What changed in this filing

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Item 1. Financial Statements

2023-11-09 compared with 2023-08-09 · 234 added, 146 removed, 840 unchanged (31% of the section changed)

3 unchanged sentences

(In Thousands, Except Share Data)

September 30,

Cash and cash equivalents

18 unchanged sentences

Total liabilities

Commitments and contingencies (See Note I)

Commitments and contingencies (See Note J)

Shareholders’ equity:

5 unchanged sentences

Accumulated other comprehensive loss

Treasury stock, at cost ( 835,651 shares, including 118,136 shares held by deferred compensation arrangements at June 30, 2023, and 452,952 shares including 135,437 shares held by deferred compensation arrangements at December 31, 2022)

Treasury stock, at cost ( 936,823 shares, including 119,308 shares held by deferred compensation arrangements at September 30, 2023, and 452,952 shares including 135,437 shares held by deferred compensation arrangements at December 31, 2022)

Deferred compensation arrangements ( 119,308 and 135,437 shares, respectively)

6 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Interest income:

41 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Pension and other post retirement obligations:

4 unchanged sentences

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

Unrealized (losses) gains on investment securities:

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

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

Net unrealized losses on investment securities:

Net unrealized holding losses on investment securities, gross

Net unrealized holding losses on investment securities, net

Reclassification adjustment for net losses included in net income, gross

Reclassification adjustment for net losses included in net income, net

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

Other comprehensive (loss) income, net of taxes

Comprehensive income (loss)

Other comprehensive loss related to unrealized losses on investment securities, net of taxes

Other comprehensive loss, net of taxes

Comprehensive (loss) income

September 30,

Accumulated Other Comprehensive Loss By Component:

7 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Three months ended June 30, 2023 and 2022

Three months ended September 30, 2023 and 2022

(In Thousands, Except Share Data)

Comprehensive

Balance at March 31, 2023

Balance at June 30, 2023

Other comprehensive loss, net of tax

5 unchanged sentences

Treasury stock issued to benefit plans, net

Balance at September 30, 2023

Balance at June 30, 2022

Balance at March 31, 2022

Other comprehensive loss, net of tax

3 unchanged sentences

Stock-based compensation

Distribution of stock under deferred compensation arrangements

Treasury stock purchased

Treasury stock issued to benefit plans, net

Balance at June 30, 2022

Treasury stock purchased to benefit plans, net

Balance at September 30, 2022

See accompanying notes to consolidated financial statements (unaudited).

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Six months ended June 30, 2023 and 2022

Nine months ended September 30, 2023 and 2022

(In Thousands, Except Share Data)

1 unchanged sentence

Balance at December 31, 2022

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Dividends declared:

5 unchanged sentences

Treasury stock issued to benefit plans, net

Balance at June 30, 2023

Balance at September 30, 2023

Balance at December 31, 2021

7 unchanged sentences

Treasury stock issued to benefit plans, net

Balance at June 30, 2022

Balance at September 30, 2022

See accompanying notes to consolidated financial statements (unaudited).

2 unchanged sentences

(In Thousands)

Six Months Ended

Nine Months Ended

September 30,

Operating activities:

29 unchanged sentences

Financing activities:

Net decrease in deposits

Net increase in deposits

Net (decrease) increase in overnight borrowings

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

Net decrease in other Federal Home Loan Bank borrowings

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

Proceeds from other Federal Home Loan Bank borrowings

Payments on and maturities of other Federal Home Loan Bank borrowings

Payments of contingent consideration for acquisitions

Redemption of subordinated notes payable

4 unchanged sentences

Withholding taxes paid on share-based compensation

Net cash used in financing activities

Net cash (used in) provided by financing activities

Change in cash and cash equivalents

12 unchanged sentences

Fair value of liabilities assumed

Contingent consideration in exchange for acquired assets

See accompanying notes to consolidated financial statements (unaudited).

1 unchanged sentence

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2023

SEPTEMBER 30, 2023

BASIS OF PRESENTATION

The interim financial data as of and for the three and six months ended June 30, 2023 is unaudited;

The interim financial data as of and for the three and nine months ended September 30, 2023 is unaudited;

however, in the opinion of Community Bank System, Inc.

3 unchanged sentences

Current and Prior Period Acquisitions

On May 1, 2023, the Company, through its subsidiary OneGroup NY, Inc.

(“OneGroup”), completed the acquisition of certain assets of Hyde Park Insurance Services, Inc.

(“Hyde Park”), an insurance agency headquartered in Tampa, Florida for $ 4.3 million in cash.

The Company recorded a $ 2.8 million customer list intangible and recognized $ 1.5 million of goodwill in conjunction with the acquisition.

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

Revenues of approximately $ 0.2 million and direct expenses of approximately $ 0.1 million were included in the consolidated statements of income for the three and six months ended June 30, 2023.

During the nine months ended September 30, 2023, the Company, through its subsidiaries OneGroup NY, Inc.

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

(“Wealth Partners”), completed the acquisition of certain assets of five financial services companies.

The acquired companies provide insurance and wealth management services and are headquartered in New York, Pennsylvania, and Florida.

Total aggregate consideration for these acquisitions was $ 7.9 million, including $ 6.5 million in cash and $ 1.4 million in contingent consideration arrangements.

The contingent consideration arrangements are based on achieving certain levels of retained revenue over a period ranging from two to five years .

The fair value of these arrangements has been recorded based on the assumption that retained revenue levels will meet or exceed the required threshold for the maximum contingent consideration payments.

Aggregate assets acquired were $ 4.9 million, including $ 4.7 million of customer list intangible assets and the Company recorded goodwill of $ 3.0 million.

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

Revenues and direct expenses included in the consolidated statements of income for the three and nine months ended September 30, 2023 were immaterial.

On March 1, 2023, the Company completed the acquisition of certain assets of Axiom Realty Group, which includes Axiom Capital Corp., Axiom Realty Management, LLC and Axiom Realty Advisors, LLC (collectively referred to as “Axiom”) for $ 1.8 million in cash.

1 unchanged sentence

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

Revenues for the three months ended June 30, 2023 were immaterial and were approximately $ 0.1 million for the six months ended June 30, 2023.

Direct expenses of approximately $ 0.5 million and $ 0.7 million were included in the consolidated statements of income for the three and six months ended June 30, 2023, respectively.

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

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

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

Revenues of approximately $ 0.2 million and $ 0.3 million and direct expenses of approximately $ 0.1 million and $ 0.2 million were included in the consolidated statements of income for the three and six months ended June 30, 2023, respectively.

Revenues of approximately $ 0.3 million and $ 0.4 million and direct expenses of approximately $ 0.5 million and $ 1.2 million were included in the consolidated statements of income for the three and nine months ended September 30, 2023, respectively.

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

3 unchanged sentences

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

Revenues of approximately $ 3.5 million and $ 7.1 million and direct expenses of approximately $ 1.3 million and $ 2.4 million from the Elmira branch network, which may not include certain shared expenses, were included in the consolidated statements of income for the three and six months ended June 30, 2023, respectively.

Revenues of approximately $ 2.4 million and direct expenses of approximately $ 0.6 million from the Elmira branch network were included in the consolidated statements of income for the three and six months ended June 30, 2022.

Revenues of approximately $ 3.9 million and $ 11.0 million and direct expenses of approximately $ 1.1 million and $ 3.5 million from the Elmira branch network, which may not include certain shared expenses, were included in the consolidated statements of income for the three and nine months ended September 30, 2023, respectively.

Revenues of approximately $ 4.8 million and $ 7.2 million and direct expenses of approximately $ 1.2 million and $ 1.8 million from the Elmira branch network were included in the consolidated statements of income for the three and nine months ended September 30, 2022, respectively.

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

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

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

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

Included in the consolidated statements of income for the three and six months ended June 30, 2023 are revenues of approximately $ 0.2 million and $ 0.4 million, respectively, and direct expenses of approximately $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2023, respectively.

Revenues of approximately $ 0.3 million and $ 0.6 million and direct expenses of approximately $ 0.1 million and $ 0.2 million were included in the consolidated statements of income for the three and six months ended June 30, 2022, respectively.

During 2022, the Company, through its subsidiary OneGroup, completed acquisitions of certain assets of four insurance agencies for an aggregate amount of $ 3.5 million in cash.

The Company recorded a $ 2.9 million customer list intangible asset and a $ 0.1 million intangible asset for a noncompete agreement and recognized $ 0.5 million of goodwill in conjunction with the acquisitions.

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

Revenues and direct expenses included in the consolidated statements of income for the three and nine months ended September 30, 2023 and 2022 were immaterial.

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

Through the first six months of 2023, the carrying amount of loans, accrued interest and fees receivable, other assets and other liabilities associated with the Elmira acquisition was adjusted upon receipt of new information.

Through the first nine months of 2023, the carrying amount of loans, accrued interest and fees receivable, other assets and other liabilities associated with the Elmira acquisition was adjusted upon receipt of new information.

The adjustments resulted in a net decrease to goodwill of $ 0.1 million.

During the three months ended June 30, 2023, the carrying amount of other intangibles associated with the Axiom acquisition was adjusted upon receipt of new information.

During the nine months ended September 30, 2023, the carrying amount of other intangibles associated with the Axiom acquisition was adjusted upon receipt of new information.

The adjustment resulted in a net decrease to goodwill of $ 0.6 million.

The Elmira and Axiom acquisitions generally expanded the Company’s banking presence in New York.

The OneGroup acquisitions generally expanded the Company’s insurance services presence in New York and Florida.

The OneGroup and Wealth Partners acquisitions generally expanded the Company’s insurance and wealth management presence in New York, Florida and Pennsylvania.

Management expects that the Company will benefit from greater geographic diversity and the advantages of other synergistic business development opportunities.

2 unchanged sentences

Consideration:

Contingent consideration

Total net consideration

Recognized amounts of identifiable assets acquired and liabilities assumed:

9 unchanged sentences

Total identifiable assets, net

(1) Includes amounts for all OneGroup acquisitions completed in 2023, including immaterial acquisitions not described above.

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

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

(1) Includes amounts for four OneGroup acquisitions and one Wealth Partners acquisition completed in 2023.

(2) Includes amounts for four OneGroup acquisitions completed in 2022.

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

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

The Company acquired loans from Elmira for which there was evidence of a more-than-insignificant deterioration in credit quality since origination (PCD loans).

The Company acquired certain loans from Elmira for which there was evidence of a more-than-insignificant deterioration in credit quality since origination (PCD loans).

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

8 unchanged sentences

Borrowings assumed with the Elmira acquisition included Federal Home Loan Bank of New York (“FHLB”) borrowings with a fair value of $ 17.6 million, with maturity dates ranging from January 2023 through March 2027 and a weighted average interest rate of 2.48 %.

The core deposit intangibles related to the Elmira acquisition and other intangibles related to three of the OneGroup acquisitions completed in 2022, the OneGroup acquisitions completed in 2023, and the Axiom acquisition are being amortized using an accelerated method over an estimated useful life of eight years .

The core deposit intangibles related to the Elmira acquisition and other intangibles related to three of the OneGroup acquisitions completed in 2022, the OneGroup and Wealth Partners acquisitions completed in 2023, and the Axiom acquisition are being amortized using an accelerated method over an estimated useful life of eight years .

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

The goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the Elmira and Axiom acquisitions and the All Other segment for the OneGroup acquisitions completed in 2023 and the JMD acquisition.

The goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the Elmira and Axiom acquisitions and the All Other segment for the OneGroup and Wealth Partners acquisitions completed in 2023 and 2022.

Goodwill arising from the Elmira acquisition is not deductible for tax purposes.

Goodwill arising from the Axiom acquisition, the OneGroup acquisitions completed in 2023, and the JMD acquisition is deductible for tax purposes.

Goodwill arising from the Axiom acquisition and the OneGroup and Wealth Partners acquisitions completed in 2023 and 2022 is deductible for tax purposes.

Direct costs related to the acquisitions were expensed as incurred.

Merger and acquisition integration-related expenses were immaterial for the three months ended June 30, 2023 and $ 0.1 million for the six months ended June 30, 2023.

Merger and acquisition integration-related expenses were $ 4.0 million and $ 4.3 million during the three and six months ended June 30, 2022, respectively.

Merger and acquisition integration-related expenses were immaterial for the three and nine months ended September 30, 2023.

Merger and acquisition integration-related expenses were $ 0.4 million and $ 4.7 million during the three and nine months ended September 30, 2022, respectively.

These expenses have been separately stated in the consolidated statements of income.

Supplemental Pro Forma Financial Information

The following unaudited condensed pro forma information assumes the Elmira acquisition had been completed as of January 1, 2021 for the three and six months ended June 30, 2022.

The following unaudited condensed pro forma information assumes the Elmira acquisition had been completed as of January 1, 2021 for the three and nine months ended September 30, 2022.

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

1 unchanged sentence

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

Acquisition-related expenses totaling $ 4.0 million and $ 4.3 million for the three and six months ended June 30, 2022, respectively, related to Elmira were included in the pro forma information as if they were incurred in the first quarter of 2021.

Acquisition-related expenses totaling $ 0.4 million and $ 4.7 million for the three and nine months ended September 30, 2022, respectively, related to Elmira were included in the pro forma information as if they were incurred in the first quarter of 2021.

The effects of the Elmira acquisition are reflected in all periods in 2023.

Pro Forma (Unaudited)

Three Months Ended

Six Months Ended

Nine Months Ended

(000’s omitted)

June 30, 2022

September 30, 2022

Total revenue, net of interest expense

ACCOUNTING POLICIES

SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the Company, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 76 through 87 of the Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 1, 2023 except as noted below.

5 unchanged sentences

The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances.

As of June 30, 2023, $ 32.5 million of accounts receivable, including $ 8.5 million of unbilled fee revenue, and $ 1.1 million of unearned revenue, was recorded in the consolidated statements of condition.

As of September 30, 2023, $ 35.3 million of accounts receivable, including $ 8.1 million of unbilled fee revenue and $ 0.9 million of unearned revenue, was recorded in the consolidated statements of condition.

As of December 31, 2022, $ 33.3 million of accounts receivable, including $ 8.8 million of unbilled fee revenue, and $ 1.1 million of unearned revenue, was recorded in the consolidated statements of condition.

18 unchanged sentences

INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities as of June 30, 2023 and December 31, 2022 are as follows:

June 30, 2023

The amortized cost and estimated fair value of investment securities as of September 30, 2023 and December 31, 2022 are as follows:

September 30, 2023

December 31, 2022

17 unchanged sentences

Total equity and other securities

Included in the Company’s investment securities portfolio is Federal Reserve Bank (“FRB”) common stock with a carrying value of $ 33.6 million and $ 31.1 million at September 30, 2023 and December 31, 2022, respectively.

The investment in FRB stock represents approximately half of the total required subscription, and the remaining half is unpaid and remains subject to call by the FRB.

A summary of investment securities that have been in a continuous unrealized loss position is as follows:

As of June 30, 2023

As of September 30, 2023

Less than 12 Months

31 unchanged sentences

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

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

Timely interest payments continue to be made on the securities.

The unrealized losses in the portfolios are primarily attributable to changes in interest rates.

As such, management does not believe any individual unrealized loss as of June 30, 2023 represents credit losses and no unrealized losses have been recognized in the provision for credit losses.

Accordingly, there is no allowance for credit losses on the Company’s available-for-sale investment portfolio as of June 30, 2023.

Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 12.7 million at June 30, 2023 and is excluded from the estimate of credit losses.

As such, management does not believe any individual unrealized loss as of September 30, 2023 represents credit losses and no unrealized losses have been recognized in the provision for credit losses.

Accordingly, there is no allowance for credit losses on the Company’s available-for-sale investment portfolio as of September 30, 2023.

Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 11.8 million at September 30, 2023 and is excluded from the estimate of credit losses.

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

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

The Company notes that at June 30, 2023 all securities in the held-to-maturity classification are U.S.

The Company notes that at September 30, 2023 all securities in the held-to-maturity classification are U.S.

Treasury securities and government agency mortgage-backed securities;

2 unchanged sentences

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

At June 30, 2023 the U.S.

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

At September 30, 2023, the U.S.

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

On August 1, 2023, Fitch downgraded the U.S.

4 unchanged sentences

Management has concluded that the prepayment risk associated with these securities is insignificant and it is expected to recover the recorded investment.

Accordingly, there is no allowance for credit losses on the Company’s held-to-maturity debt portfolio as of June 30, 2023.

Accrued interest receivable on held-to-maturity debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 4.7 million at June 30, 2023 and is excluded from the estimate of credit losses.

Accordingly, there is no allowance for credit losses on the Company’s held-to-maturity debt portfolio as of September 30, 2023.

Accrued interest receivable on held-to-maturity debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 2.9 million at September 30, 2023 and is excluded from the estimate of credit losses.

The Company has the intent and ability to hold the securities to maturity.

The amortized cost and estimated fair value of debt securities at June 30, 2023, by contractual maturity, are shown below.

The amortized cost and estimated fair value of debt securities at September 30, 2023, by contractual maturity, are shown below.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

9 unchanged sentences

Government agency collateralized mortgage obligations

Investment securities with a fair value of $ 3.45 billion and $ 2.18 billion at June 30, 2023 and December 31, 2022, respectively, were pledged to collateralize certain deposits, borrowings and potential future borrowings.

Investment securities with a fair value of $ 2.19 billion and $ 2.18 billion at September 30, 2023 and December 31, 2022, respectively, were pledged to collateralize certain deposits, borrowings and potential future borrowings.

Securities pledged to collateralize certain deposits and borrowings included $ 542.8 million and $ 466.9 million of U.S.

Treasury securities that were pledged as collateral for securities sold under agreement to repurchase at June 30, 2023 and December 31, 2022, respectively.

All securities sold under agreement to repurchase as of June 30, 2023 and December 31, 2022 have an overnight and continuous maturity.

Treasury securities that were pledged as collateral for securities sold under agreement to repurchase at September 30, 2023 and December 31, 2022, respectively.

All securities sold under agreement to repurchase as of September 30, 2023 and December 31, 2022 have an overnight and continuous maturity.

During the first quarter of 2023, the Company sold $ 786.1 million in book value of available-for-sale U.S.

4 unchanged sentences

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

September 30,

(000’s omitted)

6 unchanged sentences

Loans, net of allowance for credit losses

The following table presents the aging of the amortized cost basis of the Company’s past due loans by segment as of June 30, 2023:

The following table presents the aging of the amortized cost basis of the Company’s past due loans by segment as of September 30, 2023:

90+ Days Past

13 unchanged sentences

Consumer direct

No interest income on nonaccrual loans was recognized during the three and six months ended June 30, 2023.

No interest income on nonaccrual loans was recognized during the three and nine months ended September 30, 2023.

An immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income.

10 unchanged sentences

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

The following tables show the amount of business lending loans by credit quality category at June 30, 2023 and December 31, 2022:

The following tables show the amount of business lending loans by credit quality category at September 30, 2023 and December 31, 2022:

(000’s omitted)

Term Loans Amortized Cost Basis by Origination Year

June 30, 2023

September 30, 2023

Business lending:

12 unchanged sentences

Nonperforming loans include 90+ days past due and still accruing and nonaccrual loans.

The following table details the balances in all other loan categories at June 30, 2023:

The following table details the balances in all other loan categories at September 30, 2023:

(000’s omitted)

Term Loans Amortized Cost Basis by Origination Year

June 30, 2023

September 30, 2023

Consumer mortgage:

39 unchanged sentences

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

A summary of individually assessed business loans as of June 30, 2023 and December 31, 2022 follows:

A summary of individually assessed business loans as of September 30, 2023 and December 31, 2022 follows:

September 30,

(000’s omitted)

4 unchanged sentences

Specifically allocated allowance

The average carrying balance of individually assessed loans was $ 2.5 million and $ 8.7 million for the three months ended June 30, 2023 and 2022, respectively.

The average carrying balance of individually assessed loans was $ 3.1 million and $ 12.2 million for the six months ended June 30, 2023 and 2022, respectively.

No interest income was recognized on individually assessed loans for the three or six months ended June 30, 2023 and 2022.

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, payment delay, or interest rate reduction.

The average carrying balance of individually assessed loans was $ 4.5 million and $ 3.2 million for the three months ended September 30, 2023 and 2022, respectively.

The average carrying balance of individually assessed loans was $ 6.6 million and $ 12.2 million for the nine months ended September 30, 2023 and 2022, respectively.

No interest income was recognized on individually assessed loans for the three or nine months ended September 30, 2023 and 2022.

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, payment delay, interest rate reduction.

When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

4 unchanged sentences

Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

During the three and six months ended June 30, 2023, the amount of loans that were modified to borrowers experiencing financial difficulty was immaterial.

The estimate of allowance for credit losses includes historical losses from loans that were modified due to borrower financial difficulty, therefore a change to the allowance for credit losses is generally not recorded upon modification.

The following tables present the amortized cost basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023, by class and by type of modification.

The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below.

Three Months Ended

September 30, 2023

Total Class of

(000s omitted except for percentages)

Business lending

Nine Months Ended

September 30, 2023

Total Class of

(000s omitted except for percentages)

Business lending

Consumer mortgage

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The following table presents the performance of such loans that have been modified at September 30, 2023.

90+ Days Past

Past Due 30 –

Due and Still

(000s omitted)

Business lending

Consumer mortgage

The following tables present the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three and nine months ended September 30, 2023:

Three Months Ended

September 30, 2023

Weighted-Average

Term Extension (Years)

Business lending

Nine Months Ended

September 30, 2023

Weighted-Average

Term Extension (Years)

Business lending

Consumer mortgage

There were no loans modified to borrowers with financial difficulty that had a payment default subsequent to modification during the three and nine months ended September 30, 2023.

Prior to the adoption of ASU 2022-02 on January 1, 2023, modified loans were reviewed by the Company to identify if a troubled debt restructuring (“TDR”) had occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.

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

The amount of TDRs as of December 31, 2022 and the amount of loans modified in a TDR during the three and six months ended June 30, 2022 were immaterial.

The amount of TDRs as of December 31, 2022 are presented below.

December 31, 2022

(000’s omitted)

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

The following table presents information related to loans modified in a TDR during the three months and nine months ended September 30, 2022.

Of the loans noted in the table below, all consumer mortgage loans for the three months and nine months ended September 30, 2022 were modified due to a Chapter 7 bankruptcy as described previously.

The financial effects of these restructurings were immaterial.

Three Months Ended

Nine Months Ended

September 30, 2022

(000’s omitted)

loans modified

Business lending

Consumer mortgage

Consumer indirect

Consumer direct

Allowance for Credit Losses

The following presents by segment the activity in the allowance for credit losses during the three months and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, 2023

The following presents by segment the activity in the allowance for credit losses during the three months and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30, 2023

(000’s omitted)

6 unchanged sentences

Total allowance for credit losses

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

(000’s omitted)

6 unchanged sentences

Total allowance for credit losses

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

(000’s omitted)

6 unchanged sentences

Total allowance for credit losses

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

(000’s omitted)

6 unchanged sentences

Total allowance for credit losses

The allowance for credit losses for loans increased to $ 63.3 million at June 30, 2023 compared to $ 61.1 million at December 31, 2022 and $ 55.5 million at June 30, 2022, reflective of a weaker economic forecast and an increase in loans outstanding.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 25.0 million at June 30, 2023 and is excluded from the estimate of credit losses and amortized cost basis of loans.

The allowance for credit losses for loans increased to $ 64.9 million at September 30, 2023 compared to $ 61.1 million at December 31, 2022 and $ 60.4 million at September 30, 2022, reflective of a stable economic forecast and an increase in loans outstanding.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $ 28.4 million at September 30, 2023 and is excluded from the estimate of credit losses and amortized cost basis of loans.

Under ASU No.

3 unchanged sentences

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

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

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

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

For qualitative macroeconomic adjustments, the Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that are weighted, with forecasts available as of June 30, 2023.

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

16 unchanged sentences

In addition, current delinquencies, charge-offs and acquired loans were considered.

During the six months ended June 30, 2023, the Company did not purchase any loans, while the Company sold $ 1.8 million of secondary market eligible residential consumer mortgage loans during the period.

During the six months ended June 30, 2022, the Company purchased $ 436.9 million of loans in connection with the acquisition of Elmira and sold $ 3.7 million of secondary market eligible residential consumer mortgage loans.

At September 30, 2023, loans with a carrying amount of approximately $ 4.30 billion were pledged to secure certain borrowings with the FHLB and FRB.

There were $ 315.8 million of borrowings outstanding under these arrangements at September 30, 2023.

During the nine months ended September 30, 2023, the Company did not purchase any loans, while the Company sold $ 4.6 million of secondary market eligible residential consumer mortgage loans during the period.

During the nine months ended September 30, 2022, the Company purchased $ 436.9 million of loans in connection with the acquisition of Elmira, consisting of $ 125.3 million of business lending loans, $ 271.4 million of consumer mortgage loans, $ 9.4 million of consumer indirect loans, $ 12.5 million of consumer direct loans and $ 18.3 million of home equity loans.

The Company sold $ 4.5 million of secondary market eligible residential consumer mortgage loans during the nine months ended September 30, 2022.

GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as follows:

June 30, 2023

September 30, 2023

December 31, 2022

6 unchanged sentences

(000’s omitted)

Jul - Dec 2023

Shown below are the components of the Company’s goodwill at December 31, 2022 and June 30, 2023:

Oct - Dec 2023

Shown below are the components of the Company’s goodwill at December 31, 2022 and September 30, 2023:

(000’s omitted)

December 31, 2022

June 30, 2023

September 30, 2023

During the third quarter of 2023, the Company secured $ 300.0 million of fixed rate FHLB term borrowings.

The borrowings consisted of a $ 100.0 million five year fixed rate advance with a rate of 4.50 % and a $ 200.0 million five year monthly amortizing advance with a rate of 4.78 % , both of which have contractual final maturity dates in August 2028.

BENEFIT PLANS

4 unchanged sentences

The Company made a $ 0.1 million contribution to its defined benefit pension plan in the first quarter of 2022.

The post-retirement benefits component of net periodic benefit cost for the three and six months ended June 30, 2023 and 2022 is immaterial.

The pension benefits component of net periodic benefit cost for the three and six months ended June 30, 2023 and 2022 is as follows:

The post-retirement benefits component of net periodic benefit cost for the three and nine months ended September 30, 2023 and 2022 is immaterial.

The pension benefits component of net periodic benefit cost for the three and nine months ended September 30, 2023 and 2022 is as follows:

Pension Benefits

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(000’s omitted)

7 unchanged sentences

Under the two class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared and participation rights in undistributed earnings.

The Company has determined that all of its outstanding non-vested stock awards are participating securities as of June 30, 2023.

The Company has determined that all of its outstanding non-vested stock awards are participating securities as of September 30, 2023.

Basic earnings per share are computed based on the weighted-average of the common shares outstanding for the period.

2 unchanged sentences

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

Weighted-average anti-dilutive stock options outstanding for the three and six months ended June 30, 2023 were immaterial and 0.2 million, respectively, compared to approximately 0.4 million and 0.3 million weighted-average anti-dilutive stock options outstanding for the three and six months ended June 30, 2022, respectively, that were not included in the computation below.

The following is a reconciliation of basic to diluted earnings per share for the three and six months ended June 30, 2023 and 2022:

Weighted-average anti-dilutive stock options outstanding for the three and nine months ended September 30, 2023 were immaterial and 0.2 million, respectively, compared to approximately 0.4 million and 0.3 million weighted-average anti-dilutive stock options outstanding for the three and nine months ended September 30, 2022, respectively, that were not included in the computation below.

The following is a reconciliation of basic to diluted earnings per share for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(000’s omitted, except per share data)

13 unchanged sentences

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

There were 400,000 shares of treasury stock purchases made under this authorization during the first six months of 2023 with an average price paid per share of $ 51.42 .

There were 500,000 shares of treasury stock purchases made under this authorization during the first nine months of 2023 with an average price paid per share of $ 51.35 .

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

There were 250,000 shares of treasury stock purchases made under this authorization in 2022, all of which were repurchased during the first six months of 2022, with an average price paid per share of $ 65.51 .

There were 250,000 shares of treasury stock purchases made under this authorization in 2022, all of which were repurchased during the first nine months of 2022, with an average price paid per share of $ 65.51 .

COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS

8 unchanged sentences

The contract amounts of commitments and contingencies are as follows:

September 30,

(000’s omitted)

2 unchanged sentences

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

As of June 30, 2023, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of such pending or threatened matters against the Company or its subsidiaries will be material to the Company’s consolidated financial position.

As of September 30, 2023, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of such pending or threatened matters against the Company or its subsidiaries will be material to the Company’s consolidated financial position.

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

1 unchanged sentence

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

The amount of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is not believed to be material in the aggregate.

The range of losses for matters where an exposure is not currently estimable or considered probable is not believed to be material in the aggregate.

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

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

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

On May 11, 2023, the FDIC issued a notice of proposed rulemaking that would implement a special assessment to recover the uninsured deposit losses from recent bank failures.

11 unchanged sentences

There were no transfers between any of the levels for the periods presented.

June 30, 2023

September 30, 2023

(000’s omitted)

36 unchanged sentences

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

The unpaid principal value of mortgage loans held for sale was approximately $ 1.4 million at June 30, 2023.

The unpaid principal value of mortgage loans held for sale was approximately $ 0.6 million at September 30, 2023.

There were no mortgage loans held for sale at December 31, 2022.

19 unchanged sentences

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

June 30, 2023

September 30, 2023

December 31, 2022

(000’s omitted)

Individually assessed loans

Other real estate owned

7 unchanged sentences

Thus, the resulting nonrecurring fair value measurements are generally classified as Level 3.

Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and, therefore, such valuations classify as Level 3.

Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and, therefore, such valuations are classified as Level 3.

Other real estate owned (“OREO”) is valued at the time the loan is foreclosed upon and the asset is transferred to OREO.

1 unchanged sentence

The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the customer and customer’s business.

Such discounts are significant, ranging from 9.0 % to 75.1 % at June 30, 2023 and result in a Level 3 classification of the inputs for determining fair value.

Such discounts are significant, ranging from 9.0 % to 73.8 % at September 30, 2023 and result in a Level 3 classification of the inputs for determining fair value.

OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

4 unchanged sentences

Such inputs include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds and are considered to be unobservable and contribute to the Level 3 classification of mortgage servicing rights.

In accordance with GAAP, the Company must record impairment charges, on a nonrecurring basis, when the carrying value of a stratum exceeds its estimated fair value.

In accordance with GAAP, the Company must record impairment charges, on a nonrecurring basis, when the carrying value of a mortgage servicing rights class exceeds its estimated fair value.

Impairment is recognized through a valuation allowance.

There is a valuation allowance of approximately $ 1.0 million and $ 0.7 million at June 30, 2023 and December 31, 2022, respectively.

There is a valuation allowance of approximately $ 1.2 million and $ 0.7 million at September 30, 2023 and December 31, 2022, respectively.

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

1 unchanged sentence

The valuation of contingent consideration is calculated using an income approach method, which provides an estimation of the fair value of an asset or liability based on future cash flows over a discrete projection period, discounted to present value using an appropriate rate of return.

The assumptions used in the valuation calculation are based on significant unobservable inputs, therefore such valuations classify as Level 3.

The assumptions used in the valuation calculation are based on significant unobservable inputs, therefore such valuations are classified as Level 3.

The contingent consideration related to the Fringe Benefits Design of Minnesota, Inc.

1 unchanged sentence

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

Key assumptions include (1) a discount rate of 6.91 % applied to present value the payment, and (2) probability adjusted level of retained revenue of $ 4.7 million.

Key assumptions include (1) a discount rate of 6.91 % applied to present value the payment, and (2) probability of achievement of retained revenue level of 37.8 %.

Based on the results of the June 2023 revaluation, the Company recorded a reduction to the fair value of the contingent consideration of $ 0.1 million which is included in the consolidated statements of income as an acquisition-related contingent consideration adjustment.

The adjusted fair value at June 30, 2023 was $ 1.0 million.

No adjustments were made to the fair value of the contingent consideration related to the FBD acquisition during the three months ended September 30, 2023.

The contingent consideration related to the Thomas Gregory Associates Insurance Brokers, Inc.

1 unchanged sentence

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

Key assumptions include (1) a discount rate range of 6.73 % to 6.94 % applied to present value the payment, and (2) probability adjusted level of retained revenue of $ 3.3 million to $ 4.0 million.

Key assumptions include (1) a discount rate range of 6.73 % to 6.94 % applied to present value the payment, and (2) probability of achievement of retained revenue level of 86.1 %.

Based on the results of the June 2023 revaluation, the Company recorded an increase to the fair value of the contingent consideration of $ 1.1 million which is included in the consolidated statements of income as an acquisition-related contingent consideration adjustment.

The adjusted fair value at June 30, 2023 was $ 2.8 million.

In the third quarter of 2023, the first of the two required payments were made on the contingent consideration in the amount of $ 2.4 million, based on actual retained revenue results.

An additional $ 0.1 million adjustment was recorded to adjust the fair value of the remaining contingent consideration liability, resulting in a fair value of $ 0.5 million at September 30, 2023.

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

5 unchanged sentences

(000’s omitted, except per loan data)

June 30, 2023

September 30, 2023

Valuation Technique

1 unchanged sentence

(Weighted Average)

Individually assessed loans

Fair value of collateral

Estimated cost of disposal/market adjustment

Other real estate owned

16 unchanged sentences

6.7 % - 6.9 % ( 6.9 %)

Probability adjusted level of retained revenue

$ 3.3 million - $ 4.7 million

Probability of achievement

37.8 % - 100.0 % ( 70.9 %)

Significant Unobservable

23 unchanged sentences

5.9 % - 6.2 % ( 6.1 %)

Probability adjusted level of retained revenue

$ 3.1 million - $ 5.1 million

Probability of achievement

44.9 % - 53.5 % ( 50.1 %)

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

3 unchanged sentences

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

The weighted average of the probability of achievement was determined by calculating the proportion of the probability-weighted payment of the total maximum payment, weighted by the amount of the payment as part of the total fair value of contingent consideration.

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

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

The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at June 30, 2023 and December 31, 2022 are presented below.

The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at September 30, 2023 and December 31, 2022 are presented below.

The table presented below excludes other financial instruments for which the carrying value approximates fair value including cash and cash equivalents, accrued interest receivable and accrued interest payable.

June 30, 2023

September 30, 2023

December 31, 2022

11 unchanged sentences

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

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

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

Held-to-maturity U.S.

Treasury and agency securities have been classified as a Level 1 valuation.

The fair values of held-to-maturity U.S.

Treasury and agency investment securities are based upon quoted prices, if available.

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

Held-to-maturity government agency mortgage-backed securities have been classified as a Level 2 valuation.

The fair values of held-to-maturity government agency mortgage-backed securities are based on current market rates for similar products.

Deposits have been classified as a Level 2 valuation.

23 unchanged sentences

Benefit Services

Three Months Ended June 30, 2023

Three Months Ended September 30, 2023

Net interest income

7 unchanged sentences

Core deposit intangibles & Other intangibles

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Net interest income

3 unchanged sentences

Acquisition expenses

Acquisition-related contingent consideration adjustment

Other operating expenses

3 unchanged sentences

Benefit Services

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

Net interest income

8 unchanged sentences

Income before income taxes

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Net interest income

7 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements