​ 63,009 ​ 83,342 ​ ​ 52,595 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total investments ​ $ 4,231,899 ​ $ 5,314,888 ​ $ 5,643,022 ​ Loans Loans ended the second quarter at $9.17 billion, $361.4 million, or 4.1%, higher than December 31, 2022 ending loans and $1.03 billion, or 12.6%, higher than June 30, 2022. The business lending portfolio consists of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and vehicle dealer floor plan financing. The business lending portfolio increased $501.7 million, or 15.1%, from June 30, 2022 and increased $188.0 million, or 5.2%, from December 31, 2022, driven by net 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 lines of credit, partially offset by decreases in commercial and industrial term loans. While certain macroeconomic concerns are emerging related to non-owner occupied commercial real estate, the Company’s exposure to this portfolio remains relatively low at 180% of total bank-level capital. The increases in these segments are reflective of continued high 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. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category. 45 Table of Contents Consumer mortgages increased $168.3 million, or 5.8%, from one year ago and increased $59.6 million, or 2.0%, from December 31, 2022, reflective of organic growth. Over the past year the Company produced net organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, investments in additional resources and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets. Home equity loans increased $13.7 million, or 3.2%, from one year ago, and increased $5.2 million, or 1.2%, from December 31, 2022, in part aided by lower levels of consumer mortgage refinancing-related payoffs and paydowns in the higher interest rate environment. 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 $342.4 million, or 23.1%, from one year ago and increased $108.5 million, or 6.3%, 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 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. Asset Quality The following table sets forth the allocation of the allowance for credit losses by loan category as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to 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, total allowance for credit losses at the end of the second quarter was $63.3 million, an increase of $7.7 million, or 13.9%, from one year earlier and an increase of $2.2 million, or 3.6%, from the end of 2022. Table 7: Allowance for Credit Losses by Loan Type ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, 2023 December 31, 2022 June 30, 2022 ​ ​ ​ ​ ​ Percent of ​ ​ ​ ​ Percent of ​ ​ ​ ​ Percent of ​ ​ ​ ​ ​ ​ Total ​ ​ ​ ​ Total ​ ​ ​ ​ Total ​ (000’s omitted except for ratios) ​ Allowance Loans Allowance Loans Allowance Loans ​ Business lending ​ $ 25,291 ​ 41.8 % $ 23,297 ​ 41.4 % $ 23,241 ​ 40.9 % Consumer mortgage ​ 14,553 33.5 % 14,343 34.2 % 12,631 35.7 % Consumer indirect ​ 17,808 17.9 % 17,852 17.5 % 14,378 16.1 % Consumer direct ​ 3,032 2.0 % 2,973 2.0 % 2,822 2.1 % Home equity ​ 1,600 4.8 % 1,594 4.9 % 1,470 5.2 % Unallocated ​ ​ 1,000 ​ 0.0 % ​ 1,000 ​ 0.0 % ​ 1,000 ​ 0.0 % Total ​ $ 63,284 100.0 % $ 61,059 100.0 % $ 55,542 100.0 % ​ As demonstrated in Table 7, the consumer direct and indirect installment loan portfolios carry higher credit risk than the business lending, consumer mortgage and home equity portfolios and therefore the Company allocates a higher proportional allowance to these portfolios. The unallocated allowance is maintained for potential inherent losses in the specific portfolios that are not captured due to model imprecision. The unallocated allowance of $1.0 million at June 30, 2023 was consistent with December 31, 2022 and June 30, 2022. The changes in allowance allocations reflect management’s continued refinement of its loss estimation techniques. However, given the inherent imprecision in the many estimates used in the determination of the allocated portion of the allowance, management remained conservative in the approaches used to establish the overall allowance for credit losses. Management considers the allocated and unallocated portions of the allowance for credit losses to be prudent and reasonable. 46 Table of Contents Allowance for credit losses and loan net charge-off ratios are as follows: Table 8: Loan Ratios ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ June 30, ​ ​ 2023 2022 2022 Allowance for credit losses/total loans ​ 0.69 % 0.69 % 0.68 % Allowance for credit losses/nonperforming loans ​ 190 % 183 % 150 % Nonaccrual loans/total loans ​ 0.33 % 0.33 % 0.39 % Allowance for credit losses/nonaccrual loans ​ 211 % 209 % 175 % Net charge-offs (annualized) to average loans outstanding (quarterly): ​ ​ ​ ​ ​ ​ ​ ​ Business lending ​ ​ 0.02 % 0.01 % (0.01) % Consumer mortgage ​ ​ 0.02 % ​ 0.01 % ​ 0.01 % Consumer indirect ​ ​ 0.05 % ​ 0.46 % ​ 0.15 % Consumer direct ​ ​ 0.17 % ​ 0.41 % ​ (0.02) % Home equity ​ ​ 0.07 % ​ (0.01) % ​ 0.00 % Total loans ​ ​ 0.03 % ​ 0.09 % ​ 0.02 % ​ Net charge-offs during the second quarter of 2023 were $0.7 million, an increase of $0.3 million compared to the second quarter of 2022. All portfolios with the exception of consumer indirect experienced higher charge-off levels in the second quarter of 2023 compared to the second quarter of 2022. The total net charge-off ratio (net charge-offs annualized as a percentage of average loans outstanding for the quarter) for the second quarter was 0.03%, six basis points lower than the ratio at December 31, 2022 and one basis point higher than the ratio at June 30, 2022. Net charge-off ratios for the second quarter of 2023 for the business lending, consumer mortgage, and home equity portfolios were above the Company’s average for the trailing eight quarters, while the net charge-off ratio for the consumer indirect and consumer direct portfolios were below the Company’s average for the trailing eight quarters. Economic conditions have been 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 June 30, 2023 was $0.6 million. This compares to $0.5 million at December 31, 2022 and $0.6 million at June 30, 2022. At June 30, 2023, OREO consisted of 11 residential properties with a total value of $0.6 million. This compares to seven residential properties with a total value of $0.5 million at December 31, 2022, and nine residential properties with a total value of $0.5 million and one commercial property with a value of $0.1 million at June 30, 2022. Approximately 11% of the nonperforming loans at June 30, 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 Company’s market area, particularly in the recreational and lodging industry. Approximately 81% of nonperforming loans at June 30, 2023 were comprised of consumer mortgages. Collateral values of residential properties within most of the Company’s market areas have generally remained stable or increased over the past several years. Although high inflation has had some adverse impact on consumers, the unemployment rate remains low and this has contributed to the credit performance in the consumer mortgage loan segment remaining favorable. 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 190% at the end of the second quarter, as compared to 183% at year-end 2022 and 150% at June 30, 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. Based on this analysis, a relationship may be assigned a special assets officer or other senior lending officer to review the loan, meet with the borrowers, assess the collateral and recommend an action plan. This plan could include foreclosure, restructuring loans, issuing demand letters or other actions. The Company’s larger criticized credits are also reviewed on a quarterly basis by senior credit administration management, special assets officers and business lending management to monitor their status and discuss credit management plans. Business lending management reviews the criticized business loan portfolio on a monthly basis. 47 Table of Contents Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 0.83% at the end of the second quarter, six basis points below the 0.89% at year-end 2022 and eight basis points above the 0.75% at June 30, 2022. The business lending delinquency ratio at the end of the second quarter of 0.41% was one basis point above the level of 0.40% at December 31, 2022 and June 30, 2022, due a generally stable business environment in the Company’s market area. The delinquency rates for the consumer indirect and home equity portfolios decreased as compared to the levels at December 31, 2022, while consumer mortgage increased and consumer direct remained consistent. The delinquency rates for the consumer direct, home equity, and consumer mortgage all increased compared to the levels at June 30, 2022, while delinquency rates for consumer indirect decreased. The Company recorded a $0.8 million provision for credit losses in the second quarter of 2023. The second quarter provision for credit losses was $5.3 million lower than the equivalent prior year period’s provision for credit losses of $6.0 million, which included $3.9 million of acquisition-related provision for credit losses from the Elmira acquisition. The second quarter of 2023 provision for credit losses reflects stable economic forecasts and asset quality metrics as well as net loan growth between the periods. The allowance for credit losses of $63.3 million as of June 30, 2023 increased $2.2 million compared to December 31, 2022 and increased $7.7 million compared to June 30, 2022. The allowance for credit losses to total loans ratio was 0.69% at June 30, 2023, consistent with the level at December 31, 2022 and one basis point higher than the level at June 30, 2022. Refer to Note E: Loans and Allowance for Credit Losses in the notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses. As of June 30, 2023, the net purchase discount related to the $1.13 billion of remaining non-PCD loan balances acquired in prior period acquisitions was approximately $22.5 million, or 2.0% of that portfolio. Deposits As shown in Table 9, average deposits of $12.89 billion in the second quarter were $441.1 million, or 3.3%, lower than the second quarter of 2022. Total average deposit balances decreased $291.0 million, or 2.2%, from the fourth quarter of last year, while on an ending basis total deposits decreased $140.5 million, or 1.1%, from December 31, 2022. The mix of average deposit balances changed as the weighting of non-maturity deposits (noninterest checking, interest checking, savings and money market) to total deposits has decreased slightly from the prior year levels. Average noninterest checking deposits as a percentage of average total deposits was 29.8% in the second quarter compared to 30.5% in the second quarter of 2022 and 31.9% in the fourth quarter of last year. Average non-maturity deposits (noninterest checking, interest checking, savings and money market) represented 90.9% of the Company’s deposit funding base and time deposits represented 9.1% of total average deposits in the second quarter of 2023 compared to 92.9% and 7.1%, respectively in the equivalent period year period. The quarterly average cost of deposits was 0.59% for the second quarter of 2023, compared to 0.18% for the fourth quarter of 2022 and 0.08% in the second 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, as well as a decline in the proportion of noninterest and low-rate deposit balances. 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 June 30, 2023 is comprised of approximately 63% consumer, 26% business and 11% municipal, and broadly dispersed with an average personal 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, 72% of the Company’s total deposits 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 June 30, 2023, the Company’s total uninsured deposits, net of collateralized and intercompany deposits, is estimated at approximately $2.05 billion. This amount is determined by adjusting the amounts reported in the Bank Call Report by intercompany deposits, which are not customer facing and are therefore eliminated in consolidation, and municipal deposits which are collateralized by certain pledged investment securities. The Bank Call Report estimated uninsured deposit balances at June 30, 2023 are reported gross at $3.60 billion, which includes intercompany accounts of $304.2 million and collateralized deposits of $1.24 billion. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of second quarter ending total deposits. Average nonpublic fund deposits for the second quarter of 2023 decreased $444.4 million, or 3.8%, versus the fourth quarter of 2022 and decreased $297.9 million, or 2.5%, versus the year-earlier period. Average public fund deposits for the second quarter increased $153.4 million, or 11.4%, from the fourth quarter of 2022 primarily due to the Company’s competitive pricing and business development efforts and decreased $143.2 million, or 8.7%, from the second 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 12.3% in the second quarter of 2022 to 11.6% in the second quarter of 2023. 48 Table of Contents Table 9: Quarterly Average Deposits ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ June 30, (000’s omitted) 2023 2022 2022 Noninterest checking deposits ​ $ 3,836,341 ​ $ 4,198,086 $ 4,061,738 Interest checking deposits ​ ​ 3,117,984 ​ 3,264,432 ​ 3,436,320 Savings deposits ​ ​ 2,386,908 ​ 2,441,720 ​ 2,410,405 Money market deposits ​ ​ 2,369,203 ​ 2,383,216 ​ 2,476,999 Time deposits ​ ​ 1,179,104 ​ ​ 893,074 ​ 945,135 Total deposits ​ $ 12,889,540 ​ $ 13,180,528 $ 13,330,597 Nonpublic fund deposits ​ $ 11,393,890 ​ $ 11,838,284 $ 11,691,764 Public fund deposits ​ ​ 1,495,650 ​ ​ 1,342,244 ​ 1,638,833 Total deposits ​ $ 12,889,540 ​ $ 13,180,528 $ 13,330,597 ​ Borrowings Borrowings, excluding securities sold under agreement to repurchase, at the end of the second quarter of 2023 totaled $251.3 million. This was $539.8 million lower than borrowings at December 31, 2022 and $162.6 million above the level at the end of the second quarter of 2022. The increase from the prior year second quarter was primarily due to an increase in overnight borrowings of $168.0 million to support the funding of loan growth. The decrease from the fourth quarter of 2022 was primarily related to a decrease in overnight borrowings of $534.4 million as the Company utilized proceeds from its first quarter securities sales 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 customer accounts that price and operate similar to a deposit instrument. Customer repurchase agreements were $233.5 million at the end of the second quarter of 2023, a decrease of $113.2 million from December 31, 2022 due primarily to the seasonal characteristics of this portfolio, and were $9.7 million above their level at June 30, 2022. Shareholders’ Equity and Regulatory Capital Total shareholders’ equity was $1.62 billion at the end of the second quarter, up $65.7 million from the balance at December 31, 2022. The increase was driven by $74.7 million of other comprehensive income, net of tax, net income of $54.1 million, $4.2 million recognized from employee stock options earned and net activity under the Company’s employee stock plans of $0.6 million, partially offset by dividends declared of $47.4 million and common stock repurchased of $20.5 million. The other comprehensive income, net of tax, was comprised of a $75.3 million increase in the after-tax market value adjustment on the available-for-sale investment portfolio due to 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 six months and the recognition of the loss on sales of available-for-sale investment securities related to aforementioned balance sheet repositioning, partially offset by a negative $0.6 million adjustment to the funded status of the Company’s retirement plans. Over the past 12 months, total shareholders’ equity decreased $44.3 million, as a decrease in the 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, the issuance of common stock in association with the employee stock plan, the accretion of the market value adjustment associated with the transfer of securities from available-for-sale to held-to-maturity and the Company’s benefit plans. The dividend payout ratio (dividends declared divided by net income) for the first six months of 2023 was 87.7%, compared to 53.5% for the six months ended June 30, 2022. Excluding the after-tax impact of the loss on sales of investment securities, the YTD 2023 dividend payout ratio was 49.8%. Dividends declared for the first six months of 2023 increased 2.0% compared to the first six months of 2022, 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 37.7% versus the equivalent year-to-date period due to increases in operating expenses and realized loss on investment securities, partially offset by increases in net interest income and noninterest revenues and a decrease in the provision for credit losses. Excluding the after-tax impact of the securities sales in the first quarter of 2023, net income increased 9.7% between the first six months of 2023 and the equivalent prior year period. Additionally, the number of common shares outstanding decreased 0.4% over the last twelve months, as common stock repurchases outweighed new issuance activity in the Company’s employee stock plans. During the third quarter of 2023, the Company announced an additional one-cent, or 2.3%, increase in the quarterly dividend to $0.45 per share on its common stock, which marked the 31 st consecutive year of dividend increases for the Company. 49 Table of Contents 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 and ability to pay dividends. 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” 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 June 30, 2023 and December 31, 2022. Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer as of June 30, 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%, (ii) Tier 1 capital to total risk-weighted assets (“Tier 1 risk-based capital ratio”) of at least 8.5%, and (iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets (“Total risk-based capital ratio”) of at least 10.5%. In addition, the Company and Bank must maintain a ratio of ending Tier 1 capital to adjusted quarterly average assets (“Tier 1 leverage ratio”) of at least 5.0% to be considered “well capitalized” under the regulatory framework for prompt corrective action. As of June 30, 2023 and December 31, 2022, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”. As of June 30, 2023 and December 31, 2022, the regulatory capital ratios for the Company and Bank are presented below. Table 10: Regulatory Ratios ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, 2023 December 31, 2022 ​ ​ Community Bank ​ Community ​ Community Bank ​ Community ​ System, Inc. Bank, N.A. System, Inc. Bank, N.A. ​ Tier 1 leverage ratio ​ 9.35 % 7.81 % 8.79 % 7.26 % Common equity Tier 1 capital ratio 15.20 % 12.66 % 15.71 % 12.86 % Tier 1 risk-based capital ratio 15.20 % 12.66 % 15.71 % 12.86 % Total risk-based capital ratio 15.90 % 13.36 % 16.40 % 13.56 % ​ The Company’s Tier 1 leverage ratio, a primary measure of regulatory capital as defined above, was 9.35% at the end of the second quarter, up 0.56 percentage points from December 31, 2022 and 0.70 percentage points above 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 (net of associated deferred tax liabilities or “net intangibles”) and other comprehensive income or loss items, decreasing 0.7%, primarily as a result of common share repurchases slightly outweighing earnings retention that was negatively impacted by the realized loss on investment security sales in connection with the first quarter 2023 balance sheet repositioning, while average assets, excluding intangibles and the market value adjustment on investments, decreased 6.5%. The Tier 1 leverage ratio increased compared to the prior year’s second quarter as shareholders’ equity, excluding net intangibles and other comprehensive income or loss items, increased 4.9% as net earnings retention outweighed share repurchases, while average assets, excluding intangibles and the market value adjustment on investments, decreased 2.9%. The decrease in average assets, excluding intangibles and the market value adjustment on investments, between both periods was primarily due to the impact from the Company’s first quarter 2023 balance sheet repositioning. The shareholders’ equity-to-assets ratio was 10.71% at the end of the second quarter of 2023 compared to 9.80% at December 31, 2022 and 10.73% at June 30, 2022. The tangible equity-to-assets ratio (a non-GAAP measure) of 5.34% increased 0.70 percentage points from December 31, 2022 and decreased 0.06 percentage points versus June 30, 2022 (see Table 11 for Reconciliation of Quarterly GAAP to Non-GAAP Measures). The decrease in the tangible equity-to-assets ratio (non-GAAP) from one year prior was primarily driven by a $28.5 million, or 3.6%, decrease in tangible equity due to the decline in accumulated other comprehensive loss related to the Company’s investment securities portfolio, partially offset by a $363.9 million, or 2.5%, decrease in tangible assets due primarily to the aforementioned sales and maturities of certain available-for-sale investment securities. The increase in the net tangible equity-to-assets ratio (non-GAAP) from December 31, 2022 was driven by a $65.7 million, or 9.5%, increase in tangible equity due to the increase in accumulated other comprehensive loss related to the Company’s investment securities portfolio, while tangible assets decreased $727.6 million, or 4.9%, primarily due to the reduction in investment securities and borrowings resulting from the Company’s first quarter balance sheet repositioning and investment maturities. 50 Table of Contents Liquidity Liquidity risk is a measure of the Company’s ability to raise cash when needed at a reasonable cost and minimize any loss. The Company maintains appropriate liquidity levels in both normal operating conditions as well as stressed environments. The Company must be capable of meeting all obligations to its customers at any time and, therefore, the active management of its liquidity position remains an important management objective. The Bank has appointed the Asset Liability Committee (“ALCO”) to manage liquidity risk using policy guidelines and limits on indicators of potential liquidity risk. The indicators are monitored using a scorecard with three risk level limits. These risk indicators measure core liquidity and funding needs, capital at risk and change in available funding sources. The risk indicators are monitored using such metrics as the core basic surplus ratio, unencumbered securities to average assets, free loan collateral to average assets, loans to deposits, deposits to total funding and borrowings to total funding ratios. Given the uncertain nature of the Company’s customers’ demands, as well as the Company’s desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on and off-balance sheet funds available that can be utilized when needed. Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity must be supplemented with additional sources such as credit lines from correspondent banks and borrowings from the FHLB and the Federal Reserve. Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements, large certificates of deposit and the brokered CD market. The primary source of non-deposit funds are FHLB or Federal Reserve overnight advances, of which there were $234 million of outstanding borrowings at June 30, 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 June 30, 2023, the Bank had $222.8 million of cash and cash equivalents of which $34.6 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 $120.4 million at June 30, 2023. The Company also had $1.65 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and had $1.43 billion of funding availability at the Federal Reserve’s discount window. Additionally, the Company had approximately $1.05 billion of securities that could be sold or pledged at the FHLB or Federal Reserve to obtain additional funding. There was $25.0 million available in an unsecured line of credit with a correspondent bank at quarter end. The Company’s available sources of immediately available liquidity of $4.23 billion at the end of the second quarter of 2023 represent over 200% of the Company’s estimated uninsured deposits, net of collateralized and intercompany deposits, estimated at approximately $2.05 billion. The Company’s primary approach to measuring short-term liquidity is known as the Basic Surplus/Deficit model. It is used to calculate liquidity over two time periods: first, the amount of cash that could be made available within 30 days (calculated as liquid assets less short-term liabilities as a percentage of average assets); and second, a projection of subsequent cash availability over an additional 60 days. As of June 30, 2023, this ratio was 13.2% for 30-days and 12.0% for 90-days, excluding the Company’s capacity to borrow additional funds from the FHLB and other sources. This is considered to be a sufficient amount of liquidity based on the Company’s internal policy requirement of 7.5%. A sources and uses statement is used by the Company to measure intermediate liquidity risk over the next twelve months. As of June 30, 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 June 30, 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. 51 Table of Contents 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. 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 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 as filed with the SEC on May 10, 2023. ​ 52 Table of Contents Forward-Looking Statements This report contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Forward-looking statements often use words such as “anticipate,” “could,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “forecast,” “believe,” or other words of similar meaning. These statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. Moreover, the Company’s plans, objectives and intentions are subject to change based on various factors (some of which are beyond the Company’s control). Factors that could cause actual results to differ from those discussed in the forward-looking statements include: (1) 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; (3) the effect of, and changes in, monetary and fiscal policies and laws, including future changes in Federal and state statutory income tax rates and interest rate and other policy actions of the Board of Governors of the Federal Reserve System; (4) the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin; (5) future provisions for credit losses on loans and debt securities; (6) changes in nonperforming assets; (7) the effect of a fall in stock market or bond prices on the Company’s fee income businesses, including its employee benefit services, wealth management, and insurance businesses; (8) risks related to credit quality; (9) inflation, interest rate, liquidity, market and monetary fluctuations; (10) the strength of the U.S. economy in general and the strength of the local economies where the Company conducts its business; (11) the timely development of new products and services and customer perception of the overall value thereof (including features, pricing and quality) compared to competing products and services; (12) changes in consumer spending, borrowing and savings habits; (13) technological changes and implementation and financial risks associated with transitioning to new technology-based systems involving large multi-year contracts; (14) the ability of the Company to maintain the security of its financial, accounting, technology, data processing and other operating systems and facilities; (15) effectiveness of the Company’s risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, the Company’s ability to manage its credit or interest rate risk, the sufficiency of its allowance for credit losses and the accuracy of the assumptions or estimates used in preparing the Company’s financial statements and disclosures; (16) failure of third parties to provide various services that are important to the Company’s operations; (17) any acquisitions or mergers that might be considered or consummated by the Company and the costs and factors associated therewith, including differences in the actual financial results of the acquisition or merger compared to expectations and the realization of anticipated cost savings and revenue enhancements; (18) the ability to maintain and increase market share and control expenses; (19) the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of the Company and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, service fees, risk management, securities, capital requirements, and other aspects of the financial services industry; (20) changes in the Company’s organization, compensation and benefit plans and in the availability of, and compensation levels for, employees in its geographic markets; (21) the outcome of pending or future litigation and government proceedings; (22) other risk factors outlined in the Company’s filings with the SEC from time to time; and (23) the success of the Company at managing the risks of the foregoing. The foregoing list of important factors is not all-inclusive. For more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to the discussion under the heading “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 the Form 10-Q for the quarter ended March 31, 2023, as filed with the SEC on May 10, 2023. Any forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. ​ 53 Table of Contents Reconciliation of GAAP to Non-GAAP Measures Table 11: GAAP to Non-GAAP Reconciliations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, June 30, (000’s omitted) ​ 2023 ​ 2022 2023 2022 ​ Income statement data ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Pre-tax, pre-provision net revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (GAAP) ​ $ 48,291 ​ $ 39,805 ​ $ 54,089 ​ $ 86,860 ​ Income taxes ​ 13,182 ​ ​ 10,971 ​ 14,357 ​ ​ 23,748 ​ Income before income taxes ​ ​ 61,473 ​ ​ 50,776 ​ ​ 68,446 ​ ​ 110,608 ​ Provision for credit losses ​ ​ 752 ​ ​ 6,038 ​ ​ 4,252 ​ ​ 6,944 ​ Pre-tax, pre-provision net revenue (non-GAAP) ​ ​ 62,225 ​ ​ 56,814 ​ ​ 72,698 ​ ​ 117,552 ​ Acquisition expenses ​ ​ (1) ​ ​ 3,960 ​ ​ 56 ​ ​ 4,259 ​ Loss on sales of investment securities ​ ​ 0 ​ ​ 0 ​ ​ 52,329 ​ ​ 0 ​ Gain on debt extinguishment ​ ​ 0 ​ ​ 0 ​ ​ (242) ​ ​ 0 ​ Acquisition-related contingent consideration adjustment ​ ​ 1,000 ​ ​ 400 ​ ​ 1,000 ​ ​ 400 ​ Unrealized loss on equity securities ​ ​ 50 ​ ​ 22 ​ ​ 50 ​ ​ 20 ​ Adjusted pre-tax, pre-provision net revenue (non-GAAP) ​ $ 63,274 ​ $ 61,196 ​ $ 125,891 ​ $ 122,231 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Pre-tax, pre-provision net revenue per share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted earnings per share (GAAP) ​ $ 0.89 ​ $ 0.73 ​ $ 1.00 ​ $ 1.60 ​ Income taxes ​ ​ 0.25 ​ ​ 0.20 ​ ​ 0.27 ​ ​ 0.44 ​ Income before income taxes ​ ​ 1.14 ​ ​ 0.93 ​ ​ 1.27 ​ ​ 2.04 ​ Provision for credit losses ​ ​ 0.01 ​ ​ 0.12 ​ ​ 0.08 ​ ​ 0.11 ​ Pre-tax, pre-provision net revenue per share (non-GAAP) ​ ​ 1.15 ​ ​ 1.05 ​ ​ 1.35 ​ ​ 2.15 ​ Acquisition expenses ​ ​ 0.00 ​ ​ 0.07 ​ ​ 0.00 ​ ​ 0.08 ​ Loss on sales of investment securities ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.96 ​ ​ 0.00 ​ Gain on debt extinguishment ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ Acquisition-related contingent consideration adjustment ​ ​ 0.02 ​ ​ 0.01 ​ ​ 0.02 ​ ​ 0.01 ​ Unrealized loss on equity securities ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ Adjusted pre-tax, pre-provision net revenue per share (non-GAAP) ​ $ 1.17 ​ $ 1.13 ​ $ 2.33 ​ $ 2.24 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (GAAP) ​ $ 48,291 ​ $ 39,805 ​ $ 54,089 ​ $ 86,860 ​ Acquisition expenses ​ ​ (1) ​ ​ 3,960 ​ ​ 56 ​ ​ 4,259 ​ Tax effect of acquisition expenses ​ ​ 0 ​ ​ (856) ​ ​ (12) ​ ​ (919) ​ Subtotal (non-GAAP) ​ ​ 48,290 ​ ​ 42,909 ​ ​ 54,133 ​ ​ 90,200 ​ Loss on sales of investment securities ​ ​ 0 ​ ​ 0 ​ ​ 52,329 ​ ​ 0 ​ Tax effect of loss on sales of investment securities ​ ​ 0 ​ ​ 0 ​ ​ (11,171) ​ ​ 0 ​ Subtotal (non-GAAP) ​ ​ 48,290 ​ ​ 42,909 ​ ​ 95,291 ​ ​ 90,200 ​ Gain on debt extinguishment ​ ​ 0 ​ ​ 0 ​ ​ (242) ​ ​ 0 ​ Tax effect of gain on debt extinguishment ​ ​ 0 ​ ​ 0 ​ ​ 52 ​ ​ 0 ​ Subtotal (non-GAAP) ​ ​ 48,290 ​ ​ 42,909 ​ ​ 95,101 ​ ​ 90,200 ​ Acquisition-related contingent consideration adjustment ​ ​ 1,000 ​ ​ 400 ​ ​ 1,000 ​ ​ 400 ​ Tax effect of acquisition-related contingent consideration adjustment ​ ​ (214) ​ ​ (86) ​ ​ (214) ​ ​ (86) ​ Subtotal (non-GAAP) ​ ​ 49,076 ​ ​ 43,223 ​ ​ 95,887 ​ ​ 90,514 ​ Acquisition-related provision for credit losses ​ ​ 0 ​ ​ 3,927 ​ ​ 0 ​ ​ 3,927 ​ Tax effect of acquisition-related provision for credit losses ​ ​ 0 ​ ​ (848) ​ ​ 0 ​ ​ (848) ​ Subtotal (non-GAAP) ​ ​ 49,076 ​ ​ 46,302 ​ ​ 95,887 ​ ​ 93,593 ​ Unrealized loss on equity securities ​ ​ 50 ​ ​ 22 ​ ​ 50 ​ ​ 20 ​ Tax effect of unrealized loss on equity securities ​ ​ (11) ​ ​ (5) ​ ​ (11) ​ ​ (4) ​ Operating net income (non-GAAP) ​ ​ 49,115 ​ ​ 46,319 ​ ​ 95,926 ​ ​ 93,609 ​ Amortization of intangibles ​ ​ 3,705 ​ ​ 3,851 ​ ​ 7,372 ​ ​ 7,583 ​ Tax effect of amortization of intangibles ​ ​ (793) ​ ​ (832) ​ ​ (1,576) ​ ​ (1,629) ​ Subtotal (non-GAAP) ​ ​ 52,027 ​ ​ 49,338 ​ ​ 101,722 ​ ​ 99,563 ​ Acquired non-PCD loan accretion ​ ​ (886) ​ ​ (1,023) ​ ​ (1,965) ​ ​ (1,757) ​ Tax effect of acquired non-PCD loan accretion ​ ​ 190 ​ ​ 221 ​ ​ 420 ​ ​ 378 ​ Adjusted net income (non-GAAP) ​ $ 51,331 ​ $ 48,536 ​ $ 100,177 ​ $ 98,184 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Return on average assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Adjusted net income (non-GAAP) ​ $ 51,331 ​ $ 48,536 ​ $ 100,177 ​ $ 98,184 ​ Average total assets ​ ​ 15,150,001 ​ ​ 15,452,712 ​ ​ 15,257,833 ​ ​ 15,524,064 ​ Adjusted return on average assets (non-GAAP) ​ ​ 1.36 % ​ 1.26 % ​ 1.32 % ​ 1.28 % ​ 54 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended Six Months Ended ​ ​ ​ June 30, June 30, ​ (000's omitted) ​ 2023 2022 ​ 2023 ​ 2022 ​ Income statement data, continued ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Return on average equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Adjusted net income (non-GAAP) ​ $ 51,331 ​ $ 48,536 ​ $ 100,177 ​ $ 98,184 ​ Average total equity ​ ​ 1,632,992 ​ ​ 1,743,410 ​ ​ 1,605,010 ​ ​ 1,891,305 ​ Adjusted return on average equity (non-GAAP) ​ ​ 12.61 % ​ 11.17 % ​ 12.59 % ​ 10.47 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest margin ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest income ​ $ 109,279 ​ $ 103,141 ​ $ 220,309 ​ $ 198,013 ​ Total average interest-earning assets ​ ​ 13,940,636 ​ ​ 14,471,683 ​ ​ 14,071,904 ​ ​ 14,354,694 ​ Net interest margin ​ ​ 3.14 % ​ 2.86 % ​ 3.16 % ​ 2.78 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest margin (FTE) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest income ​ $ 109,279 ​ $ 103,141 ​ $ 220,309 ​ $ 198,013 ​ Fully tax-equivalent adjustment ​ ​ 1,080 ​ ​ 1,008 ​ ​ 2,171 ​ ​ 1,838 ​ Fully tax-equivalent net interest income ​ ​ 110,359 ​ ​ 104,149 ​ ​ 222,480 ​ ​ 199,851 ​ Total average interest-earning assets ​ ​ 13,940,636 ​ ​ 14,471,683 ​ ​ 14,071,904 ​ ​ 14,354,694 ​ Net interest margin (FTE) (non-GAAP) ​ ​ 3.18 % ​ 2.89 % ​ 3.19 % ​ 2.81 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted earnings per share (GAAP) ​ $ 0.89 ​ $ 0.73 ​ $ 1.00 ​ $ 1.60 ​ Acquisition expenses ​ 0.00 ​ 0.07 ​ ​ 0.00 ​ ​ 0.07 ​ Tax effect of acquisition expenses ​ 0.00 ​ (0.02) ​ ​ 0.00 ​ ​ (0.02) ​ Subtotal (non-GAAP) ​ 0.89 ​ 0.78 ​ ​ 1.00 ​ ​ 1.65 ​ Loss on sales of investment securities ​ 0.00 ​ 0.00 ​ ​ 0.96 ​ ​ 0.00 ​ Tax effect of loss on sales of investment securities ​ 0.00 ​ 0.00 ​ ​ (0.21) ​ ​ 0.00 ​ Subtotal (non-GAAP) ​ 0.89 ​ 0.78 ​ ​ 1.75 ​ ​ 1.65 ​ Gain on debt extinguishment ​ 0.00 ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ Tax effect of gain on debt extinguishment ​ 0.00 ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ Subtotal (non-GAAP) ​ 0.89 ​ 0.78 ​ ​ 1.75 ​ ​ 1.65 ​ Acquisition-related contingent consideration adjustment ​ 0.02 ​ 0.01 ​ ​ 0.02 ​ ​ 0.01 ​ Tax effect of acquisition-related contingent consideration adjustment ​ 0.00 ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ Subtotal (non-GAAP) ​ ​ 0.91 ​ ​ 0.79 ​ ​ 1.77 ​ ​ 1.66 ​ Acquisition-related provision for credit losses ​ ​ 0.00 ​ ​ 0.07 ​ ​ 0.00 ​ ​ 0.07 ​ Tax effect of acquisition-related provision for credit losses ​ ​ 0.00 ​ ​ (0.01) ​ ​ 0.00 ​ ​ (0.01) ​ Subtotal (non-GAAP) ​ ​ 0.91 ​ ​ 0.85 ​ ​ 1.77 ​ ​ 1.72 ​ Unrealized loss on equity securities ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ Tax effect of unrealized loss on equity securities ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​ Operating earnings per share (non-GAAP) ​ ​ 0.91 ​ ​ 0.85 ​ ​ 1.77 ​ ​ 1.72 ​ Amortization of intangibles ​ 0.07 ​ 0.07 ​ ​ 0.14 ​ ​ 0.14 ​ Tax effect of amortization of intangibles ​ (0.01) ​ (0.02) ​ ​ (0.02) ​ ​ (0.03) ​ Subtotal (non-GAAP) ​ ​ 0.97 ​ ​ 0.90 ​ ​ 1.89 ​ ​ 1.83 ​ Acquired non-PCD loan accretion ​ ​ (0.02) ​ ​ (0.02) ​ ​ (0.04) ​ ​ (0.03) ​ Tax effect of acquired non-PCD loan accretion ​ ​ 0.00 ​ ​ 0.01 ​ ​ 0.00 ​ ​ 0.01 ​ Diluted adjusted net earnings per share (non-GAAP) ​ $ 0.95 ​ $ 0.89 ​ $ 1.85 ​ $ 1.81 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest operating expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest expenses (GAAP) ​ $ 113,038 ​ $ 110,424 ​ $ 227,090 ​ $ 210,231 ​ Amortization of intangibles ​ ​ (3,705) ​ ​ (3,851) ​ ​ (7,372) ​ ​ (7,583) ​ Acquisition expenses ​ 1 ​ (3,960) ​ ​ (56) ​ ​ (4,259) ​ Acquisition-related contingent consideration adjustment ​ (1,000) ​ (400) ​ ​ (1,000) ​ ​ (400) ​ Total adjusted noninterest expenses (non-GAAP) ​ $ 108,334 ​ $ 102,213 ​ $ 218,662 ​ $ 197,989 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Efficiency ratio – GAAP ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Noninterest expenses (GAAP) - numerator ​ $ 113,038 ​ $ 110,424 ​ $ 227,090 ​ $ 210,231 ​ Net interest income (GAAP) ​ ​ 109,279 ​ ​ 103,141 ​ ​ 220,309 ​ ​ 198,013 ​ Noninterest revenues (GAAP) ​ ​ 65,984 ​ ​ 64,097 ​ ​ 79,479 ​ ​ 129,770 ​ Total revenues (GAAP) - denominator ​ $ 175,263 ​ $ 167,238 ​ $ 299,788 ​ $ 327,783 ​ Efficiency ratio (GAAP) ​ ​ 64.5 % ​ 66.0 % ​ 75.8 % ​ 64.1 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating efficiency ratio – non-GAAP ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Adjusted noninterest expenses (non-GAAP) - numerator ​ $ 108,334 ​ $ 102,213 ​ $ 218,662 ​ $ 197,989 ​ Fully tax-equivalent net interest income ​ ​ 110,359 ​ ​ 104,149 ​ ​ 222,480 ​ ​ 199,851 ​ Noninterest revenues ​ ​ 65,984 ​ ​ 64,097 ​ ​ 79,479 ​ ​ 129,770 ​ Acquired non-PCD loan accretion ​ ​ (886) ​ ​ (1,023) ​ ​ (1,965) ​ ​ (1,757) ​ Unrealized loss on equity securities ​ ​ 50 ​ ​ 22 ​ ​ 50 ​ ​ 20 ​ Loss on sales of investment securities ​ ​ 0 ​ ​ 0 ​ ​ 52,329 ​ ​ 0 ​ Gain on debt extinguishment ​ ​ 0 ​ ​ 0 ​ ​ (242) ​ ​ 0 ​ Operating revenues (non-GAAP) - denominator ​ $ 175,507 ​ $ 167,245 ​ $ 352,131 ​ $ 327,884 ​ Operating efficiency ratio (non-GAAP) ​ ​ 61.7 % ​ 61.1 % ​ 62.1 % ​ 60.4 % 55 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, December 31, June 30, ​ (000’s omitted) ​ 2023 ​ 2022 ​ 2022 Balance sheet data - at end of quarter ​ ​ ​ ​ ​ ​ ​ ​ ​ Total assets ​ ​ ​ ​ ​ ​ ​ ​ ​ Total assets (GAAP) ​ $ 15,108,050 ​ $ 15,835,651 ​ $ 15,487,833 ​ Intangible assets ​ (901,709) ​ (902,837) ​ (917,891) ​ Deferred taxes on intangible assets ​ 45,003 ​ 46,130 ​ 45,349 ​ Total tangible assets (non-GAAP) ​ $ 14,251,344 ​ $ 14,978,944 ​ $ 14,615,291 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total common equity ​ ​ ​ ​ ​ ​ ​ Shareholders' equity (GAAP) ​ $ 1,617,406 ​ $ 1,551,705 ​ $ 1,661,696 ​ Intangible assets ​ (901,709) ​ (902,837) ​ (917,891) ​ Deferred taxes on intangible assets ​ 45,003 ​ 46,130 ​ 45,349 ​ Total tangible common equity (non-GAAP) ​ $ 760,700 ​ $ 694,998 ​ $ 789,154 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shareholder's equity-to-assets ratio ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total shareholders' equity (GAAP) - numerator ​ $ 1,617,406 ​ $ 1,551,705 ​ $ 1,661,696 ​ Total assets (GAAP) - denominator ​ $ 15,108,050 ​ $ 15,835,651 ​ $ 15,487,833 ​ Shareholders' equity-to-assets ratio (GAAP) ​ ​ 10.71 % ​ 9.80 % ​ 10.73 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tangible equity-to-assets ratio at quarter end ​ ​ ​ ​ ​ ​ ​ Total tangible common equity (non-GAAP) - numerator ​ $ 760,700 ​ $ 694,998 ​ $ 789,154 ​ Total tangible assets (non-GAAP) - denominator ​ $ 14,251,344 ​ $ 14,978,944 ​ $ 14,615,291 ​ Tangible equity-to-assets ratio at quarter end (non-GAAP) ​ 5.34 % 4.64 % 5.40 % ​ ​