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Item 2. Management’s Discussion and Analysis

2024-05-10 compared with 2023-11-09 · 469 added, 451 removed, 357 unchanged (72% of the section changed)

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

(the “Company” or “CBSI”) as of and for the three and nine months ended September 30, 2023 and 2022, although in some circumstances the second and first quarters of 2023 are also discussed in order to more fully explain recent trends.

(the “Company” or “CBSI”) as of and for the three months ended March 31, 2024 and 2023, although in some circumstances the fourth 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 33.

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, “third quarter” refers to the three months ended September 30, 2023, “YTD” refers to the nine months ended September 30, 2023, and earnings per share (“EPS”) figures refer to diluted EPS.

Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2024, “last year” and equivalent terms refer to calendar year 2023, “first quarter” refers to the three months ended March 31, and earnings per share (“EPS”) figures refer to diluted EPS.

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

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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, “Significant Accounting Policies” beginning on page 12 of this Form 10-Q.

Management considers its critical accounting estimates those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company’s financial condition or results of operations.

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;

and the carrying value of goodwill and other intangible assets.

A summary of the critical accounting policies and estimates used by management is disclosed in the MD&A on pages 32-34 of the most recent Form 10-K (fiscal year ended December 31, 2023) filed with the Securities and Exchange Commission (“SEC”) on February 29, 2024, and there have been no material changes other than those described below regarding the Allowance for Credit Losses.

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

Allowance for Credit Losses

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

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

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

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

The Company utilizes three methods for calculating the ACL:

cumulative loss, vintage loss and line loss.

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

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

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

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

During the first quarter of 2024, the Company updated the ACL model to add 2023 results into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures.

One of the most significant estimates and judgments influencing the results of the ACL calculation is the macroeconomic forecasts.

Changes in these economic forecasts could significantly affect the estimated expected credit losses and lead to materially different amounts from one period to the next.

To illustrate the sensitivity of the ACL calculation to these economic forecasts, management performed a hypothetical sensitivity analysis using a weighting of 100% to the downside forecast, rather than the existing weighting of baseline, upside and downside of 40%, 30% and 30%, respectively.

The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at March 31, 2024 were 4.5% and 1.9%, respectively, compared to 4.5% and 1.7% at December 31, 2023, respectively.

The hypothetical downside forecast includes assumptions of a weakening economy represented by a cumulative decline in real GDP of 2.6%, enhanced geopolitical tensions, elevated inflation, a peak unemployment rate of 7.7% and an average unemployment rate of 6.4%.

The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three months ended March 31, 2024 by approximately $4.4 million, and decrease net income by $3.3 million (net of tax).

This change is reflective of the sensitivity of the various economic factors used in the ACL model.

The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate at the same time that economic conditions are changing, which would affect the results of the ACL calculation.

The impact that the economic factors have on the model is affected by the severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments.

Improvements in one factor may offset deterioration in other factors, both qualitative and quantitative.

The third party downside economic forecast used in the hypothetical scenario described does not predict a severe economic downturn, but rather a moderate recessionary environment.

The Company’s geographic distribution of loans outside of major metropolitan areas, combined with low statistical correlation between historical losses and national economic indicators, results in changes to the allowance that are less significant as compared to national economic activity.

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, 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 $0.82 in the third quarter of 2023, down $0.08, or 8.9%, from the third quarter of 2022.

Diluted adjusted net earnings per share, a non-GAAP measure, were $0.86 in the third quarter of 2023, compared to $0.94 in the third quarter of 2022, an $0.08 per share, or 8.5%, decrease.

Adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, was $1.10 per share in the third quarter of 2023, down $0.15, or 12.0%, from the third quarter of 2022.

The Company also provides supplemental reporting of its results on an “operating” or “tangible” basis.

During the first quarter of 2024, the Company modified the presentation of its non-GAAP operating results to exclude amortization of intangible assets which the Company believes better reflects core performance across its segments and enhances comparability to both banking and non-banking organizations.

The prior period has been recast to conform to the current period presentation.

Results on an “operating” basis exclude the after-tax effects of acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain on equity securities and amortization of intangible assets.

Results on a “tangible” basis exclude goodwill and intangible asset balances, net of accumulated amortization and applicable deferred tax amounts.

In addition, the Company provides supplemental reporting for “operating pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain on equity securities and amortization of intangible assets from income before income taxes.

Although operating 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, helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions or restructuring activities.

The Company also provides supplemental reporting of its interest income, net interest income and net interest margin on a fully tax-equivalent (“FTE”) basis, which includes an adjustment to interest income and net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable.

Although fully tax-equivalent interest income, net interest income and net interest margin are non-GAAP measures, the Company’s management believes this information helps enhance comparability of the performance of assets that have different tax liabilities.

Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 14.

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 business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services, including employee benefit services, insurance services and wealth management services, to retail, commercial, institutional and municipal customers.

The Company’s banking subsidiary is Community Bank, N.A.

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The Company’s core operating objectives are:

(i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies, certain selective de novo expansions 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:

(i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies, certain selective de novo expansions and divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) increase the noninterest component of total revenues through growth in existing banking, employee benefit services, insurance services and wealth management services business units, and the acquisition of additional financial services and banking businesses, (iv) 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, and (v) utilize technology including robotic process automation 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 results and financial condition include, but are not limited to:

net income and earnings per share;

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and the performance of recently acquired businesses.

Third quarter 2023 net income decreased $4.6 million, or 9.4%, compared to the third quarter of 2022, while YTD net income decreased $37.3 million, or 27.5% compared to the equivalent 2022 timeframe.

Earnings per share of $0.82 for the third quarter of 2023 was $0.08 less than the third quarter of 2022, while 2023 YTD earnings per share of $1.82 was $0.67 lower than 2022 YTD earnings per share.

The decrease in net income and earnings per share between the quarterly periods was due to an increase in operating expenses and a decrease in net interest income, partially offset by an increase in noninterest revenues and decreases in the provision for credit losses, income taxes and fully-diluted shares outstanding.

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.

The YTD decrease in net income and earnings per share was also reflective of increases in operating expenses, net interest income and noninterest revenues and decreases in income taxes, the provision for credit losses and fully-diluted shares outstanding.

Third quarter and YTD net income adjusted to exclude acquisition expenses, acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, gain on debt extinguishment, realized loss on sales of investment securities and the unrealized loss on equity securities (“operating net income”), a non-GAAP measure, decreased $4.8 million, or 9.8%, as compared to the third quarter of 2022 and decreased $2.5 million, or 1.7%, compared to September YTD 2022.

Earnings per share adjusted to exclude acquisition expenses, acquisition-related contingent consideration adjustment, acquisition-related provision for credit losses, gain on debt extinguishment, realized loss on sales of investment securities and the unrealized loss on equity securities (“operating earnings per share”), a non-GAAP measure, of $0.82 for the third quarter decreased $0.08 compared to the third quarter of 2022.

Operating earnings per share of $2.60 for the first nine months of 2023 decreased $0.02 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 $4.81 billion at the end of the third 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 third quarter ending total deposits.

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 13% and the cycle-to-date total funding beta was 15%, reflective of a high proportion of non-interest bearing deposits, representing approximately 29% of total deposits, and the composition and stability of the customer base.

In addition, more than 70% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the third quarter, and the Company does not currently utilize brokered or wholesale deposits.

Net interest margin increased seven basis points between the third quarter of 2022 and the third quarter of 2023 and increased 27 basis points on a YTD basis.

Fully tax-equivalent net interest margin, a non-GAAP measure, also increased seven basis points between the third quarter of 2022 and the third quarter of 2023 and increased 28 basis points on a YTD basis.

Loan balances increased on both an average and ending basis as compared to the prior year third 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 YTD balance growth.

Deposit balances decreased on both an average and ending basis as compared to the third quarter of 2022 and YTD due in part to outflows driven by higher customer expenditure levels in the inflationary environment, as well as increased rate competition from other banks and non-depository financial institutions.

However, deposit balances were up on an ending basis from the end of the prior quarter and the end of the prior year.

The yield on average interest earning assets increased 76 basis points compared to the prior year third quarter and 81 basis points compared to the prior YTD period, as the yields on average loans, investments and interest-earning cash equivalents all improved.

The yield on average loans for the third quarter increased 70 basis points compared to the third quarter of 2022 and 67 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 19 basis points compared to the prior year’s third quarter and 35 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 and the maturity of certain investment securities between the periods.

The Company’s total cost of funds increased 72 basis points from last year’s third quarter and 55 basis points YTD, as the rate paid on interest-bearing deposits and the rate paid on borrowings both increased.

The provision for credit losses of $2.9 million for the third quarter and $7.1 million for YTD 2023 were $2.2 million and $4.9 million lower than the provision for credit losses for the comparable prior year periods, respectively.

The third quarter and YTD 2023 provision for credit losses were reflective of a stabilizing economic outlook combined with an increase in loans outstanding while the third 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 third quarter of 2023.

The nonperforming loan ratio of 0.39% at September 30, 2023 was only one basis point higher than the ratio at September 30, 2022 and three basis points above the ratio one quarter prior.

The total delinquent loan ratio remained below historical averages at 0.90%, but increased slightly from 0.71% at the end of the third quarter of 2022 and 0.83% at the end of the prior quarter.

Net charge-offs continued to be well below long-term average levels at $1.2 million, or an annualized 0.05% of average loans, for the third quarter and $3.5 million, or an annualized 0.05% of average loans, for the first nine months of 2023, compared to net charge-offs of $0.4 million, or an annualized 0.02% of average loans, for the prior year third quarter and $1.3 million, or an annualized 0.02% of average loans, for the first nine months of 2022.

Banking noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, were down $0.9 million, or 5.1%, as compared to the prior year’s third quarter and were down $1.1 million, or 2.1%, 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.

Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, were up $3.3 million, or 7.1%, as compared to the prior year’s third quarter and up $5.3 million, or 3.7%, compared to the prior YTD period.

The increase in quarterly financial services business revenues reflected growth in all of the three business units while the YTD increase reflected increases in insurance services and employee benefit services revenues that were partially offset by a slight decline in wealth management services revenues.

Noninterest expenses increased $8.3 million, or 7.7%, between the third quarter of 2022 and the third quarter of 2023 and increased $25.2 million, or 7.9%, between September YTD 2022 and September YTD 2023.

The YTD increase was primarily due to a $17.0 million, or 8.8%, increase in salaries and employee benefits driven by increases in merit and market-related employee wages, higher employee benefit-related expenses including higher medical expenses, and certain executive retirement-related expenses.

The remaining net increase in other expense categories was due to various factors including general inflationary pressures, 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 various matters, an increase in data processing and communications expenses due to the Company’s continued investment in customer-facing and back office digital technologies and higher business development and marketing expenses due to the Company’s investment in digital marketing initiatives and higher levels of targeted advertisements intended to generate deposits.

The Company has initiated a plan to optimize the retail customer service workforce which will temporarily reduce branch-related operating expenses, and reinvest in the retail network through de novo branch expansion in new, more densely populated markets throughout the Company’s geographic footprint.

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.

First quarter net income increased $35.1 million as compared to the first quarter of 2023 and earnings per share of $0.76 for the first quarter of 2024 increased $0.65 from the first quarter of 2023.

The increase in net income and earnings per share for the quarter was primarily the result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale investment securities realized during the prior year’s first quarter in connection with a balance sheet repositioning.

In addition, increases in noninterest expenses, the provision for credit losses and income taxes and a decrease in net interest income were partially offset by an increase in noninterest revenues and a decrease in the number of fully diluted shares outstanding.

First quarter operating net income, a non-GAAP measure, decreased $5.9 million, or 11.9%, as compared to the first quarter of 2023.

Operating earnings per share, a non-GAAP measure, of $0.82 for the first quarter decreased $0.10 compared to the first quarter of 2023 while operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, decreased $0.04 compared to the prior year’s first quarter.

Net interest margin and fully tax-equivalent net interest margin, a non-GAAP measure, decreased 22 basis points between the first quarter of 2023 and the first quarter of 2024.

The yield on average interest earning assets increased 61 basis points compared to the prior year first quarter as the yield on average loans and yield on average investments both improved.

The yield on average loans for the first quarter increased 66 basis points compared to the first quarter of 2023, driven by market-related increases in interest rates on new loans, an 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 16 basis points compared to the prior year, which also benefitted from higher market interest rates as well as the maturities of certain lower-yielding available-for-sale investment securities between the periods.

The Company’s total cost of funds increased 87 basis points from the year earlier period, as the rate paid on interest-bearing deposits increased 111 basis points and the rate paid on borrowings increased 103 basis points due in most part to market-driven increases in deposit and borrowing rates, as well as the higher proportion of funding coming from comparatively higher rate time deposits and external borrowings, including the Company’s utilization of the Federal Reserve’s Bank Term Funding Program during the first quarter of 2024.

Loan balances increased on both an average and ending basis as compared to the prior year first quarter, reflective of continued strong organic loan growth.

Deposit balances also increased on both an average and ending basis as compared to the first quarter of 2023 due primarily to growth in public fund deposit balances.

Investment balances, including cash equivalents, decreased on both an average and ending basis between the first quarter of 2023 and the first quarter of 2024 primarily due to the maturities of certain lower-yielding available-for-sale investment securities between the periods, partially offset by higher interest-earning cash balances.

Borrowing balances increased on both an average and ending basis compared to the prior year first quarter reflective of the Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings during 2023 to support the funding of continued loan growth.

Reflective of an increase in loans outstanding and a stable economic forecast, the Company recorded a $6.1 million provision for credit losses during the first quarter of 2024, $2.6 million higher than the first quarter of 2023, as the Company increased credit loss reserves primarily related to the business lending and consumer indirect portfolios.

Asset quality remained strong and below long-term historical averages throughout the first quarter of 2024, although net charge-off, nonperforming and delinquent loan ratios increased in comparison to the first quarter of 2023 levels.

Net charge-offs of $2.8 million remained relatively low at an annualized 0.12% of average loans, but were $1.3 million higher than levels for the first quarter of 2023.

Nonperforming loans as a percentage of total loans increased 12 basis points to 0.50% between the first quarter of 2023 and the first quarter of 2024 primarily driven by the business loans associated with three customers being downgraded from accruing to nonaccrual status.

The 30 to 89 day delinquent loan ratio increased eight basis points versus one year ago to 0.43% primarily due to increases in delinquent balances in the consumer mortgage and consumer indirect loan portfolios.

Banking noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, increased $1.8 million, or 11.1%, as compared to the prior year’s first quarter, reflective of increases in debit interchange and ATM fees and commercial real estate (“CRE”) financing and advisory revenues.

Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, increased $2.9 million, or 5.8%, as compared to the prior year’s first quarter, due to a $2.3 million increase in employee benefit services revenues and a $1.0 million increase in wealth management services revenues, partially offset by a $0.4 million decrease in insurance services revenues.

Noninterest expenses increased $4.0 million, or 3.5%, between the first quarter of 2023 and the first quarter of 2024, primarily due to a $1.6 million increase in salaries and employee benefits, a $1.2 million increase in data processing and communications expenses and a $1.6 million increase in other expenses.

The increase in salaries and employee benefits was primarily driven by merit and market-related increases in employee wages, partially offset by the impact of the previously announced retail customer service workforce reduction plan and a decrease in employee retirement-related severance expense.

The increase in data processing and communications expenses was reflective of continued investment in customer-facing and back-office technologies including investments being made in additional technology to enhance the detection and prevention of customer payment-related fraud and cybersecurity-related incidents.

Other expenses were up due to increases in insurance expenses, including $0.4 million associated with an additional expected increase to the FDIC special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate and a decline in non-service related components of the net periodic pension benefit credit.

The Company’s deposit base and liquidity position continues to be strong, as the Company had total immediately available liquidity sources of $4.60 billion at the end of the first quarter of 2024, 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 total deposits at the end of the first quarter.

Since the Federal Reserve began raising the federal funds rate in March 2022 in an effort to combat inflation, the cycle-to-date deposit beta (change in the Company’s cost of funds as a proportion of the change in the federal funds rate) for the Company is 20% and the cycle-to-date total funding beta is 23% of the cumulative 525 basis point increase in the federal funds rate, reflective of a comparatively high proportion of non-interest bearing deposits, representing approximately 27% of total ending deposits, and the composition and stability of the customer base.

In addition, more than 65% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the first quarter.

The Company did not utilize brokered or wholesale deposits.

Net Income and Profitability

As shown in Table 1, net income for the third quarter and September YTD of $44.1 million and $98.2 million, respectively, decreased $4.6 million, or 9.4%, as compared to the third quarter of 2022 and decreased $37.3 million, or 27.5%, compared to September YTD 2022.

Earnings per share of $0.82 for the third quarter was $0.08 lower than the third quarter of 2022, while earnings per share for the first nine months of 2023 of $1.82 was $0.67 lower than the first nine months of 2022.

The decrease in net income and earnings per share for the quarter was reflective of an increase in operating expenses and a decrease in net interest income, partially offset by an increase in noninterest revenues and decreases in the provision for credit losses, income taxes and fully-diluted shares outstanding.

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 $44.2 million and $140.2 million for the third quarter and September YTD, respectively, decreased $4.8 million, or 9.8%, as compared to the third quarter of 2022 and decreased $2.5 million, or 1.7%, compared to September YTD 2022.

Operating earnings per share, a non-GAAP measure, of $0.82 for the third quarter was down $0.08 compared to the third quarter of 2022, while operating earnings per share of $2.60 for the first nine months of 2023 was down $0.02 compared to the first nine months of 2022.

As shown in Table 1, net income for the first quarter of $40.9 million increased $35.1 million as compared to the first quarter of 2023.

Earnings per share of $0.76 for the first quarter of 2024 increased $0.65 compared to the first quarter of 2023.

The increase in net income and earnings per share was primarily due to the realized loss on the sales of investment securities that was recognized in the first quarter of 2023, which negatively impacted first quarter 2023 net income by $41.2 million, or $0.75 per share.

Excluding this item, earnings per share decreased $0.10, primarily driven by increases in noninterest expenses, the provision for credit losses and income taxes, and a decrease in net interest income, partially offset by an increase in noninterest revenues and a decrease in the number of fully diluted shares outstanding.

Operating net income, a non-GAAP measure, of $43.8 million for the first quarter decreased $5.9 million, or 11.9%, as compared to the first quarter of 2023.

Operating earnings per share, a non-GAAP measure, of $0.82 for the first quarter was down $0.10 compared to the first quarter of 2023.

See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

As reflected in Table 1, third quarter net interest income of $107.8 million was down $2.6 million, or 2.4%, from the comparable prior year period.

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

Net interest income for the first nine months of 2023 increased $19.7 million, or 6.4%, versus the first nine months of 2022.

The year-over-year improvement resulted from an increase in the 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 third quarter of $2.9 million and September YTD of $7.1 million decreased $2.2 million and $4.9 million as compared to the third quarter and first nine months of 2022, respectively.

The third 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 YTD 2022 provision for credit losses included $3.9 million of acquisition-related provision for credit losses due to the Elmira acquisition.

Third quarter and year-to-date noninterest revenues were $67.6 million and $147.1 million, respectively, up $2.3 million, or 3.6%, from the third quarter of 2022 and down $48.0 million, or 24.6%, from the first nine months of 2022.

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

The YTD decrease was primarily due to the incurrence 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 deposit service charges and fees, debit interchange and ATM fees, wealth management services revenues, mortgage banking revenues and unrealized loss on equity securities, partially offset by increases in insurance services revenues, employee benefit services revenues and other banking revenues and a realization of a gain on debt extinguishment.

Noninterest expenses of $116.5 million and $343.6 million for the third quarter and September YTD periods, respectively, reflected an increase of $8.3 million, or 7.7%, from the third quarter of 2022 and an increase of $25.2 million, or 7.9%, from the first nine months of 2022.

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

Excluding acquisition-related expenses comprised of contingent consideration adjustments and integration-related expenses, 2023 operating expenses were $8.6 million, or 8.0%, higher for the third quarter and $29.1 million, or 9.3%, higher for the year-to-date timeframe.

The effective income tax rates were 21.2% and 21.1% for third quarter and YTD 2023, respectively, as compared to 22.0% and 21.6% for the comparable prior year periods.

The decline in the quarterly and YTD effective income tax rates were 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.

As reflected in Table 1, first quarter net interest income of $107.0 million was down $4.0 million, or 3.6%, from the comparable prior year period.

The decrease was primarily the result of an increase in the cost of interest-bearing liabilities, partially offset by higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to strong organic loan growth, and the sales and maturities of certain lower-yielding available-for-sale investment securities.

Reflective of an increase in loans outstanding and a stable economic forecast, the provision for credit losses of $6.1 million for the first quarter of 2024 increased $2.6 million as compared to the $3.5 million provision for credit losses in the first quarter of 2023.

The Company increased its qualitative assessment of future uncertainty and built credit loss reserves that were primarily attributable to the business lending and consumer indirect portfolios.

First quarter noninterest revenues were $70.3 million, up $56.8 million from the first quarter of 2023.

The increase was primarily due to the realized loss on sales of available-for-sale investment securities that was recognized in the first quarter of 2023, which negatively impacted first quarter 2023 noninterest revenues by $52.3 million.

Total operating noninterest revenues, a non-GAAP measure, were $70.3 million in the first quarter of 2024, an increase of $4.7 million, or 7.1%, from the prior year’s first quarter.

This increase was driven by a $2.9 million, or 5.8%, increase in financial services business revenues and a $1.8 million, or 11.1%, increase in banking noninterest revenues.

Noninterest expenses of $118.1 million for the first quarter reflected an increase of $4.0 million, or 3.5%, from the first quarter of 2023.

The increase in noninterest expenses for the quarter was primarily due to increases in salaries and employee benefits, data processing and communications expenses, and other expenses.

Income tax expense increased $11.0 million between comparable quarters as pre-tax income increased $46.1 million, due primarily to the previously mentioned realized loss on the sale of certain available-for-sale securities in the first quarter of 2023.

A condensed income statement is as follows:

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(000’s omitted, except per share data)

10 unchanged sentences

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, a non-GAAP measure) for the third quarter was $108.8 million, a decrease of $2.7 million, or 2.4%, compared to the same period last year.

This was driven by a 100 basis point increase in the rate paid on average interest-bearing liabilities and a $666.2 million decrease in average interest-earning assets, partially offset by a 76 basis point increase in the yield on average interest-earnings assets and a $42.6 million decrease in average interest-bearing liabilities in comparison to the third quarter of 2022.

As reflected in Table 3 for the quarter, net interest income was unfavorably impacted by $24.3 million due to the increase in the rate paid on average interest-bearing liabilities and $5.5 million due to the volume decrease in interest-earning assets, partially offset by the favorable impact on net interest income of $27.1 million due to the increase in the yield on average interest-earning assets.

September YTD net interest income (with nontaxable income converted to a fully tax-equivalent basis), as reflected in Table 2b, of $331.3 million, increased $19.9 million, or 6.4%, from the year-earlier period.

The September YTD increase resulted from an 81 basis point increase in the yield on average interest-earning assets, partially offset by a $58.4 million increase in average interest-bearing liabilities, a $412.0 million decrease in average interest-earning assets and a 77 basis point increase in the average rate paid on interest-bearing liabilities.

As reflected in Table 3 for September YTD, the increase in the yield on average interest-earning assets had a favorable impact on net interest income of $85.0 million, partially offset by the unfavorable impacts on net interest income of $9.4 million due to the volume decrease in average interest-earning assets, $55.6 million due to the increase in the rate paid on average interest-bearing liabilities and $0.1 million due to the increase in average interest-bearing liabilities.

Net interest margin of 3.07% and fully tax-equivalent net interest margin (non-GAAP) of 3.10% for the third quarter of 2023 were both seven basis points higher as compared to the third quarter of 2022.

The increase was the result of a 76 basis point increase in the interest-earning asset yield and the decreases in average interest-earning asset balances and overnight borrowings driven by the sales and maturities of certain available-for-sale investment securities between the periods, partially offset by a 100 basis point increase in the rate paid on average interest-bearing liabilities.

Net interest margin of 3.13% for the first nine months of 2023 was 27 basis points higher than the comparable period of 2022 while the fully tax-equivalent net interest margin (non-GAAP) of 3.16% for the first nine months of 2023 was 28 basis points higher than the comparable period of 2022.

The yield on interest-earning assets increased 81 basis points, while the rate on interest-bearing liabilities increased by 77 basis points for the first nine months of 2023 as compared to the prior year period.

The decline in noninterest and low-rate checking deposit balances also had an adverse impact on the net interest margin and fully tax-equivalent net interest margin (non-GAAP) for both periods.

The 76 basis point increase in the yield on average interest-earning assets for the quarter was the result of increases in both the yield on average loans and the yield on average investments, including cash equivalents.

The yield on average loans for the third quarter increased by 70 basis points compared to the third quarter of 2022.

The third quarter of 2023 yield on average investments, including cash equivalents, increased 19 basis points compared to the prior year.

The 81 basis point increase in the yield on interest-earning assets for the first nine months of 2023 was the result of a 67 basis point increase in the yield on average loans and a 35 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 nine months of 2023.

The rate paid on average interest-bearing liabilities increased by 100 basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits increased 92 basis points and the average rate paid on external borrowings increased 200 basis points from the comparable prior period.

For the first nine months of 2023, the rate paid on average interest-bearing liabilities increased by 77 basis points from the comparable prior year period as the rate paid on average interest-bearing deposits increased 67 basis points and the rate paid on average external borrowings increased 212 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 and term 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 large balance 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 third quarter and YTD average balance of investments, including cash equivalents, decreased $1.64 billion and $1.68 billion, respectively, as compared to the corresponding prior year periods, primarily due to 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 third quarter and YTD periods.

The cash equivalents component of average earning assets increased $27.5 million and decreased $436.5 million for the third quarter and YTD periods, respectively, compared to the prior year periods.

The YTD decline in average cash equivalents was due in part to the funding of strong organic loan growth.

Average loan balances increased $970.3 million for the quarter and $1.27 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 $180.4 million compared to the prior year quarter and $190.8 million compared to the prior YTD period.

The quarterly and YTD decreases in average interest-bearing deposits were due to decreases in interest checking, money market and savings deposits, partially offset by an increase in time deposits.

The decrease in deposit balances were due in part to outflows driven by 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 $137.9 million and $249.2 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 and term borrowings to meet the Company’s funding needs, including $300.0 million of term FHLB borrowings secured during the third quarter of 2023 at a weighted average rate of 4.69%.

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 24.2% in 2023 and 24.1% in 2022.

Net interest income totaled $107.0 million for the first quarter of 2024 compared to $111.0 million for the first quarter of 2023.

As shown in Table 2, fully tax-equivalent net interest income, a non-GAAP measure, for the first quarter was $108.0 million, a $4.1 million, or 3.7%, decrease from the same period last year.

The decrease resulted from a 115 basis point increase in the rate paid on average interest-bearing liabilities and a $755.3 million increase in average interest-bearing liability balances, partially offset by a $374.0 million increase in average interest-earnings asset balances and a 61 basis point increase in the yield on average interest-earning assets in comparison to the first quarter of 2023.

As reflected in Table 3, the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $29.5 million and the volume increase in average interest-bearing liability balances of $1.3 million were partially offset by the favorable impacts of the volume increase in average interest-earning asset balances of $3.4 million and the increase in the yield on average interest-earning assets of $23.3 million.

The net interest margin of 2.95% and fully tax-equivalent net interest margin of 2.98%, a non-GAAP measure, for the first quarter of 2024 both decreased 22 basis points from the first quarter of 2023 driven by the increase in the rate paid on average interest-bearing liabilities, partially offset by the increase in the yield on average interest-earnings assets and a higher proportion of those assets being comprised of loan balances due to strong organic loan growth and the sales and maturities of certain lower-yielding available-for-sale investment securities between the periods.

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

The yield on average loans for the first quarter increased by 66 basis points compared to the first quarter of 2023, reflective of market-related increases in interest rates on new loans, an increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and a high level of new loan originations.

The first quarter of 2024 yield on average investments, including cash equivalents, increased 16 basis points compared to the prior year, as market interest rates increased and the proportion of higher-yielding cash equivalents increased.

The current quarter’s yield on average investments, excluding cash equivalents, increased one basis point as the majority of the Company’s investment portfolio is comprised of fixed yield securities, while the yield on average cash equivalents increased 190 basis points compared to the first quarter of 2023.

The average book balance of investments in the first quarter, including cash equivalents, decreased $530.5 million, or 10.0%, as compared to the corresponding prior year period due to a $733.0 million, or 13.9%, decrease in average investment balances, reflective of sales and maturities of certain available-for-sale investment securities, partially offset by a $202.5 million increase in average cash equivalents.

Investment purchases outpaced sales, maturities, calls and principal payments during the first quarter of 2024 driven by $38.4 million of government agency mortgage-backed securities purchases classified as held-to-maturity.

Average loan balances were $904.5 million, or 10.2%, greater than the prior year’s first quarter balances with increases in all five major loan portfolios due to high levels of organic growth.

The first quarter of 2024 rate on average interest-bearing liabilities increased 115 basis points compared to the prior year first quarter reflective of a 111 basis point increase in the rate paid on average interest-bearing deposits and a 103 basis point increase in the rate paid on average borrowings.

The increase in the rate paid on average interest-bearing deposits was due to interest rates on certain interest-bearing deposits being raised in response to market conditions, including the effects of a 100 basis point increase in the Federal Funds rate during 2023 as a result of the Federal Reserve Bank’s efforts to lower elevated inflation, and a shift in deposit mix as customers responded to changes in market interest rates by moving funds into higher yielding account types.

The increase in the rate paid on average borrowings was primarily the result of higher market interest rates between the periods and the Company securing $400.0 million of fixed rate Federal Home Loan Bank term borrowings in the third and fourth quarters of 2023 to help meet the Company’s funding needs.

Average interest-bearing deposits increased $536.5 million between the first quarter of 2023 and the first quarter of 2024 with increases in time and money market deposits, partially offset by decreases in savings and interest checking deposits primarily driven by net public fund inflows and the aforementioned shift in deposit mix.

The Company continues to be proactive in managing customer relationships with depositors, particularly larger consumer, commercial and municipal customers.

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”), the Federal Reserve Bank of New York (“Federal Reserve”), securities sold under agreement to repurchase (customer repurchase agreements) and subordinated notes payable, increased $218.8 million compared to the prior year quarter due to a $381.8 million increase in average term FHLB borrowings and a $217.6 million increase in average Federal Reserve Bank Term Funding Program borrowings to meet the Company’s funding needs, partially offset by a $333.0 million decrease in average overnight borrowings, a $44.5 million decrease in average customer repurchase agreements and a $3.1 million decrease in average subordinated notes payable.

At the end of the first quarter, the Company was not in an overnight borrowing position and did not hold any outstanding borrowings from the Federal Reserve’s Bank Term Funding Program.

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

Interest income and yields are on a fully tax-equivalent (“FTE”) basis using a marginal income tax rate of 24.4% in 2024 and 24.3% in 2023.

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

4 unchanged sentences

Three Months Ended

September 30, 2023

September 30, 2022

(000’s omitted except yields and rates)

Interest-earning assets:

Cash equivalents

Taxable investment securities (1)

Nontaxable investment securities (1)

Loans (net of unearned discount) (2)

Total interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities:

Interest checking, savings, and money market deposits

Time deposits

Customer repurchase agreements

Overnight borrowings

FHLB borrowings

Subordinated notes payable

Total interest-bearing liabilities

Noninterest-bearing liabilities:

Noninterest checking deposits

Other liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest earnings

Net interest spread

Net interest margin on interest-earning assets

Net interest margin on interest-earning assets (FTE) (non-GAAP)

Fully tax-equivalent adjustment (3)

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

(2) Includes nonaccrual loans.

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

(3) The 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.

Year-to-Date Average Balance Sheet

Nine Months Ended

September 30, 2023

September 30, 2022

March 31, 2024

March 31, 2023

(000’s omitted except yields and rates)

12 unchanged sentences

FHLB borrowings

Federal Reserve short-term borrowings

Subordinated notes payable

13 unchanged sentences

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.

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

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

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

Three months ended September 30, 2023

Nine months ended September 30, 2023

versus September 30, 2022

Increase (Decrease) Due to Change in (1)

Three months ended March 31, 2024

versus March 31, 2023

Increase (Decrease) Due to Change in (1)

4 unchanged sentences

Nontaxable investment securities

Loans (net of unearned discount)

Total interest-earning assets (2)

5 unchanged sentences

FHLB borrowings

Federal Reserve short-term borrowings

Subordinated notes payable

8 unchanged sentences

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.

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

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

1 unchanged sentence

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.

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

Noninterest Revenues

Three Months Ended

Nine Months Ended

September 30,

(000’s omitted)

8 unchanged sentences

Gain on debt extinguishment

Unrealized loss on equity securities

Unrealized gain on equity securities

Total noninterest revenues

Noninterest revenues/total revenues

Noninterest revenues/operating revenues (FTE basis, non-GAAP) (1)

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

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

Operating noninterest revenues/operating revenues (FTE basis) (non-GAAP) (1)

(1) Operating noninterest revenues, a non-GAAP measure, excludes loss on sales of investment securities, gain on debt extinguishment and unrealized gain on equity securities from total noninterest revenues.

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

See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

As displayed in Table 4, noninterest revenues were $67.6 million for the third quarter of 2023 and $147.1 million for the first nine months of 2023.

This represents an increase of $2.3 million, or 3.6%, for the quarter and a decrease of $48.0 million, or 24.6%, for the YTD period in comparison to the equivalent 2022 periods.

The increase for the quarterly period was driven by increases in employee benefit services revenue, insurance services revenue and wealth management services revenue, partially offset by a decrease in banking noninterest 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, unrealized loss on equity securities and gain on debt extinguishment recognized in the first quarter of 2023, noninterest revenues were up $4.2 million, or 2.2%, between September YTD 2023 and September YTD 2022 which was driven by increases in insurance services revenue and employee benefit services revenue, partially offset by decreases in banking noninterest revenue and wealth management services revenue.

Banking noninterest revenue of $17.6 million for the third quarter and $51.8 million for the first nine months of 2023 decreased $0.9 million, or 5.1%, and decreased $1.1 million, or 2.1%, respectively, as compared to the corresponding prior year periods.

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

The YTD decrease was driven by decreases in deposit service charges and fees, debit interchange and ATM 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 the last quarter of 2023 and early 2024 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 increased $2.1 million, or 7.6%, and $1.6 million, or 1.8%, for the three and nine months ended September 30, 2023, respectively, as compared to the equivalent prior year periods primarily related to new business and a significant year-over-year increase in the total participants under administration, along with a modest increase from market appreciation.

Insurance services revenue was up $0.8 million, or 6.9%, and $4.0 million, or 12.6%, for the third quarter and YTD periods, respectively, driven primarily by a strong premium market and organic expansion, along with growth resulting from acquisitions between the periods.

Wealth management services revenue was up $0.4 million, or 5.8%, for the third quarter of 2023, but down $0.2 million, or 1.0%, for September 2023 YTD as compared to the same time periods of 2022.

The ratio of noninterest revenues to total revenues was 38.5% for the third quarter of 2023 and 31.0% for September YTD 2023, compared to 37.1% for the prior year’s third quarter and 38.7% for September YTD 2022.

The quarterly increase was due to noninterest revenues increasing 3.6% while net interest income decreased 2.4% driven by higher funding costs.

The YTD decrease was primarily the result of the $48.0 million, or 24.6%, decrease in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities, while net interest income increased 6.4%, 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 38.5% for the quarter and 37.8% for the nine months ended September 30, 2023, respectively, versus 37.2% and 38.8% for the comparable periods of 2022.

The increase between the quarterly periods was due to a 3.7% increase in adjusted noninterest revenues, while adjusted net interest income (FTE basis) decreased 2.4%.

The year-to-date decrease was a function of a 6.4% increase in adjusted net interest income (FTE basis) while adjusted noninterest revenues increased 2.2%.

As displayed in Table 4, noninterest revenues were $70.3 million in the first quarter of 2024.

This represents an increase of $56.8 million for the quarter in comparison to the same 2023 timeframe which 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 prior year’s first quarter.

Operating noninterest revenues, a non-GAAP measure that excludes loss on sales of investment securities, gain on debt extinguishment and unrealized gain on equity securities from total noninterest revenues, were $70.3 million in the first quarter, an increase of $4.7 million, or 7.1%, from the same quarter last year.

The increase in operating noninterest revenues, a non-GAAP measure, was driven by increases in employee benefit services revenues, banking noninterest revenues and wealth management services revenues, partially offset by a decrease in insurance services revenues.

Employee benefit services revenues increased $2.3 million, or 7.9%, as compared to the prior year first quarter primarily related to a year-over-year increase in the total participants under administration, along with growth in asset-based fee revenues resulting from market appreciation and the acquisition of certain assets of Creative Plan Designs Limited, a provider of employee benefit plan design, administration and consulting, on February 1, 2024.

Wealth management services revenues increased $1.0 million, or 11.7%, as compared to the prior year first quarter as more favorable investment market conditions drove an increase in assets under management between the periods.

Insurance services revenues decreased $0.4 million, or 3.6%, for the first quarter of 2024 as compared to the first quarter of 2023, reflective of timing differences in certain commercial policy renewals and lower insurance carrier-related contingency revenues.

Banking noninterest revenues of $18.2 million for the first quarter of 2024 increased $1.8 million, or 11.1% as compared to the corresponding prior year period.

The year-over-year increase was driven by increases in debit interchange and ATM fees ($0.7 million, or 12.0%), reflective of fluctuations in annual card-related promotional income and a higher level of debit card transaction activity, deposit service charges and fees ($0.6 million, or 9.2%), other banking revenues ($0.4 million, or 12.2%), including a $0.5 million increase in CRE financing and advisory revenues associated with the Axiom acquisition and mortgage banking revenues ($0.1 million, or 25.5%).

The Company expects continued growth in its other banking revenues associated with interest rate swap fee revenues due to its recent implementation of interest rate swap origination capabilities.

The ratio of noninterest revenues to total revenues was 39.6% for the first quarter of 2024, compared to 10.8% for the prior year’s first quarter.

The increase was primarily the result of the $56.8 million increase in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities recognized in the prior year’s first quarter, while net interest income decreased 3.6%, driven by funding cost pressures.

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 39.4% for the quarter ended March 31, 2024 versus 36.9% for the equivalent period of 2023.

The increase was driven by a 7.1% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, decreased 3.7%, driven by funding cost pressures.

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 below sets forth the quarterly 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.

Noninterest Expenses

Three Months Ended

Nine Months Ended

September 30,

(000’s omitted)

5 unchanged sentences

Business development and marketing

Litigation accrual

Acquisition expenses

Acquisition-related contingent consideration adjustment

Total noninterest expenses

Noninterest expenses/average assets

Operating expenses (1) /average assets (non-GAAP)

Operating noninterest expenses (1) /average assets (non-GAAP)

Efficiency ratio (GAAP)

Operating efficiency ratio (non-GAAP) (2)

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

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

See Table 14 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.

(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 fully tax-equivalent basis plus noninterest revenues excluding loss on sales of investment securities, gain on debt extinguishment and unrealized gain on equity securities.

See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

As shown in Table 5, the Company recorded noninterest expenses of $116.5 million and $343.6 million for the third quarter and YTD periods of 2023, respectively, representing an increase of $8.3 million, or 7.7%, for the quarter and an increase of $25.2 million, or 7.9%, for the YTD period.

Third quarter and YTD 2023 noninterest expenses included $0.1 million and $1.1 million of acquisition expenses and acquisition-related contingent consideration adjustment, respectively, compared to $0.4 million and $5.1 million in third quarter and YTD 2022, respectively.

Salaries and employee benefits increased $4.5 million, or 6.8%, and $17.0 million, or 8.8%, for the third 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 $1.3 million for the quarter and $2.4 million YTD), occupancy and equipment (consistent between the quarters and up $0.1 million YTD), legal and professional fees (up $0.6 million for the quarter and $1.9 million YTD), business development and marketing (up $1.0 million for the quarter and $2.1 million YTD), amortization of intangible assets (down $0.3 million for the quarter and $0.5 million YTD) and other expenses (up $1.5 million for the quarter and $6.0 million YTD).

The increase in salaries and benefits was driven by merit and market-related increases in employee wages, higher employee medical expenses and certain executive retirement expenses.

Other expenses were up primarily due to increases in insurance expenses, travel-related expenses and non-service related components of the net periodic pension benefit credit.

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 various matters.

The increase in data processing and communications expenses was due to the Company’s continued investment in customer-interfacing and digital technologies and the upgrading of operational support systems between the comparable periods.

Business development and marketing expenses increased due to the Company’s investment in digital marketing initiatives and higher levels of targeted advertisements intended to generate deposit inflows.

The Company’s GAAP efficiency ratio was 66.4% for the third quarter of 2023, 4.8 percentage points unfavorable to the comparable quarter of 2022.

This resulted from total noninterest expenses increasing 7.7% due to the factors noted above, while total revenues decreased 0.2%, primarily due to lower net interest income driven by higher funding costs.

The GAAP efficiency ratio of 72.3% for September YTD 2023 was 9.1 percentage points unfavorable to the 63.2% GAAP efficiency ratio for September YTD 2022.

The increase in the GAAP efficiency ratio between the comparable YTD periods was the result of total revenues decreasing 5.6% 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 7.9% due to the factors noted above.

Annualized current quarter noninterest expenses as a percentage of average assets increased 0.30 percentage points versus the third quarter of the prior year as noninterest expenses increased 7.7% while average assets decreased 2.8%.

On a YTD basis, annualized noninterest expenses as a percentage of average assets increased 0.28 percentage points as noninterest expenses increased 7.9% while average assets decreased 2.1%.

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 operating efficiency ratio (a non-GAAP measure, as defined in the table above) was 64.3% for the third quarter, 5.0 percentage points unfavorable to the comparable quarter of 2022.

This resulted from operating expenses (as defined above) increasing 8.6%, while operating revenues (as defined above) increased 0.1%.

The operating efficiency ratio (non-GAAP) of 62.8% for the first nine months of 2023 was 2.8 percentage points unfavorable compared to the first nine months of 2022 due to 9.8% higher operating expenses (as defined above), while operating revenues (as defined above) increased by 4.8%.

Current year operating expenses (as defined above) as a percentage of average assets (non-GAAP) increased 0.31 percentage points versus the prior year quarter and 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 8.6% for the quarter and 9.8% for the year-to-date period, while average assets decreased 2.8% for the quarter and 2.1% for the year-to-date period.

The third quarter and YTD 2023 effective income tax rates were 21.2% and 21.1%, respectively, as compared to 22.0% and 21.6% for the comparable periods of 2022.

The decrease in the third 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 the third quarter and YTD 2023 were 21.2% and 21.3%, respectively, as compared to 22.0% for both of the comparable periods of 2022.

Investment Securities

The carrying value of investment securities (including unrealized gains and losses) was $3.96 billion at the end of the third quarter, a decrease of $1.35 billion, or 25.5%, from December 31, 2022 and $1.27 billion, or 24.2%, lower than September 30, 2022.

The balance of cash equivalents was $260.0 million at the end of the third quarter, an increase of $241.6 million from December 31, 2022 and $230.0 million from September 30, 2022.

The book value of investment securities (excluding unrealized gains and losses) of $4.51 billion at the end of the third quarter decreased $1.33 billion from December 31, 2022 and $1.69 billion from September 30, 2022.

During the first nine months of 2023, the Company purchased $23.9 million of government agency mortgage-backed securities with an average yield of 5.49%, 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 $582.6 million of investment maturities, calls and principal payments during the first nine months of 2023.

Additionally, there was $30.1 million of net accretion on investment securities during the first nine months of 2023.

The effective duration of the investment securities portfolio was 7.2 years at the end of the third quarter of 2023, as compared to 6.3 years at the end of 2022 and 6.5 years at the end of the third quarter of 2022.

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses in the available-for-sale and equity securities portfolio.

At September 30, 2023, the investment portfolio excluding held-to-maturity investment securities had a $546.4 million net unrealized loss, as compared to a $522.7 million net unrealized loss at December 31, 2022 and a $964.9 million net unrealized loss at September 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, 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:

As shown in Table 5, the Company recorded noninterest expenses of $118.1 million for the first quarter of 2024, representing an increase of $4.0 million, or 3.5%, from the prior year’s first quarter.

The increase in noninterest expenses was attributable to a $1.6 million, or 2.2%, increase in salaries and employee benefits, a $1.6 million, or 24.4%, increase in other expenses, a $1.2 million, or 9.3%, increase in data processing and communications expenses, a $0.3 million, or 3.1%, increase in occupancy and equipment expenses, a $0.1 million, or 5.0%, increase in business development and marketing and a $0.1 million increase in litigation accrual.

The increases in these noninterest expenses were partially offset by a $0.8 million, or 16.5%, decrease in legal and professional fees and a $0.1 million, or 2.5%, decrease in the amortization of intangible assets.

Operating expenses, a non-GAAP measure, increased $4.0 million, or 3.6%, between the comparable quarters.

The increase in salaries and benefits expense was driven by merit and market-related increases in employee wages, partially offset by the impact of the previously announced retail customer service workforce optimization plan and a decrease in employee retirement-related severance expense.

Other expenses were up primarily due to increases in insurance expenses and non-service related components lowering the net periodic pension benefit credit.

The increase in insurance expenses included $0.4 million associated with an additional expected increase to the FDIC special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate.

The increase in data processing and communications expenses is reflective of the Company’s continued investment in customer-facing and back-office technologies including investments being made in additional system resources to enhance the detection and prevention of customer payment-related fraud and cybersecurity-related incidents.

The Company’s GAAP efficiency ratio was 66.6% for the first quarter of 2024, 25.0 percentage points favorable to the comparable quarter of 2023.

This resulted from total revenues increasing 42.4%, primarily due to a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the prior year quarter, while total noninterest expenses increased 3.5% due to the factors noted above.

Annualized current quarter noninterest expenses as a percentage of average assets were consistent with the first quarter of the prior year as noninterest expenses increased 3.5% due to the factors noted above and average assets increased 2.8% primarily due to the aforementioned organic loan growth.

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 64.1% for the first quarter of 2024, 2.0 percentage points unfavorable to the comparable quarter of 2023.

This resulted from operating noninterest expenses, a non-GAAP measure as described above, increasing 3.6%, while operating revenues (FTE), a non-GAAP measure as described above, increased by a lesser 0.3%.

Current year operating noninterest expenses, a non-GAAP measure as described above, as a percentage of average assets were consistent with the prior year first quarter.

First quarter operating noninterest expenses, a non-GAAP measure as defined above, increased 3.6% year-over-year, while average assets increased 2.8% primarily due to the aforementioned organic loan growth.

The first quarter 2024 effective income tax rate was 22.9%, compared to 16.9% for the first quarter of 2023.

The increase in the effective income tax rate was primarily attributable to a higher proportion of benefit derived from stock based compensation activity in relation to total income taxes during the first quarter of 2023 as total income taxes in the prior year’s first quarter were significantly lower driven by a $52.3 million realized loss on sales of investment securities.

The Company recorded $0.2 million of tax expense associated with stock-based compensation in the first quarter of 2024 and a $0.3 million tax benefit associated with stock-based compensation in the first quarter of 2023, while total income tax expense was $12.2 million and $1.2 million for the same respective periods.

The effective tax rates excluding the stock-based compensation tax benefits and federal tax credit amortization were 22.0% for the first quarter of 2024 and 21.4% for the first quarter of 2023, an increase of 0.6 percentage points primarily due to an increase in the full-year 2024 pre-tax income projection as compared to the prior year.

The carrying value of investment securities (including unrealized gains and losses on available-for-sale securities) was $4.15 billion at the end of the first quarter, a decrease of $13.2 million, or 0.3%, from December 31, 2023 and $478.6 million, or 10.3%, lower than March 31, 2023.

The book value (excluding unrealized gains and losses) of investment securities increased $28.8 million from December 31, 2023, driven by government agency mortgage-backed securities purchases, and decreased $440.9 million from March 31, 2023 due to the maturities of certain lower-yielding available-for-sale investment securities in the prior year.

During the first quarter of 2024, the Company purchased $38.4 million of government agency mortgage-backed securities with an average yield of 5.71%, which the Company classified as held-to-maturity.

These additions were offset by $16.7 million from investment maturities, calls, and principal payments during the first three months of 2024.

Additionally, there was $9.4 million of net accretion on investment securities during the first quarter of 2024.

The effective duration of the investment securities portfolio was 6.8 years at the end of the first quarter of 2024, as compared to 7.0 years at the end of 2023 and 6.8 years at the end of the first quarter of 2023.

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

At March 31, 2024, the investment portfolio (excluding held-to-maturity investment securities) had a $422.7 million net unrealized loss, a $42.0 million increase from the $380.7 million net unrealized loss at December 31, 2023 and a $37.7 million increase from the $385.0 million net unrealized loss at March 31, 2023.

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

Investment Securities

September 30,

(000’s omitted)

17 unchanged sentences

Total investments

Loans ended the third quarter at $9.45 billion, $640.7 million, or 7.3%, higher than at December 31, 2022 and $906.5 million, or 10.6%, higher than at September 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 $420.5 million, or 12.0%, from September 30, 2022 and increased $269.3 million, or 7.4%, 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 multi-family and commercial real estate non-owner occupied, followed by commercial real estate owner occupied, and to a lesser extent 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 diverse and relatively low at 186% of total bank-level regulatory capital, 24% of total loans and 15% of total assets.

Loans ended the first quarter at $9.88 billion, $178.9 million, or 1.8%, higher than December 31, 2023 ending loans and $901.2 million, or 10.0%, higher than March 31, 2023.

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

The business lending portfolio increased $472.3 million, or 12.6%, from March 31, 2023, and $135.8 million, or 3.3%, from December 31, 2023, driven by net organic growth over both periods.

Non-owner occupied commercial real estate increased $38.7 million, or 2.3%, multifamily increased $38.5 million, or 6.2%, business non-real estate loans, including commercial and industrial lending, increased $34.1 million, or 3.4%, and owner-occupied commercial real estate increased $24.5 million, or 3.3%, as compared to December 31, 2023.

While certain macroeconomic concerns have emerged related to non-owner occupied and multifamily commercial real estate, the Company’s exposure to this portfolio is diverse both geographically and by industry type, and remains relatively low at 15% of total assets, 25% of total loans and 201% of total bank-level regulatory capital.

Commercial real estate lending represents 75.5% of the total business lending portfolio at March 31, 2024 while other commercial and industrial lending represents the remaining 24.5% of total business lending.

The Company’s largest non-owner occupied commercial real estate lending concentration by property type is multifamily at 20.6% of total business lending, followed by office and commercial construction, at 11.7% and 11.2%, respectively.

The Company’s largest owner-occupied and commercial and industrial lending concentration by industry is retail trade at 7.7% of total business lending, followed by health care and social assistance at 2.8% and real estate rental and leasing at 2.4%.

These levels demonstrate the Company’s diversity in the lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) accounting for more than 13% of the CRE portfolio and a very low level of commercial real estate lending being conducted in major metropolitan areas.

See Table 7 below for concentrations of CRE lending by borrower type and Table 8 below for concentrations of CRE by property location.

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

1 unchanged sentence

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 expects the composition of its growth in its business lending portfolio over the remaining three quarters of 2024 to be a proportionally higher balance of business non-real estate lending as compared to commercial real estate lending than that experienced by the Company over the past several years, in order to maintain the overall concentration of its CRE portfolio.

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

Consumer mortgages increased $221.2 million, or 7.4%, from one year ago and increased $184.3 million, or 6.1%, from December 31, 2022, reflective of organic growth.

Home equity loans increased $11.7 million, or 2.7%, from one year ago, and increased $10.8 million, or 2.5%, from December 31, 2022, in part aided by lower levels of consumer mortgage refinancing-related payoffs and paydowns in the higher interest rate environment.

The following table presents the concentration by borrower type of the Company’s CRE loan balances as of March 31, 2024:

Concentrations of CRE Lending by Borrower Type

(000’s omitted, except percentages)

Amortized Cost

Percentage of Total

Multifamily and non-owner occupied CRE by property type:

Commercial Construction

Other Lessors of CRE

Warehouse/Industrial

Nursing/Assisted Living

Residential Construction

Total multifamily and non-owner occupied CRE

Owner-occupied CRE by industry:

Health Care and Social Assistance

Real Estate Rental and Leasing

Other Services

Manufacturing

Agriculture and Forestry

Arts, Entertainment and Recreation

Accommodation and Food Services

Wholesale Trade

Transportation and Warehousing

Professional, Scientific and Technical Services

Educational Services

Total owner occupied CRE

The following table presents the geographic concentrations of the Company’s CRE loan balances by property location (MSA) as of March 31, 2024:

Concentrations of CRE by Property Location

Multifamily CRE

Owner occupied CRE

Non-owner occupied CRE

(000’s omitted, except percentages)

Albany-Schenectady-Troy, NY

Burlington-South Burlington, VT

Rochester, NY

Buffalo-Cheektowaga, NY

Scranton Wilkes-Barre, PA

Utica-Rome, NY

All Other MSA - NY (1)(2)

All Other MSA - PA (1)(2)

All Other MSA (1)

All Other Non-MSA

The MSAs within these captions are individually less than 2% of total CRE exposure.

The MSAs within these captions include certain counties in adjacent states with a high degree of economic and social integration to the respective core city in New York or Pennsylvania.

Consumer mortgages increased $297.7 million, or 9.9%, from one year ago and increased $32.4 million, or 1.0%, from December 31, 2023, with the increases over both periods representing net organic growth and included the impact of certain secondary market sales of organic production.

The Company sold $1.2 million and $6.8 million of consumer mortgage production during the first quarter of 2024 and over the last year, respectively.

Over the past year, the Company produced net organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, recruitment of additional mortgage loan originators and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets relative to the national environment.

Reflective of the higher interest rate environment and consumer expectations of future interest rate movements, the consumer mortgage growth produced over the last quarter is comprised of a higher proportion of adjustable rate loans than experienced in recent periods.

During the first quarter of 2024, approximately 32% of the net consumer mortgage growth is comprised of adjustable rate loans compared to approximately 9% over the last twelve months.

The Company expects this trend to continue during the remainder of 2024.

Home equity loans increased $14.0 million, or 3.2%, from one year ago and decreased $0.5 million, or 0.1%, from December 31, 2023, in part a result of 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 $117.1 million, or 6.6%, from one year ago, and increased $11.1 million, or 0.6%, from December 31, 2023.

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.

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 sales volumes that existed in its market area and dealer network, which, combined with higher vehicle sales prices, resulted in growth in the Company’s consumer installment portfolio.

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.

2 unchanged sentences

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.

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

This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to 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 is not indicative of the specific amount of future net charge-offs that is expected to 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 third quarter was $64.9 million, an increase of $4.6 million, or 7.6%, from one year earlier and an increase of $3.9 million, or 6.4%, from the end of 2022.

As shown in Table 9, total allowance for credit losses at the end of the first quarter was $70.1 million, an increase of $6.9 million, or 11.0%, from one year earlier and up $3.4 million, or 5.1%, from the end of 2023.

Allowance for Credit Losses by Loan Type

September 30, 2023

March 31, 2024

December 31, 2023

September 30, 2022

March 31, 2023

(000’s omitted except for ratios)

5 unchanged sentences

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

The unallocated allowance of $1.0 million at September 30, 2023 was consistent with December 31, 2022 and September 30, 2022.

The unallocated allowance of $1.0 million at March 31, 2024 was consistent with December 31, 2023 and March 31, 2023.

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.

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

September 30,

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

Allowance for credit losses/total loans

7 unchanged sentences

Consumer direct

Net charge-offs during the third quarter of 2023 were $1.2 million, an increase of $0.9 million compared to the third quarter of 2022.

All portfolios except the home equity portfolio experienced higher net charge-off levels in the third quarter of 2023 compared to the third 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 third quarter was 0.05%, four basis points lower than the ratio at December 31, 2022 and three basis points higher than the ratio at September 30, 2022.

Despite the increase in net charge-offs in the third quarter of 2023, the net charge-off ratio remains well below the Company’s average for the past ten years of 0.12%.

Net charge-off ratios for the third quarter of 2023 for the consumer mortgage, consumer direct and home equity portfolios were above the Company’s average for the trailing eight quarters, while the net charge-off ratio for the business lending and consumer indirect 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 September 30, 2023 was $0.6 million.

This compares to $0.5 million at both December 31, 2022 and September 30, 2022.

At September 30, 2023, OREO consisted of 10 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 eight residential properties with a total value of $0.5 million at September 30, 2022.

Approximately 15% of the nonperforming loans at September 30, 2023 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type.

While the level of nonperforming business loans was $0.8 million higher than the prior year, the business lending nonperforming loans ratio was consistent as business conditions in the Company’s market area remain stable.

Approximately 76% of nonperforming loans at September 30, 2023 were comprised of consumer mortgages.

The net charge-offs during the first quarter of 2024 were $2.8 million, $1.3 million higher than the first quarter of 2023, with all portfolios experiencing higher net charge-off levels than the prior year.

The total net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the first quarter of 2024 was 0.12%, five basis points higher than the first quarter of 2023, and two basis points above the level at the fourth quarter of 2023.

Net charge-off ratios for the first quarter of 2024 for all loan portfolios were stable as compared to the Company’s average for the trailing eight quarters.

Economic conditions are also relatively stable, with the unemployment rate in particular remaining low and supporting the moderate levels of net charge-offs experienced by the Company as compared to its historical trends.

Other real estate owned (“OREO”) at March 31, 2024 was $1.7 million as compared to $0.5 million at March 31, 2023 and $1.2 million at December 31, 2023.

At March 31, 2024, OREO consisted of 23 residential properties with a total value of $1.3 million and two commercial properties with a total value of $0.4 million.

This compares to 21 residential properties with a total value of $1.1 million and one commercial property with a value of $0.1 million at December 31, 2023, and eight residential properties with a total value of $0.5 million and no commercial properties at March 31, 2023.

The increase in OREO over the last twelve months was primarily driven by the Company working through a backlog of residential foreclosures that arose due to pandemic-related moratoriums that have since been lifted.

Approximately 31% of the nonperforming loans at March 31, 2024 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry and property type.

Of the nonperforming loans in the business lending portfolio, non-owner occupied commercial real estate represents 86% of the balances, owner-occupied commercial real estate represents 10% of the balances, and other commercial and industrial loans represents 4% of the balances.

There are no nonperforming multifamily loans.

The level of nonperforming business loans increased from the prior year primarily due to changes in the financial conditions and loan repayment performance of three business lending relationships that were individually assessed for a specific allocation of the allowance for credit losses.

Approximately 61% of nonperforming loans at March 31, 2024 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.

Although high levels of 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 portfolio 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 176% at the end of the third quarter, as compared to 183% at year-end 2022 and 186% at September 30, 2022.

The decrease in this ratio between the annual quarterly periods was primarily driven by the increases in nonperforming business loan and consumer mortgage levels rising proportionally more than the allowance for credit losses.

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.

The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 142% at the end of the first quarter, as compared to 122% at year-end 2023 and 187% at March 31, 2023.

The decrease in this ratio between the annual quarterly periods was due to nonperforming loans increasing proportionally more than the allowance for credit losses, primarily driven by the aforementioned increase in nonperforming business lending loans.

The Company’s senior management, special asset officers and business lending management 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.

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

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

Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 0.90% at the end of the third quarter, one basis point above the 0.89% at year-end 2022 and 19 basis points above the 0.71% at September 30, 2022.

The business lending delinquency ratio at the end of the third quarter of 0.49% was nine basis points above the level of 0.40% at December 31, 2022 and 32 basis points above the level of 0.17% at September 30, 2022.

The delinquency rates for the consumer indirect and consumer direct portfolios decreased as compared to the levels at December 31, 2022, while delinquency rates in the consumer mortgage and home equity portfolios increased.

The delinquency rates for all loan portfolios increased compared to the levels at September 30, 2022.

Despite the increase in delinquent loans in the third quarter of 2023, the current quarter delinquency rates remained below the Company’s average for the past ten years of 1.04%.

The Company recorded a $2.9 million provision for credit losses in the third quarter of 2023.

The third quarter provision for credit losses was $2.2 million lower than the equivalent prior year period’s provision for credit losses of $5.1 million.

The third 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 $64.9 million as of September 30, 2023 increased $3.9 million compared to December 31, 2022 and increased $4.6 million compared to September 30, 2022.

The allowance for credit losses to total loans ratio was 0.69% at September 30, 2023, consistent with the level at December 31, 2022 and two basis points lower than the level at September 30, 2022.

Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 0.93% at the end of the first quarter of 2024, 13 basis points below the year-end 2023 ratio of 1.06% and 20 basis points above the March 31, 2023 ratio of 0.73%.

The business lending delinquency ratio at the end of the first quarter was 16 basis points below the level at December 31, 2023 and 19 basis points above the level at March 31, 2023.

The delinquency rates for the consumer mortgage, consumer indirect, consumer direct and home equity portfolios all increased as compared to the levels at March 31, 2023, however, all portfolio segments except for home equity decreased as compared to their levels at December 31, 2023.

The Company recorded a $6.1 million provision for credit losses in the first quarter of 2024.

The first quarter provision for credit losses was $2.6 million higher than the equivalent prior year period’s provision for credit losses of $3.5 million.

The allowance for credit losses of $70.1 million as of March 31, 2024 increased $6.9 million from the level one year ago.

While economic forecasts remained stable, the current quarter provision for credit losses is reflective of an increase in loan balances and the Company increasing its qualitative assessment of future uncertainty and building credit loss reserves, with a primary focus on the business lending and consumer indirect portfolios.

The allowance for credit losses to total loans ratio was 0.71% at March 31, 2024, one basis point higher than the level at March 31, 2023 and two basis points higher than the level at December 31, 2023.

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 September 30, 2023, the net purchase discount related to the $1.09 billion of remaining non-PCD loan balances acquired in prior period acquisitions was approximately $21.6 million, or 2.0% of that portfolio.

As shown in Table 9, average deposits of $12.77 billion in the third quarter were $562.5 million, or 4.2%, lower than the third quarter of 2022.

Total average deposit balances decreased $408.1 million, or 3.1%, from the fourth quarter of last year, while on an ending basis total deposits increased $18.5 million, or 0.1%, 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 from the prior year levels.

Average noninterest checking deposits as a percentage of average total deposits was 29.8% in the third quarter compared to 31.4% in the third quarter of 2022 and 31.9% in the fourth quarter of last year.

Average non-maturity deposits represented 89.2% of the Company’s deposit funding base and time deposits represented 10.8% of total average deposits in the third quarter of 2023 compared to 92.8% and 7.2%, respectively, in the equivalent period year period.

The quarterly average cost of deposits was 0.76% for the third quarter of 2023, compared to 0.18% for the fourth quarter of 2022 and 0.11% in the third 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.

As of March 31, 2024, the net purchase discount related to the $1.01 billion of remaining non-PCD loan balances acquired through prior period acquisition transactions was approximately $20.0 million, or 2.0% of that portfolio.

As shown in Table 11, average deposits of $13.03 billion in the first quarter were $63.9 million, or 0.5%, higher than the first quarter of 2023.

Total average deposit balances increased $59.3 million, or 0.5%, from the fourth quarter of last year, while on an ending basis, total deposits increased $423.9 million, or 3.3%, from December 31, 2023.

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

Average noninterest checking deposits as a percentage of average total deposits was 27.4% in the first quarter compared to 31.2% in the first quarter of 2023 and 28.6% in the fourth quarter of last year.

Average non-maturity deposits represented 85.7% of the Company’s average deposit funding base in the first quarter of 2024, while time deposits represented 14.3% of total average deposits.

In comparison, time deposits represented 7.4% of total average deposits during the first quarter of 2023 and 12.3% of total average deposits during the fourth quarter of last year due in part to customers responding to changes in market interest rates by moving funds into higher yielding time deposit accounts.

The quarterly average cost of deposits was 1.14% for the first quarter of 2024, compared to 0.31% in the first quarter of 2023, 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 September 30, 2023 is comprised of approximately 61% consumer, 26% business and 13% municipal, and broadly dispersed with an average personal deposit account balance of approximately $12,000 and average business deposit relationship of approximately $62,000, while the Company’s total average deposit account balance is under $20,000.

In addition, at the end of the quarter, 70% 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 September 30, 2023, the Company’s total uninsured deposits, net of collateralized and intercompany deposits, is estimated at approximately $2.11 billion.

This amount is determined by adjusting the amounts reported in the Bank Call Report by intercompany deposits, which are not external customers 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 September 30, 2023 are reported gross at $3.92 billion, which includes intercompany account balances of $334.2 million and collateralized deposits of $1.47 billion.

Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of third quarter ending total deposits.

Average nonpublic fund deposits for the third quarter of 2023 decreased $422.2 million, or 3.6%, versus the fourth quarter of 2022 and decreased $589.4 million, or 4.9%, versus the year-earlier period as competition intensified in the rising interest rate environment.

Average public fund deposits for the third quarter increased $14.1 million, or 1.1%, from the fourth quarter of 2022 and increased $26.9 million, or 2.0%, from the third quarter of 2022, primarily due to the Company’s competitive pricing and business development efforts.

Average public fund deposits as a percentage of total average deposits increased from 10.0% in the third quarter of 2022 to 10.6% in the third quarter of 2023.

The Company’s deposit base is well diversified across customer segments, which as of March 31, 2024 is comprised of approximately 60% consumer, 25% business and 15% municipal, and broadly dispersed with an average consumer deposit account balance of approximately $12,000 and average business deposit relationship of approximately $62,000, while the Company’s total average deposit account balance is under $20,000.

In addition, at the end of the quarter, 66% of the Company’s total deposit balances were in checking and low-rate savings accounts and the weighted-average age of the Company’s non-maturity deposit accounts was approximately 15 years.

The total estimated amount of deposits that exceeded the $250,000 insured limit provided by the FDIC, net of collateralized and intercompany deposits, was approximately $2.12 billion at March 31, 2024.

This amount is determined by adjusting the amounts reported in the Bank Call Report by intercompany deposits, which are not external customers and are therefore eliminated in consolidation, and municipal deposits whose uninsured balances are collateralized by certain pledged investment securities.

The Bank Call Report estimated uninsured deposit balances at March 31, 2024 are reported gross at $4.27 billion, which includes intercompany account balances of $334.8 million, and collateralized deposits of $1.81 billion.

Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of ending total deposits at March 31, 2024.

These estimates are based on the determination of known deposit account balances of each depositor and the insurance guidelines provided by the FDIC.

Average nonpublic fund deposits for the first quarter of 2024 decreased $100.7 million, or 0.9%, versus the fourth quarter of 2023 and decreased $308.5 million, or 2.7%, versus the year-earlier period due in part to increased rate competition from other banks and non-depository financial institutions.

Average public fund deposits for the first quarter increased $160.0 million, or 9.7%, from the fourth quarter of 2023 primarily due to the seasonal receipt of property tax payments and increased $372.5 million, or 26.0%, from the first quarter of 2023, reflective of competitive pricing offerings and expansion of its municipal deposit relationship base due to the Company’s business development efforts.

Average public fund deposits as a percentage of total average deposits increased from 11.0% in the first quarter of 2023 to 13.8% in the first quarter of 2024.

Quarterly Average Deposits

September 30,

(000’s omitted)

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Total deposits

Borrowings, excluding securities sold under agreement to repurchase, at the end of the third quarter of 2023 totaled $316.8 million.

This was $474.3 million lower than borrowings at December 31, 2022 and $174.3 million above the level at the end of the third quarter of 2022.

The increase from the prior year third quarter was primarily due to an increase in other FHLB borrowings of $297.4 million as the Company secured $300.0 million of fixed rate FHLB term borrowings in the third quarter of 2023 to support the funding of continued loan growth.

The decrease from the fourth quarter of 2022 was primarily related to a decrease in overnight borrowings of $768.4 million as the Company utilized proceeds from its first quarter securities sales and subsequent investment security maturities to pay down these borrowings.

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 $330.3 million at the end of the third quarter of 2023, a decrease of $16.4 million and $22.5 million from December 31, 2022 and September 30, 2022, respectively.

Borrowings, excluding securities sold under agreement to repurchase, at the end of the first quarter of 2024 totaled $395.1 million.

This was $65.5 million, or 14.2%, lower than borrowings at December 31, 2023 and $319.4 million above the level at the end of the first quarter of 2023.

The increase from the prior year first quarter was due to an increase in other FHLB borrowings of $377.8 million, partially offset by a decrease in overnight borrowings of $58.4 million, as the Company secured fixed rate FHLB term borrowings in the third and fourth quarters of 2023 to support the funding of continued loan growth.

The decrease from the fourth quarter of 2023 was primarily related to a decrease in overnight borrowings of $53.0 million and maturities of other FHLB borrowings primarily associated with the amortizing advances secured in the prior year.

During January 2024, the Company secured $300.0 million in short-term borrowings through the Federal Reserve’s Bank Term Funding Program at a rate of 4.87% to fund expected net loan growth.

These short-term borrowings matured during March 2024 and the Bank Term Funding Program has ceased making new loans as of March 11, 2024.

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

Customer repurchase agreements were $287.2 million at the end of the first quarter of 2024, $17.4 million lower than both December 31, 2023 and March 31, 2023.

Shareholders’ Equity and Regulatory Capital

Total shareholders’ equity was $1.55 billion at the end of the third quarter, up $3.2 million from the balance at December 31, 2022.

The increase was driven by net income of $98.2 million, $6.7 million recognized from employee stock options earned and net activity under the Company’s employee stock plans of $0.7 million, partially offset by $5.3 million of other comprehensive loss, net of tax, dividends declared of $71.5 million and common stock repurchased of $25.7 million.

The other comprehensive loss, net of tax, was comprised of a $4.4 million decrease 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 nine months and the recognition of the loss on sales of available-for-sale investment securities related to aforementioned balance sheet repositioning, and a negative $0.9 million adjustment to the funded status of the Company’s retirement plans.

Over the past 12 months, total shareholders’ equity increased $93.8 million, driven primarily by an increase in the market value adjustment on investments, net income, the accretion of the market value adjustment associated with the transfer of securities from the available-for-sale portfolio to the held-to-maturity portfolio and the issuance of stock in association with the employee stock plan, partially offset by dividends declared, common stock repurchase activity and the change in the funded status of the Company’s defined benefit pension and other postretirement plans.

The dividend payout ratio (dividends declared divided by net income) for the first nine months of 2023 was 72.8%, compared to 51.8% for the nine months ended September 30, 2022.

Excluding the after-tax impact of the loss on sales of investment securities, the YTD 2023 dividend payout ratio was 51.3%.

Dividends declared for the first nine months of 2023 increased 1.8% compared to the first nine 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 and from $0.44 to $0.45 in the third quarter of 2023, while net income decreased 27.5% 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 2.8% between the first nine months of 2023 and the equivalent prior year period.

Additionally, the number of common shares outstanding decreased 0.6% 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 a 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.

Total shareholders’ equity of $1.66 billion at the end of the first quarter of 2024 represents a decrease of $41.0 million from the balance at December 31, 2023.

The decrease was driven by common stock repurchased of $34.5 million, an increase in accumulated other comprehensive loss of $26.9 million, and common stock dividends declared of $23.7 million, partially offset by net income of $40.9 million, stock-based compensation of $2.3 million and net activity under the Company’s employee stock plans of $0.9 million.

The increase in accumulated other comprehensive loss was comprised of $27.2 million of other comprehensive loss related to the Company’s investment securities portfolio, including a net decrease in the after-tax market value adjustment on the available-for-sale investment portfolio as medium and long-term market interest rates increased between the periods, partially offset by $0.3 million of other comprehensive income associated with adjustments to the overfunded status of the Company’s employee retirement plans.

Over the past 12 months, total shareholders’ equity increased $22.9 million, as net income, the issuance of common stock in association with the employee stock plans and adjustments to the overfunded status of the Company’s employee retirement plans more than offset a decrease in the after-tax market value adjustment on investments, common stock dividends declared, and common stock repurchase activity.

The dividend payout ratio (dividends declared divided by net income) for the first quarter of 2024 was 58.1%, compared to 409.1% for the first quarter of 2023.

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

First quarter dividends declared increased 0.1% versus one year earlier, as the Company’s quarterly dividend per share was raised from $0.44 to $0.45 in the third quarter of 2023, while total shares outstanding decreased 1.8% as common stock repurchases outweighed issuances from the Company’s employee stock plans.

The 2023 dividend increase marked the Company’s 31 st consecutive year of increased dividend payouts to common shareholders.

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.

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

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

The Company and the Bank are required to maintain a “capital conservation buffer” 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 September 30, 2023 and December 31, 2022.

Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer as of September 30, 2023 and December 31, 2022, the Company and the Bank must maintain:

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

The required capital conservation buffer is 2.5% as of March 31, 2024 and December 31, 2023.

Therefore, to satisfy both the minimum risk-based capital ratios and the CCB as of March 31, 2024 and December 31, 2023, the Company and the Bank must maintain:

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

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(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 September 30, 2023 and December 31, 2022, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”.

As of September 30, 2023 and December 31, 2022, the regulatory capital ratios for the Company and Bank are presented below.

As of March 31, 2024 and December 31, 2023, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”.

As of March 31, 2024 and December 31, 2023, the regulatory capital ratios for the Company and Bank are presented below.

Regulatory Ratios

September 30, 2023

March 31, 2024

December 31, 2023

September 30, 2022

March 31, 2023

Community Bank

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Total risk-based capital ratio

The Company’s Tier 1 leverage ratio, a primary measure of regulatory capital as defined above, was 9.44% at the end of the third quarter, up 0.65 percentage points from December 31, 2022 and 0.66 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, increasing 0.6%, while average assets, excluding intangibles and the market value adjustment on investments, decreased 6.3%.

The Tier 1 leverage ratio increased compared to the prior year’s third quarter as shareholders’ equity, excluding net intangibles and other comprehensive income or loss items, increased 3.2% as net earnings retention outweighed share repurchases, while average assets, excluding intangibles and the market value adjustment on investments, decreased 4.1%.

The increase in shareholders’ equity, excluding net intangibles and other comprehensive income or loss items, between both periods was primarily due to net earnings retention, that despite the negative impact of the realized loss on investment security sales in connection with the first quarter 2023 balance sheet repositioning, outweighed share repurchases.

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 10.11% at the end of the third quarter of 2023 compared to 9.80% at December 31, 2022 and 9.37% at September 30, 2022.

The tangible equity-to-assets ratio (a non-GAAP measure) of 4.81% increased 0.17 percentage points from December 31, 2022 and increased 0.73 percentage points versus September 30, 2022 (see Table 11 for Reconciliation of GAAP to Non-GAAP Measures).

The increase in the tangible equity-to-assets ratio (non-GAAP) from one year prior was primarily driven by a $97.4 million, or 16.2%, increase in tangible equity due to the decline in accumulated other comprehensive loss related to the Company’s investment securities portfolio due in part to the timing of the reclassification of certain investment securities from the available-for-sale portfolio to the held-to-maturity portfolio in the fourth quarter of 2022 and a $204.6 million, or 1.4%, 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 $3.2 million, or 0.5%, increase in tangible equity, while tangible assets decreased $449.4 million, or 3.0%, primarily due to the reduction in investment securities and borrowings resulting from the Company’s first quarter balance sheet repositioning and investment maturities.

The Company’s tier 1 leverage ratio was 9.01% at the end of the first quarter, down 33 basis points from December 31, 2023 and five basis points below its level one year earlier.

The decrease in the Tier 1 leverage ratio in comparison to December 31, 2023 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income or loss items, decreasing 1.4%, primarily as a result of common share repurchases, while average assets, excluding intangibles and the market value adjustment on available-for-sale investment securities, increased 2.2%, primarily due to organic loan growth and an increase in cash equivalent balances driven by net deposit inflows.

The Tier 1 leverage ratio decreased compared to the prior year’s first quarter as average assets, excluding intangibles and the market value adjustment, increased 2.4% primarily due to organic loan growth and an increase in cash equivalent balances driven by net funding inflows, while shareholders’ equity, excluding intangibles and other comprehensive income or loss items, increased a lesser 1.9% as the impact of net earnings retention outweighed share repurchases.

The shareholders’ equity-to-assets ratio was 10.45% at the end of the first quarter of 2024 compared to 10.92% at December 31, 2023 and 10.71% at March 31, 2023.

The tangible equity-to-tangible assets ratio, a non-GAAP measure, of 5.32% decreased 0.43 percentage points from December 31, 2023 and decreased 0.09 percentage points versus March 31, 2023 (see Table 14 for Reconciliation of Quarterly GAAP to Non-GAAP Measures).

The decrease in the tangible equity-to-tangible assets ratio, a non-GAAP measure, from one year prior was driven by a $599.3 million, or 4.2%, increase in tangible assets, a non-GAAP measure, due primarily to organic loan growth, while tangible equity, a non-GAAP measure, increased $19.5 million, or 2.5%, as net income retention outweighed the impact of share repurchases between the periods but lagged the growth rate of tangible assets.

The decrease in the tangible equity-to-tangible assets ratio, a non-GAAP measure, from December 31, 2023 was driven by a $47.2 million, or 5.6%, decrease in tangible equity, a non-GAAP measure, due mainly to share repurchases, while tangible assets, a non-GAAP measure, increased $296.7 million, or 2.0%, primarily due to organic loan growth and an increase in cash equivalent balances driven by net deposit inflows.

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

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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 sources of non-deposit funds are FHLB or Federal Reserve overnight advances and other FHLB term borrowings.

At September 30, 2023, there were $316.8 million of other FHLB term borrowings and no overnight borrowings outstanding.

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

At September 30, 2023, the Bank had $455.8 million of cash and cash equivalents of which $260.0 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks.

The Company also had $2.61 billion in unused FHLB & FRB borrowing capacity based on the Company’s quarter-end loan collateral levels.

Additionally, the Company had approximately $1.75 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 sources of immediately available liquidity of $4.81 billion at the end of the third quarter of 2023 represent over 200% of the Company’s estimated uninsured deposits, net of collateralized and intercompany deposits, estimated at approximately $2.11 billion.

The primary sources of funds are deposits, which were $13.35 billion at March 31, 2024.

The primary sources of non-deposit funds are customer repurchase agreements, and FHLB and FRB overnight advances and term borrowings.

At March 31, 2024, there were $287.2 million of customer repurchase agreements, no overnight borrowings, and $395.1 million of FHLB term borrowings outstanding.

The Company’s primary sources of available liquidity include cash and cash equivalents, borrowing capacity at the FHLB and FRB, as well as net unpledged investment securities that could be sold, subject to market conditions, or used to collateralize additional funding.

Table 13 below details the available sources of liquidity at March 31, 2024.

In addition, there was $25.0 million available in an unsecured line of credit with a correspondent bank at year end.

The Company’s sources of immediately available liquidity of $4.60 billion as of March 31, 2024 represent over 200% of the Company’s estimated uninsured deposits (deposits in excess of FDIC limits), net of collateralized and intercompany deposits (“net estimated uninsured deposits”), estimated to be approximately $2.12 billion.

Sources of Liquidity

(000's omitted)

Cash and cash equivalents

FHLB borrowing capacity

FRB borrowing capacity

Net unpledged investment securities

Total sources of liquidity

Net estimated uninsured deposits

Total sources of liquidity/net estimated uninsured deposits

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

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

As of September 30, 2023, this ratio was 10.5% for 30-days and 9.3% for 90-days, excluding the Company’s capacity to borrow additional funds from the FHLB and other sources.

As of March 31, 2024, this ratio was 8.6% for 30-days and 8.1% for 90-days, excluding the Company's capacity to borrow additional funds from the FHLB and other sources.

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

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

As of September 30, 2023, there is more than enough liquidity available during the next year to cover projected cash outflows.

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

The results of the stress tests as of September 30, 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.

To measure intermediate risk over the next twelve months, the Company reviews a sources and uses projection.

As of March 31, 2024, there is sufficient liquidity available during the next year to cover projected cash outflows.

In addition, stress tests on the cash flows are performed for 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 March 31, 2024 indicate the Company has sufficient sources of liquidity for the next year in all simulated stressed scenarios.

To measure longer-term liquidity, a baseline projection of growth in interest-earning assets and interest-bearing liabilities 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.

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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.

Triggers within the plan and liquidity risk monitor 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 set based on a variety of factors, including Company history, trends, and current operating performance, industry observations, and, as warranted, changes in internal and external economic factors.

Indicators include:

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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;

capital at risk indicators including 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.

and decrease in funds availability indicators which are 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 inform 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.

Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC on February 29, 2024.

Forward-Looking Statements

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(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 commercial real estate and residential 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 conflicts, and any slowdown in global economic growth;

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

fiscal debt, budget and tax matters, geopolitical matters and conflicts, and any changes 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;

(4) the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin including the possibility of a sudden withdrawal of the Company’s deposits due to rapid spread of information or disinformation regarding the Company’s well-being;

(5) future provisions for credit losses on loans and debt securities;

8 unchanged sentences

(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, including cybersecurity, of its financial, accounting, technology, data processing and other operating systems, facilities and data;

(14) the ability of the Company to maintain the security, including cybersecurity, of its financial, accounting, technology, data processing and other operating systems, facilities and data, including customer data;

(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;

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

(22) the effect of opening new branches to expand the Company’s geographic footprint, including the cost associated with opening and operating the branches and the uncertainty surrounding their success including the ability to meet expectations for future deposit and loan levels and commensurate revenues;

(23) the effects of natural disasters could create economic and financial disruption;

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

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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.

Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC on February 29, 2024.

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

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Three Months Ended

Nine Months Ended

September 30,

(000’s omitted)

Income statement data

Pre-tax, pre-provision net revenue

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

Net income (GAAP)

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Acquisition expenses

Litigation accrual

Loss on sales of investment securities

Gain on debt extinguishment

Acquisition-related contingent consideration adjustment

Unrealized loss on equity securities

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

Pre-tax, pre-provision net revenue per share

Unrealized gain on equity securities

Amortization of intangible assets

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

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

Diluted earnings per share (GAAP)

3 unchanged sentences

Acquisition expenses

Litigation accrual

Loss on sales of investment securities

Gain on debt extinguishment

Acquisition-related contingent consideration adjustment

Unrealized loss on equity securities

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

Unrealized gain on equity securities

Amortization of intangible assets

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

Operating net income (non-GAAP)

Net income (GAAP)

2 unchanged sentences

Subtotal (non-GAAP)

Litigation accrual

Tax effect of litigation accrual

Subtotal (non-GAAP)

Loss on sales of investment securities

4 unchanged sentences

Subtotal (non-GAAP)

Acquisition-related contingent consideration adjustment

Tax effect of acquisition-related contingent consideration adjustment

Subtotal (non-GAAP)

Acquisition-related provision for credit losses

Tax effect of acquisition-related provision for credit losses

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Subtotal (non-GAAP)

Unrealized loss on equity securities

Tax effect of unrealized loss on equity securities

Operating net income (non-GAAP)

Amortization of intangible assets

Tax effect of amortization of intangible assets

Subtotal (non-GAAP)

Acquired non-PCD loan accretion

Tax effect of acquired non-PCD loan accretion

Adjusted net income (non-GAAP)

Return on average assets

Adjusted net income (non-GAAP)

Average total assets

Adjusted return on average assets (non-GAAP)

Operating net income (non-GAAP)

Three Months Ended

Nine Months Ended

September 30,

(000's omitted)

Income statement data, continued

Return on average equity

Adjusted net income (non-GAAP)

Average total equity

Adjusted return on average equity (non-GAAP)

Net interest margin

Net interest income

Total average interest-earning assets

Net interest margin

Net interest margin (FTE)

Net interest income

Fully tax-equivalent adjustment

Fully tax-equivalent net interest income

Total average interest-earning assets

Net interest margin (FTE) (non-GAAP)

Earnings per common share

Operating diluted earnings per share (non-GAAP)

Diluted earnings per share (GAAP)

2 unchanged sentences

Subtotal (non-GAAP)

Litigation accrual

Tax effect of litigation accrual

Subtotal (non-GAAP)

Loss on sales of investment securities

4 unchanged sentences

Subtotal (non-GAAP)

Acquisition-related contingent consideration adjustment

Tax effect of acquisition-related contingent consideration adjustment

Subtotal (non-GAAP)

Acquisition-related provision for credit losses

Tax effect of acquisition-related provision for credit losses

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Subtotal (non-GAAP)

Unrealized loss on equity securities

Tax effect of unrealized loss on equity securities

Operating earnings per share (non-GAAP)

Amortization of intangible assets

Tax effect of amortization of intangible assets

Subtotal (non-GAAP)

Acquired non-PCD loan accretion

Tax effect of acquired non-PCD loan accretion

Diluted adjusted net earnings per share (non-GAAP)

Efficiency ratio – GAAP

Noninterest expenses (GAAP) - numerator

Net interest income (GAAP)

Operating diluted earnings per share (non-GAAP)

Return on assets

Net income (GAAP)

Average total assets

Return on assets (GAAP)

Operating return on assets (non-GAAP)

Operating net income (non-GAAP)

Average total assets

Operating return on assets (non-GAAP)

Return on equity

Net income (GAAP)

Average total equity

Return on equity (GAAP)

Operating return on equity (non-GAAP)

Operating net income (non-GAAP)

Average total equity

Operating return on equity (non-GAAP)

Net interest margin

Net interest income

Total average interest-earning assets

Net interest margin

Net interest margin (FTE) (non-GAAP)

Net interest income

Fully tax-equivalent adjustment (non-GAAP)

Fully tax-equivalent net interest income (non-GAAP)

Total average interest-earning assets

Net interest margin (FTE) (non-GAAP)

Three Months Ended

(000’s omitted)

Operating noninterest revenues (non-GAAP)

Noninterest revenues (GAAP)

Total revenues (GAAP) - denominator

Efficiency ratio (GAAP)

Noninterest operating expenses

Loss on sales of investment securities

Gain on debt extinguishment

Unrealized gain on equity securities

Total operating noninterest revenues (non-GAAP)

Operating noninterest expenses (non-GAAP)

Noninterest expenses (GAAP)

Amortization of intangible assets

Acquisition expenses

Acquisition-related contingent consideration adjustment

Total adjusted noninterest expenses (non-GAAP)

Operating efficiency ratio – non-GAAP

Adjusted noninterest expenses (non-GAAP) - numerator

Fully tax-equivalent net interest income

Noninterest revenues

Acquired non-PCD loan accretion

Unrealized loss on equity securities

Litigation accrual

Amortization of intangible assets

Total operating noninterest expenses (non-GAAP)

Operating revenues (non-GAAP)

Net interest income (GAAP)

Noninterest revenues (GAAP)

Total revenues (GAAP)

Loss on sales of investment securities

Gain on debt extinguishment

Operating revenues (non-GAAP) - denominator

Unrealized gain on equity securities

Total operating revenues (non-GAAP)

Noninterest revenues/total revenues

Total noninterest revenues (GAAP) – numerator

Total revenues (GAAP) – denominator

Noninterest revenues/total revenues (GAAP)

Operating noninterest revenues/operating revenues (FTE) (non-GAAP)

Total operating noninterest revenues (non-GAAP) – numerator

Total operating revenues (non-GAAP)

Fully tax-equivalent adjustment (non-GAAP)

Total operating revenues (FTE) (non-GAAP) – denominator

Operating noninterest revenues/operating revenues (FTE) (non-GAAP)

Efficiency ratio (GAAP)

Total noninterest expenses (GAAP) – numerator

Total revenues (GAAP) – denominator

Efficiency ratio (GAAP)

Operating efficiency ratio (non-GAAP)

September 30,

(000’s omitted)

Balance sheet data - at end of quarter

Total operating noninterest expenses (non-GAAP) – numerator

Total operating revenues (FTE) (non-GAAP) – denominator

Operating efficiency ratio (non-GAAP)

Total tangible assets (non-GAAP)

Total assets (GAAP)

2 unchanged sentences

Total tangible assets (non-GAAP)

Total common equity

Three Months Ended

(000’s omitted)

Total tangible common equity (non-GAAP)

Shareholders' equity (GAAP)

2 unchanged sentences

Total tangible common equity (non-GAAP)

Shareholders' equity-to-assets ratio

Shareholders’ equity-to-assets ratio at quarter end

Total shareholders’ equity (GAAP) – numerator

Total assets (GAAP) – denominator

Shareholders' equity-to-assets ratio (GAAP)

Tangible equity-to-assets ratio

Shareholders’ equity-to-assets ratio at quarter end (GAAP)

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

Total tangible common equity (non-GAAP) – numerator

Total tangible assets (non-GAAP) – denominator

Tangible equity-to-assets ratio (non-GAAP)

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

Return on tangible equity (non-GAAP)

Net income (GAAP)

Average shareholders’ equity

Average goodwill and intangible assets, net

Average deferred taxes on goodwill and intangible assets, net

Average tangible common equity (non-GAAP)

Return on tangible equity (non-GAAP)

Operating return on tangible equity (non-GAAP)

Operating net income (non-GAAP)

Average tangible common equity (non-GAAP)

Operating return on tangible equity (non-GAAP)

Book value (GAAP)

Total shareholders’ equity (GAAP) – numerator

Period end common shares outstanding – denominator

Book value (GAAP)

Tangible book value (non-GAAP)

Total tangible common equity (non-GAAP) – numerator

Period end common shares outstanding – denominator

Tangible book value (non-GAAP)

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis