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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONCOMMISSION
Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019March 31, 2020

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________to___________________

Commission File Number: 001-13695

graphicgraphic

(Exact name of registrant as specified in its charter)

Delaware 16-1213679
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

5790 Widewaters Parkway, DeWitt, New York 13214-1883
(Address of principal executive offices) (Zip Code)

(315) (315) 445-2282
(Registrant's telephone number, including area code)

NONE
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $1.00 par value per shareCBUNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
  Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  ☐  No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 51,701,79052,094,944 shares of Common Stock, $1.00 par value per share, were outstanding on AprilOctober 31 30, 2019.2020.


Table of Contents
TABLE OF CONTENTS

Part I.
Financial Information
Page
   
Item 1.
Financial Statements (Unaudited)
 
   
 
Consolidated Statements of Condition September 30, 2019March 31, 2020 and December 31, 20182019
3
   
 
Consolidated Statements of Income Three and nine months ended September 30,March 31, 2020 and 2019 and 2018
4
   
 
Consolidated Statements of Comprehensive Income Three and nine months ended September 30,March 31, 2020 and 2019 and 2018
5
   
 
Consolidated Statements of Changes in Shareholders’ Equity Three and nine months ended September 30,March 31, 2020 and 2019 and 2018
6
   
 
Consolidated Statements of Cash Flows NineThree months ended September 30,March 31, 2020 and 2019 and 2018
87
   
 
Notes to the Consolidated Financial Statements September 30, 2019March 31, 2020
98
   
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3132
   
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
51
   
Item 4.
Controls and Procedures
5253
   
Part II.
Other Information
 
   
Item 1.
Legal Proceedings
5253
   
Item 1A.
Risk Factors
5253
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
5255
   
Item 3.
Defaults Upon Senior Securities
5355
   
Item 4.
Mine Safety Disclosures
5355
   
Item 5.
Other Information
5355
   
Item 6.
Exhibits
5456

2
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Part I.Financial Information
Item 1.Financial Statements

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
(In Thousands, Except Share Data)

 
September 30,
2019
  
December 31,
2018
 
Assets:      
Cash and cash equivalents $1,014,042  $211,834 
Available-for-sale investment securities (cost of $2,392,004 and $2,952,278, respectively)  2,437,102   2,936,049 
Equity and other securities (cost of $43,680 and $44,678, respectively)  44,640   45,609 
Loans held for sale, at fair value  0   83 
         
Loans  6,853,191   6,281,121 
Allowance for loan losses  (49,423)  (49,284)
Net loans  6,803,768   6,231,837 
         
Goodwill, net  773,610   733,503 
Core deposit intangibles, net  17,872   18,596 
Other intangibles, net  49,203   55,250 
Intangible assets, net  840,685   807,349 
         
Premises and equipment, net  169,933   119,988 
Accrued interest and fees receivable  34,126   31,048 
Other assets  253,001   223,498 
         
Total assets $11,597,297  $10,607,295 
         
Liabilities:        
Noninterest-bearing deposits $2,549,395  $2,312,816 
Interest-bearing deposits  6,618,890   6,009,555 
Total deposits  9,168,285   8,322,371 
         
Short-term borrowings  0   54,400 
Securities sold under agreement to repurchase, short-term  233,333   259,367 
Other long-term debt  4,328   1,976 
Subordinated notes payable  13,814   0 
Subordinated debt held by unconsolidated subsidiary trusts  77,320   97,939 
Accrued interest and other liabilities  259,796   157,459 
Total liabilities  9,756,876   8,893,512 
         
Commitments and contingencies (See Note K)      
         
Shareholders' equity:        
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued  0   0 
Common stock, $1.00 par value, 75,000,000 shares authorized; 51,842,966 and 51,576,839 shares issued, respectively  51,843   51,577 
Additional paid-in capital  921,682   911,748 
Retained earnings  861,254   795,563 
Accumulated other comprehensive income (loss)  2,470   (45,305)
Treasury stock, at cost (182,912 shares, including 178,361 shares held by deferred compensation arrangements at September 30, 2019 and 319,015 shares including 207,403 shares held by deferred compensation arrangements at December 31, 2018, respectively)  (6,875)  (11,528)
Deferred compensation arrangements (178,361 and 207,403 shares, respectively)  10,047   11,728 
Total shareholders' equity  1,840,421   1,713,783 
         
Total liabilities and shareholders' equity $11,597,297  $10,607,295 

The accompanying notes are an integral part of the consolidated financial statements.
3
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COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In Thousands, Except Per-Share Data)

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2019  2018  2019  2018 
Interest income:            
Interest and fees on loans $79,931  $72,256  $227,701  $212,849 
Interest and dividends on taxable investments  15,862   15,421   49,376   47,462 
Interest on nontaxable investments  2,854   3,226   8,603   10,001 
Total interest income  98,647   90,903   285,680   270,312 
                 
Interest expense:                
Interest on deposits  5,859   2,764   14,526   7,277 
Interest on borrowings  347   796   1,397   1,722 
Interest on subordinated notes payable  161   0   161   0 
Interest on subordinated debt held by unconsolidated subsidiary trusts  1,004   1,145   3,161   3,645 
Total interest expense  7,371   4,705   19,245   12,644 
                 
Net interest income  91,276   86,198   266,435   257,668 
Provision for loan losses  1,751   2,215   5,573   8,342 
Net interest income after provision for loan losses  89,525   83,983   260,862   249,326 
                 
Noninterest revenues:                
Deposit service fees  16,920   16,127   48,780   54,268 
Other banking revenues  945   1,536   3,628   3,942 
Employee benefit services  24,329   23,265   72,170   68,813 
Insurance services  8,527   8,270   24,718   23,044 
Wealth management services  6,363   6,168   19,290   19,370 
Gain on sales of investment securities, net  0   0   4,882   0 
Unrealized gain on equity securities  10   743   28   722 
Loss on debt extinguishment  0   (318)  0   (318)
Total noninterest revenues  57,094   55,791   173,496   169,841 
                 
Noninterest expenses:                
Salaries and employee benefits  56,061   51,062   163,448   155,323 
Occupancy and equipment  9,801   9,770   29,708   29,738 
Data processing and communications  10,675   10,509   30,475   29,463 
Amortization of intangible assets  3,960   4,427   11,994   13,780 
Legal and professional fees  2,595   2,522   7,999   8,047 
Business development and marketing  2,604   2,587   8,532   7,301 
Acquisition expenses  6,061   (832)  7,789   (769)
Other expenses  5,172   5,188   16,812   14,793 
Total noninterest expenses  96,929   85,233   276,757   257,676 
                 
Income before income taxes  49,690   54,541   157,601   161,491 
Income taxes  10,472   11,435   31,422   33,673 
Net income $39,218  $43,106  $126,179  $127,818 
                 
Basic earnings per share $0.76  $0.84  $2.44  $2.49 
Diluted earnings per share $0.75  $0.83  $2.41  $2.46 
 March 31, 2020  December 31, 2019 
Assets:      
Cash and cash equivalents $529,336  $205,030 
Available-for-sale investment securities (cost of $2,986,577 and $3,011,551, respectively)  3,141,882   3,044,428 
Equity and other securities (cost of $42,579 and $42,965, respectively)  43,499   43,915 
Loans held for sale, at fair value  3,272   0 
         
Loans  6,866,092   6,890,543 
Allowance for credit losses  (55,652)  (49,911)
Net loans  6,810,440   6,840,632 
         
Goodwill, net  773,473   773,810 
Core deposit intangibles, net  15,001   16,418 
Other intangibles, net  44,445   46,695 
Intangible assets, net  832,919   836,923 
         
Premises and equipment, net  162,602   164,638 
Accrued interest and fees receivable  36,724   31,647 
Other assets  248,309   243,082 
         
Total assets $11,808,983  $11,410,295 
         
Liabilities:        
Noninterest-bearing deposits $2,491,720  $2,465,902 
Interest-bearing deposits  6,812,262   6,529,065 
Total deposits  9,303,982   8,994,967 
         
Overnight Federal Home Loan Bank borrowings  0   8,300 
Securities sold under agreement to repurchase, short-term  204,991   241,708 
Other Federal Home Loan Bank borrowings  3,727   3,750 
Subordinated notes payable  13,775   13,795 
Subordinated debt held by unconsolidated subsidiary trusts  77,320   77,320 
Accrued interest and other liabilities  228,557   215,221 
Total liabilities  9,832,352   9,555,061 
         
Commitments and contingencies (See Note J)      
         
Shareholders' equity:        
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued  0   0 
Common stock, $1.00 par value, 75,000,000 shares authorized; 52,189,314 and 51,974,726 shares issued, respectively  52,190   51,975 
Additional paid-in capital  935,924   927,337 
Retained earnings  902,148   882,851 
Accumulated other comprehensive income (loss)  83,444   (10,226)
Treasury stock, at cost (158,222 shares, including 158,092 shares held by deferred compensation arrangements at March 31, 2020 and 180,803 shares including 179,548 shares held by deferred compensation arrangements at December 31, 2019, respectively)  (6,005)  (6,823)
Deferred compensation arrangements (158,092 and 179,548 shares, respectively)  8,930   10,120 
Total shareholders' equity  1,976,631   1,855,234 
         
Total liabilities and shareholders' equity $11,808,983  $11,410,295 

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


43
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COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In Thousands)Thousands, Except Per-Share Data)

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2019  2018  2019  2018 
Pension and other post retirement obligations:            
Amortization of actuarial losses included in net periodic pension cost, gross $651  $304  $1,954  $910 
Tax effect  (158)  (74)  (477)  (221)
Amortization of actuarial losses included in net periodic pension cost, net  493   230  $1,477   689 
Amortization of prior service cost included in net periodic pension cost, gross  (28)  (105)  (86)  (359)
Tax effect  6   25   21   87 
Amortization of prior service cost included in net periodic pension cost, net  (22)  (80)  (65)  (272)
Initial projected benefit obligation recognized upon plan adoption, gross  0   (775)  0   (775)
Tax effect  0   189   0   189 
Initial projected benefit obligation recognized upon plan adoption, net  0   (586)  0   (586)
Other comprehensive income (loss) related to pension and other post-retirement obligations, net of taxes  471   (436)  1,412   (169)
                 
Unrealized gains (losses) on available-for-sale securities:                
Net unrealized holding gains (losses) arising during period, gross  8,756   (20,094)  66,208   (76,705)
Tax effect  (2,136)  4,879   (16,157)  18,639 
Net unrealized holding gains (losses) arising during period, net  6,620   (15,215)  50,051   (58,066)
Reclassification adjustment for net gains included in net income, gross  0   0   (4,882)  0 
Tax effect  0   0   1,194   0 
Reclassification adjustment for net gains included in net income, net  0   0   (3,688)  0 
Reclassification of other comprehensive income due to change in accounting principle – equity securities  0   0   0   (208)
Other comprehensive income/(loss) related to unrealized gains (losses) on available-for-sale securities, net of taxes  6,620   (15,215)  46,363   (58,274)
Other comprehensive income (loss), net of tax  7,091   (15,651)  47,775   (58,443)
Net income  39,218   43,106   126,179   127,818 
Comprehensive income $46,309  $27,455  $173,954  $69,375 

 As of 
  
September 30,
2019
  
December 31,
2018
 
Accumulated Other Comprehensive Income (Loss) By Component:      
       
Unrealized (loss) for pension and other post-retirement obligations $(41,629) $(43,497)
Tax effect  10,204   10,660 
Net unrealized (loss) for pension and other post-retirement obligations  (31,425)  (32,837)
         
Unrealized gain (loss) on available-for-sale securities  45,097   (16,229)
Tax effect  (10,994)  3,969 
Reclassification of other comprehensive income due to change in accounting principle – equity securities  (208)  (208)
Net unrealized gain (loss) on available-for-sale securities  33,895   (12,468)
         
Accumulated other comprehensive income (loss) $2,470  $(45,305)
 
Three Months Ended
March 31,
 
  2020  2019 
Interest income:      
Interest and fees on loans $78,565  $73,703 
Interest and dividends on taxable investments  15,329   16,087 
Interest and dividends on nontaxable investments  3,101   2,891 
Total interest income  96,995   92,681 
         
Interest expense:        
Interest on deposits  5,545   4,107 
Interest on borrowings  558   621 
Interest on subordinated notes payable  185   0 
Interest on subordinated debt held by unconsolidated subsidiary trusts  653   1,094 
Total interest expense  6,941   5,822 
         
Net interest income  90,054   86,859 
Provision for credit losses  5,594   2,422 
Net interest income after provision for credit losses  84,460   84,437 
         
Noninterest revenues:        
Deposit service fees  16,283   15,864 
Mortgage banking  916   201 
Other banking services  895   1,335 
Employee benefit services  25,366   24,054 
Insurance services  8,058   7,862 
Wealth management services  7,134   6,349 
Unrealized (loss) gain on equity securities  (30)  31 
Total noninterest revenues  58,622   55,696 
         
Noninterest expenses:        
Salaries and employee benefits  58,251   53,379 
Occupancy and equipment  10,739   10,288 
Data processing and communications  10,413   9,399 
Amortization of intangible assets  3,667   4,130 
Legal and professional fees  3,151   2,720 
Business development and marketing  2,513   2,788 
Acquisition expenses  369   534 
Other expenses  4,560   5,414 
Total noninterest expenses  93,663   88,652 
         
Income before income taxes  49,419   51,481 
Income taxes  9,285   9,535 
Net income $40,134  $41,946 
         
Basic earnings per share $0.77  $0.81 
Diluted earnings per share $0.76  $0.80 

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

4
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COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In Thousands)

 
Three Months Ended
March 31,
 
  2020  2019 
       
Pension and other post retirement obligations:      
Amortization of actuarial losses included in net periodic pension cost, gross $820  $651 
Tax effect  (197)  (159)
Amortization of actuarial losses included in net periodic pension cost, net  623   492 
         
Amortization of prior service cost included in net periodic pension cost, gross  15   (29)
Tax effect  (3)  7 
Amortization of prior service cost included in net periodic pension cost, net  12   (22)
         
Other comprehensive income related to pension and other post retirement obligations, net of taxes  635   470 
         
Unrealized gains on available-for-sale securities:        
Net unrealized holding gains arising during period, gross  122,428   23,905 
Tax effect  (29,393)  (5,832)
Net unrealized holding gains arising during period, net  93,035   18,073 
         
Other comprehensive income related to unrealized gains on available-for-sale securities, net of taxes  93,035   18,073 
         
Other comprehensive income, net of tax  93,670   18,543 
Net income  40,134   41,946 
Comprehensive income $133,804  $60,489 

 As of 
  
March 31,
2020
  
December 31,
2019
 
Accumulated Other Comprehensive Income (Loss) By Component:      
       
Unrealized (loss) for pension and other post-retirement obligations $(45,340) $(46,175)
Tax effect  11,093   11,293 
Net unrealized (loss) for pension and other post-retirement obligations  (34,247)  (34,882)
         
Unrealized gain on available-for-sale securities  155,305   32,877 
Tax effect  (37,614)  (8,221)
Net unrealized gain on available-for-sale securities  117,691   24,656 
         
Accumulated other comprehensive income (loss) $83,444  $(10,226)

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

5
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COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Three months ended September 30,March 31, 2020 and 2019 and 2018
(In Thousands, Except Share Data)

 Common Stock  Additional     
Accumulated
Other
     Deferred     
Common
Stock
  Additional     
Accumulated
Other
     Deferred    
 
Shares
Outstanding
  
Amount
Issued
  
Paid-In
Capital
  
Retained
Earnings
  
Comprehensive
(Loss)
  
Treasury
Stock
  
Compensation
Arrangements
  Total  
Shares
Outstanding
  
Amount
Issued
  
Paid-In
Capital
  
Retained
Earnings
  
Comprehensive
(Loss) Income
  
Treasury
Stock
  
Compensation
Arrangements
  Total 
                                                
Balance at June 30, 2019  51,570,608  $51,806  $917,855  $843,288  $(4,621) $(8,797) $9,979  $1,809,510 
Balance at December 31, 2019  51,793,923  $51,975  $927,337  $882,851  $(10,226) $(6,823) $10,120  $1,855,234 
                                                                
Net income              39,218               39,218               40,134               40,134 
                                                                
Other comprehensive income, net of tax                  7,091           7,091                   93,670           93,670 
                                                                
Cash dividends declared:                                
Cumulative effect of change in accounting principle – Current Expected Credit Losses              530               530 
                                
Dividends declared:                                
Common, $0.41 per share              (21,252)              (21,252)              (21,367)              (21,367)
                                                                
Common stock activity under employee stock ownership plan  37,542   37   1,254                   1,291 
Common stock activity under employee stock plans  214,588   215   6,184                   6,399 
                                                                
Stock-based compensation          1,241                   1,241           1,952                   1,952 
                                                                
Distribution of stock under deferred compensation arrangements  22,497       415           849   (1,264)  0 
                                
Treasury stock issued to benefit plans, net  51,904       1,332           1,922   68   3,322   84       36           (31)  74   79 
                                                                
Balance at September 30, 2019  51,660,054  $51,843  $921,682  $861,254  $2,470  $(6,875) $10,047  $1,840,421 
Balance at March 31, 2020  52,031,092  $52,190  $935,924  $902,148  $83,444  $(6,005) $8,930  $1,976,631 
                                                                
Balance at June 30, 2018  51,085,874  $51,512  $904,913  $750,779  $(46,491) $(15,334) $11,580  $1,656,959 
Balance at December 31, 2018  51,257,824  $51,577  $911,748  $795,563  $(45,305) $(11,528) $11,728  $1,713,783 
                                                                
Net income              43,106               43,106               41,946               41,946 
                                                                
Other comprehensive loss, net of tax                  (15,651)          (15,651)
Other comprehensive income, net of tax                  18,543           18,543 
                                                                
Cash dividends declared:                                
Dividends declared:                                
Common, $0.38 per share              (19,482)              (19,482)              (19,576)              (19,576)
                                                                
Common stock activity under employee stock ownership plan  35,261   35   1,115                   1,150 
Common stock activity under employee stock plans  150,919   151   (995)                  (844)
                                                                
Stock-based compensation          1,211                   1,211           1,391                   1,391 
                                                                
Distribution of stock under deferred compensation arrangements  32,431       1,064           830   (1,894)  0 
                                
Treasury stock issued to benefit plans, net  15,541       451           531   70   1,052   30,197       709           1,097   79   1,885 
                                                                
Balance at September 30, 2018  51,136,676  $51,547  $907,690  $774,403  $(62,142) $(14,803) $11,650  $1,668,345 
Balance at March 31, 2019  51,471,371  $51,728  $913,917  $817,933  $(26,762) $(9,601) $9,913  $1,757,128 

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

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COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYCASH FLOWS (Unaudited)
Nine months ended September 30, 2019 and 2018
(In Thousands, Except Share Data)Thousands)

 Common Stock  Additional     
Accumulated
Other
     Deferred    
  
Shares
Outstanding
  
Amount
Issued
  
Paid-In
Capital
  
Retained
Earnings
  
Comprehensive
(Loss)
  
Treasury
Stock
  
Compensation
Arrangements
  Total 
                         
Balance at December 31, 2018  51,257,824  $51,577  $911,748  $795,563  $(45,305) $(11,528) $11,728  $1,713,783 
                                 
Net income              126,179               126,179 
                                 
Other comprehensive income, net of tax                  47,775           47,775 
                                 
Cash dividends declared:                                
Common, $1.17 per share              (60,488)              (60,488)
                                 
Common stock activity under employee stock ownership plan  266,127   266   2,246                   2,512 
                                 
Stock-based compensation          3,998                   3,998 
                                 
Distribution of stock under deferred compensation arrangements  32,431       1,064           830   (1,894)  0 
                                 
Treasury stock issued to benefit plans, net  103,672       2,626           3,823   213   6,662 
                                 
Balance at September 30, 2019  51,660,054  $51,843  $921,682  $861,254  $2,470  $(6,875) $10,047  $1,840,421 
                                 
Balance at December 31, 2017  50,696,077  $51,264  $894,879  $700,557  $(3,699) $(21,014) $13,328  $1,635,315 
                                 
Net income              127,818               127,818 
                                 
Other comprehensive loss, net of tax                  (58,235)          (58,235)
                                 
Cumulative effect of change in accounting principle - equity securities              208   (208)          0 
                                 
Cash dividends declared:                                
Common, $1.06 per share              (54,180)              (54,180)
                                 
Common stock activity under employee stock ownership plan  283,412   283   5,511                   5,794 
                                 
Stock-based compensation          4,607                   4,607 
                                 
Distribution of stock under deferred compensation arrangements  35,233                   1,898   (1,898)  0 
                                 
Treasury stock issued to benefit plans, net  121,954       2,693           4,313   220   7,226 
                                 
Balance at September 30, 2018  51,136,676  $51,547  $907,690  $774,403  $(62,142) $(14,803) $11,650  $1,668,345 
 
Three Months Ended
March 31,
 
  2020  2019 
Operating activities:      
Net income $40,134  $41,946 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  4,079   3,830 
Amortization of intangible assets  3,667   4,130 
Net accretion on securities, loans and borrowings  (2,113)  (1,944)
Stock-based compensation  1,952   1,391 
Provision for credit losses  5,594   2,422 
Amortization of mortgage servicing rights  82   98 
Unrealized loss (gain) on equity securities  30   (31)
Income from bank-owned life insurance policies  (408)  (391)
Net loss on sale of loans and other assets  9   22 
Change in other assets and other liabilities  (26,332)  (16,864)
Net cash provided by operating activities  26,694   34,609 
Investing activities:        
Proceeds from maturities, calls, and paydowns of available-for-sale investment securities  61,753   52,520 
Proceeds from maturities and redemptions of equity and other investment securities  404   2,460 
Purchases of available-for-sale investment securities  (34,597)  (13,388)
Purchases of equity and other securities  (18)  (24)
Net decrease in loans  25,446   11,847 
Cash paid for acquisitions, net of cash acquired of $0 and $0, respectively  0   (1,200)
Purchases of premises and equipment, net  (3,020)  (1,227)
Real estate tax credit investments  (550)  (564)
Net cash provided by investing activities  49,418   50,424 
Financing activities:        
Net increase in deposits  309,015   297,291 
Net decrease in borrowings  (45,040)  (63,910)
Issuance of common stock  6,399   (844)
Purchases of treasury stock  (74)  (79)
Sales of treasury stock  79   1,885 
Increase in deferred compensation arrangements  74   79 
Cash dividends paid  (21,268)  (19,806)
Withholding taxes paid on share-based compensation  (991)  (3,119)
Net cash provided by financing activities  248,194   211,497 
Change in cash and cash equivalents  324,306   296,530 
Cash and cash equivalents at beginning of period  205,030   211,834 
Cash and cash equivalents at end of period $529,336  $508,364 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $6,888  $5,684 
Cash paid for income taxes  9,642   4,486 
Supplemental disclosures of noncash financing and investing activities:        
Dividends declared and unpaid  21,441   19,578 
Transfers from loans to other real estate  779   412 

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

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COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)

 
Nine Months Ended
September 30,
 
  2019  2018 
Operating activities:      
Net income $126,179  $127,818 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  11,781   11,854 
Amortization of intangible assets  11,994   13,780 
Net accretion on securities, loans and borrowings  (4,545)  (7,141)
Stock-based compensation  3,998   4,607 
Provision for loan losses  5,573   8,342 
Amortization of mortgage servicing rights  285   340 
Gain on sale of investment securities, net  (4,882)  0 
Unrealized gain on equity securities  (28)  (722)
Loss on debt extinguishment  0   318 
Income from bank-owned life insurance policies  (1,215)  (1,177)
Net  gain on sale of loans and other assets  (2)  (207)
Change in other assets and other liabilities  (20,152)  9,966 
Net cash provided by operating activities  128,986   167,778 
Investing activities:        
Proceeds from sales of available-for-sale investment securities  590,179   0 
Proceeds from maturities, calls, and paydowns of available-for-sale investment securities  153,785   102,549 
Proceeds from maturities and redemptions of equity and other investment securities  3,258   8,292 
Purchases of available-for-sale investment securities  (86,073)  (47,495)
Purchases of equity and other securities  (144)  (31)
Net increase in loans  (100,020)  (51,170)
Cash paid for acquisitions, net of cash acquired of $90,381 and $16, respectively  (4,653)  (1,737)
Settlement of bank-owned life insurance policies  1,597   0 
Purchases of premises and equipment, net  (5,025)  (8,903)
Real estate limited partnership investments  (1,342)  (1,197)
Net cash provided by investing activities  551,562   308 
Financing activities:        
Net increase in deposits  277,833   19,401 
Net decrease in borrowings  (80,502)  (86,523)
Payments on subordinated debt held by unconsolidated subsidiary trusts  (22,681)  (25,207)
Issuance of common stock  2,512   5,794 
Purchases of treasury stock  (213)  (220)
Sales of treasury stock  6,662   7,226 
Increase in deferred compensation arrangements  213   220 
Cash dividends paid  (59,014)  (52,006)
Withholding taxes paid on share-based compensation  (3,150)  (971)
Net cash provided by/(used in) financing activities  121,660   (132,286)
Change in cash and cash equivalents  802,208   35,800 
Cash and cash equivalents at beginning of period  211,834   221,038 
Cash and cash equivalents at end of period $1,014,042  $256,838 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $18,455  $12,870 
Cash paid for income taxes  34,150   20,674 
Supplemental disclosures of noncash financing and investing activities:        
Dividends declared and unpaid  21,282   19,634 
Transfers from loans to other real estate  1,833   2,426 
Acquisitions:        
Fair value of assets acquired, excluding acquired cash and intangibles  548,934   115 
Fair value of liabilities assumed  589,611   31 

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


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COMMUNITY BANK SYSTEM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2019

MARCH 31, 2020

NOTE A:  BASIS OF PRESENTATION

The interim financial data as of and for the three and nine months ended September 30, 2019March 31, 2020 is unaudited; however, in the opinion of Community Bank System, Inc. (the “Company”), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods in conformity with generally accepted accounting principles in the United States of America (“GAAP”).  The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

NOTE B:  ACQUISITIONS

Subsequent Event/Pending Acquisition – Steuben Trust Corporation
On October 21, 2019, the Company announced that it had entered into a definitive agreement to acquire Steuben Trust Corporation (“Steuben”), parent company of Steuben Trust Company, a New York State chartered bank headquartered in Hornell, New York, forYork.  Based on the Company’s closing stock price on April 30, 2020 of $62.49, the transaction was valued at approximately $106.8$106.7 million in Company stock and cash.  Steuben currently operates 14 branch locations in Western New York.  The acquisition will add 15 branch locations, extend the Company’s footprint into 2 new counties in Western New York State and enhance the Company’s presence in 4 Western New York State counties in which it currently operates. The Steuben shareholders approved the merger with the Company at its Special Meeting held on March 3, 2020.  The acquisition is expectedscheduled to close during the second quarter of 2020, pending both customary regulatory and Steuben shareholder approval. 2020. However, due to the novel Coronavirus (“COVID-19”) crisis, it is uncertain as to whether or not the closing date of the merger may be delayed.The Company expects to incur certain one-time, transaction-related costs in 2019 and 2020 in connection with the Steuben acquisition.

On September 18, 2019, the Company, through its subsidiary, Community Investment Services, Inc. (“CISI”), completed its acquisition of certain assets of a practice engaged in the financial services business headquartered in Syracuse, New York. The Company paid $0.5 million in cash to acquire a customer list, and recorded a $0.5 million customer list intangible asset in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date.

On July 12, 2019, the Company completed its merger with Kinderhook Bank Corp. (“Kinderhook”), parent company of The National Union Bank of Kinderhook, headquartered in Kinderhook, New York, for $93.4 million in cash. The merger added 11 branch locations across a 5 county area in the Capital District of Upstate New York. The merger resulted in the acquisition of $642.9$642.8 million of assets, including $479.9 million of loans and $39.8 million of investment securities, as well as $568.1$568.2 million of deposits and $40.1$40.0 million in goodwill. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues, excluding interest income on acquired investments, of approximately $4.3$4.5 million, and direct expenses, which may not include certain shared expenses, of approximately $1.8$1.9 million from Kinderhook were included in the consolidated income statement for the three and nine months ended September 30, 2019.March 31, 2020.

On January 2, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Wealth Resources Network, Inc. (“Wealth Resources”), a financial services business headquartered in Liverpool, New York. The Company paid $1.2 million in cash to acquire a customer list from Wealth Resources, and recorded a $1.2 million customer list intangible asset in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date.

On April 2, 2018, the Company, through its subsidiary, Benefit Plans Administrative Services, Inc. (“BPAS”), acquired certain assets of HR Consultants (SA), LLC (“HR Consultants”), a provider of actuarial and benefit consulting services headquartered in Puerto Rico. The Company paid $0.3 million in cash to acquire the assets of HR Consultants and recorded intangible assets of $0.3 million in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date.

On January 2, 2018, the Company, through its subsidiary, OneGroup NY, Inc. (“OneGroup”), completed its acquisition of certain assets of Penna & Associates Agency, Inc. (“Penna”), an insurance agency headquartered in Johnson City, New York.  The Company paid $0.8 million in cash to acquire the assets of Penna, and recorded goodwill in the amount of $0.3 million and a customer list intangible asset of $0.3 million in conjunction with the acquisition.  The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date.

On January 2, 2018, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Styles Bridges Associates (“Styles Bridges”), a financial services business headquartered in Canton, New York.  The Company paid $0.7 million in cash to acquire a customer list from Styles Bridges, and recorded a $0.7 million customer list intangible asset in conjunction with the acquisition.  The effects of the acquired assets have been included in the consolidated financial statements since that date.

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The assets and liabilities assumed in the acquisitions were recorded at their estimated fair values based on management's best estimates using information available at the dates of the acquisitions, and were subject to adjustment based on updated information not available at the time of the acquisitions.  The accrued income taxesDuring the fourth quarter of 2019, associated with the Kinderhook acquisition, were recorded onthe carrying amount of deposits increased by $0.08 million, loans decreased by $0.05 million, other liabilities increased by $0.04 million, other assets decreased by $0.04 million, and accrued interest and fees receivable increased by $0.01 million as a provisional basisresult of updated information not available at the time of acquisition. Goodwill associated with the Kinderhook acquisition increased by $0.2 million as a result of these adjustments.  During the first quarter of 2020, the carrying amount of other liabilities associated with the Kinderhook acquisition decreased by $0.3 million as a result of an adjustment to accrued income taxes and could vary fromdeferred income taxes. Goodwill associated with the actual recorded balance once finalized.Kinderhook acquisition decreased $0.3 million as a result of this adjustment.

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

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed after considering the measurement period adjustments described above:


 2019  2018  2019 
(000s omitted) Kinderhook  
Other (1)
  Total  
Other (2)
  Kinderhook  
Other (1)
  Total 
Consideration paid :                     
Cash $93,384  $1,650  $95,034  $1,753  $93,384  $1,650  $95,034 
Total net consideration paid $93,384  $1,650  $95,034  $1,753   93,384   1,650   95,034 
Recognized amounts of identifiable assets acquired and liabilities assumed:                            
Cash and cash equivalents  90,381   0   90,381   16   90,381   0   90,381 
Available-for-sale investment securities  37,653   0   37,653   0 
Equity and other securities  2,117   0   2,117   0 
Investment securities  39,770   0   39,770 
Loans  479,931   0   479,931   0   479,877   0   479,877 
Premises and equipment  13,970   0   13,970   10   13,970   0   13,970 
Accrued interest and fees receivable  1,119   0   1,119   0   1,130   0   1,130 
Other assets  14,144   0   14,144   105   14,109   0   14,109 
Core deposit intangibles  3,573   0   3,573   0   3,573   0   3,573 
Other intangibles  0   1,650   1,650   1,343   0   1,650   1,650 
Deposits  (568,081)  0   (568,081)  0   (568,161)  0   (568,161)
Other liabilities  (3,217)  0   (3,217)  (31)  (2,922)  0   (2,922)
Other Federal Home Loan Bank borrowings  (2,420)  0   (2,420)
Subordinated notes payable  (13,831)  0   (13,831)  0   (13,831)  0   (13,831)
Other long-term debt  (2,420)  0   (2,420)  0 
Subordinated debt held by unconsolidated subsidiary trusts  (2,062)  0   (2,062)  0   (2,062)  0   (2,062)
Total identifiable assets, net  53,277   1,650   54,927   1,443   53,414   1,650   55,064 
Goodwill $40,107  $0  $40,107  $310  $39,970  $0  $39,970 

(1) Includes amounts related to both acquisitions completed by CISI in 2019.
(2)Includes amounts related to the Styles Bridges, Penna, and HR Consultants acquisitions.

AcquiredUnder ASC 310-30, acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments were aggregated by comparable characteristics and  recorded at fair value without a carryover of the related allowance for loan losses.  Cash flows for each loan were determined using an estimate of credit losses and rate of prepayments.  Projected monthly cash flows were then discounted to present value using a market-based discount rate.  The excess of the undiscounted expected cash flows over the estimated fair value is referred to as the “accretable yield” and is recognized into interest income over the remaining lives of the acquired loans.

On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) which replaces the ASC 310-30 acquired impaired loans methodology described above with the purchased credit deteriorated (“PCD”) methodology discussed in Note C: Accounting Policies.

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

(000s omitted) 
Acquired
Impaired
Loans
  
Acquired
Non-impaired
Loans
  
Total
Acquired
Loans
  
Acquired
Impaired
Loans
  
Acquired
Non-impaired
Loans
  
Total
Acquired
Loans
 
Contractually required principal and interest at acquisition $12,661  $591,694  $604,355  $13,350  $636,384  $649,734 
Contractual cash flows not expected to be collected  (4,096)  (5,472)  (9,568)  (4,176)  (5,472)  (9,648)
Expected cash flows at acquisition  8,565   586,222   594,787   9,174   630,912   640,086 
Interest component of expected cash flows  (512)  (114,344)  (114,856)  (551)  (159,658)  (160,209)
Fair value of acquired loans $8,053  $471,878  $479,931  $8,623  $471,254  $479,877 

The fair value of checking, savings and money market deposit accounts acquired were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  Certificate of deposit accounts were valued at the present value of the certificates’ expected contractual payments discounted at market rates for similar certificates.  The fair value of subordinated notes payable was estimated using discounted cash flows and interest rates being offered on similar securities.  Subordinated notes payable assumed with the Kinderhook acquisition included $3.0 million of subordinated notes with a fixed interest rate of 6.0% maturing in February 2028 and $10.0 million of subordinated notes with a fixed interest rate of 6.375% maturing in November 2025.

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The core deposit intangibles and other intangibles related to both acquisitions completed by CISI in 2019 and the, Kinderhook Styles Bridges, Penna, and HR Consultants acquisitionsacquisition are being amortized using an accelerated method over their estimated useful life of  eight years.  The goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the Kinderhook acquisition and the All Other segment for the Penna acquisition.  Goodwill arising from the Kinderhook acquisition is not deductible for tax purposes. Goodwill arising from the Penna acquisition is deductible for tax purposes.

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Direct costs related to the acquisitions were expensed as incurred.  Merger and acquisition integration-related expenses amount to $6.1$0.4 million and $7.8$0.5 million during the three and nine months ended September 30,March 31, 2020 and the three months ended March 31, 2019, respectively, and have been separately stated in the Consolidated Statementsconsolidated statements of Income. During the three and nine months ended September 30, 2018, the Company recognized merger and acquisition integration-related recoveries in the amount of $0.8 million due to an adjustment of contract termination expenses that have been separately stated in the Consolidated Statements of Income.income.

Supplemental Pro Forma Financial Information
The following unaudited condensed pro forma information assumes the Kinderhook acquisitions had been completed as of January 1, 2018 for the three and nine months ended September 30, 2018 and September 30, 2019.  The pro forma information does not include amounts related to the two acquisitions completed by CISI in 2019 as the amounts were immaterial. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the year presented, nor is it indicative of the Company’s future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of the acquisitions.

The pro forma information set forth below reflects the historical results of Kinderhook combined with the Company’s consolidated statement of income with adjustments related to (a) certain purchase accounting fair value adjustments and (b) amortization of customer lists and core deposit intangibles.  Acquisition-related expenses totaling $6.1 million and $7.8 million for the three and nine months ended September 30, 2019 were included in the pro forma information as if they were incurred in the first quarter of 2018.


 
Pro Forma (Unaudited)
Three Months Ended
  
Pro Forma (Unaudited)
Nine Months Ended
 
(000’s omitted) 
September 30,
2019
  
September 30,
2018
  
September 30,
2019
  
September 30,
2018
 
Total revenue, net of interest expense $149,087  $148,152  $452,995  $446,084 
Net income  44,154   44,313   135,370   125,505 

NOTE C:  ACCOUNTING POLICIES

The accounting policies of the Company, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 65 through 75 of the Annual Report on Form 10-K10-K for the year ended December 31, 20182019 filed with the Securities and Exchange Commission (“SEC”) on March 1, 20192,2020 except as noted below. The accounting policies of the Company effective for the comparative periods presented prior to the adoption of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) are presented on the Form 10-K referenced above.

The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact national and international macroeconomic conditions including interest rates, unemployment rates, the speed of the anticipated recovery, and governmental and business reactions to the pandemic.  The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts COVID-19 as of March 31, 2020 and through the date of this Quarterly Report on Form 10-Q.  The accounting matters assessed included, but were not limited to, the Company’s allowance for credit losses, decrease in fee and interest income, and the carrying value of the goodwill and other long-lived assets.  While there was not a material impact to the Company’s consolidated financial statements as of and for the quarter ended March 31, 2020, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.

Investment Securities
The Company can classify its investments in debt securities as held-to-maturity, available-for-sale, or trading.  Held-to-maturity securities are those for which the Company has the positive intent and ability to hold until maturity, and are reported at cost, which is adjusted for amortization of premiums and accretion of discounts.  The Company did not use the held-to-maturity classification in 2019 or through March 31,2020.  Available-for-sale debt securities are reported at fair value with net unrealized gains and losses reflected as a separate component of shareholders' equity, net of applicable income taxes.  None of the Company's investment securities have been classified as trading securities at March 31,2020 or December 31,2019.  Equity securities with a readily determinable fair value are reported at fair value with net unrealized gains and losses recognized in the consolidated statements of income. Certain equity securities that do not have a readily determinable fair value are stated at cost, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. These securities include restricted stock of the Federal Reserve Bank of New York (“Federal Reserve”) and the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), as well as other equity securities.

Fair values for investment securities are based upon quoted market prices, where available.  If quoted market prices are not available, fair values are based upon quoted market prices of comparable instruments, or a discounted cash flow model using market estimates of interest rates and volatility.

Allowance for Credit Losses – Debt Securities
For held-to-maturity debt securities, the Company measures expected credit losses on a collective basis by major security type. The estimates of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Accrued interest receivable on held-to-maturity securities is excluded from the estimates of credit losses.

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the security structure, recent security collateral performance metrics, if applicable, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment about and expectations of future performance, and relevant independent industry research, analysis, and forecasts. The severity of the impairment and the length of time the security has been impaired is also considered in the assessment. This assessment involves a high degree of subjectivity and judgment that is based on the information available to management at a point in time. If this assessment indicates that a credit loss exists, the present value of the cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected from the security is less than the amortized cost basis of the security, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

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Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $13.9 million at March 31,2020 and is excluded from the estimate of credit losses.

Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of allowance for credit losses.  Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, and deferred loan fees and costs.

Mortgage loans held for sale are carried at fair value and are included in loans held for sale on the consolidated statements of condition.  Fair values for variable rate loans that reprice frequently are based on carrying values.  Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  The carrying amount of accrued interest approximates its fair value.

Interest on loans is accrued and credited to operations based upon the principal amount outstanding.  Nonrefundable loan fees and related direct costs are deferred and included in the loan balances where they are amortized over the life of the loan as an adjustment to loan yield using the effective yield method.  Premiums and discounts on purchased loans are amortized using the effective yield method over the life of the loans.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $19.3 million at March 31,2020 and is excluded from the estimate of credit losses and amortized cost basis of loans.  An allowance for credit losses is not measured for accrued interest receivable on loans as the Company writes off the uncollectible accrued interest balance in a timely manner.

The Company places a loan on nonaccrual status when the loan becomes 90 days past due (or sooner, if management concludes collection is doubtful), except when, in the opinion of management, it is well-collateralized and in the process of collection.  A loan may be placed on nonaccrual status earlier than 90 days past due if there is deterioration in the financial position of the borrower or if other conditions of the loan so warrant. When a loan is placed on nonaccrual status, uncollected accrued interest is reversed against interest income and the amortization of nonrefundable loan fees and related direct costs is discontinued. Interest income during the period the loan is on nonaccrual status is recorded on a cash basis after recovery of principal is reasonably assured. Nonaccrual loans are returned to accrual status when management determines that the borrower’s performance has improved and that both principal and interest are collectible.  This generally requires a sustained period of timely principal and interest payments and a well-documented credit evaluation of the borrower’s financial condition.

The Company’s charge-off policy by loan type is as follows:
Business lending loans are generally charged-off to the extent outstanding principal exceeds the fair value of estimated proceeds from collection efforts, including liquidation of collateral.  The charge-off is recognized when the loss becomes reasonably quantifiable.
Consumer installment loans are generally charged-off to the extent outstanding principal exceeds the fair value of collateral, and are recognized by the end of the month in which the loan becomes 90 days past due.
Consumer mortgage and home equity loans are generally charged-off to the extent outstanding principal exceeds the fair value of the property, less estimated costs to sell, and are recognized when the loan becomes 180 days past due.

Allowance for Credit Losses – Loans
The allowance for credit losses is a valuation account that is netted against the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquired loans, delinquency level, risk ratings or term of loans as well as changes in macroeconomic conditions, such as changes in unemployment rates, property values such as home prices, commercial real estate prices and automobile prices, gross domestic product, recession probability, and other relevant factors.

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The segments of the Company’s loan portfolio are disaggregated into the following classes that allow management to monitor risk and performance:
•
Business lending is comprised of general purpose commercial and industrial loans including, but not limited to agricultural-related and dealer floor plans, loans to not-for-profit enterprises,as well as mortgages on commercial property. The portfolio segment is further broken into portfolio classes based on risks associated with the collateral supporting the loans.  Each class of business lending can also have different payment structures.  Business lending loans are generally higher dollar loans and a large portion are risk rated at least annually.
•
Consumer mortgages consist primarily of fixed rate residential instruments, typically 10 – 30 years in contractual term, secured by first liens on real property.  FICO scores are used to monitor higher risks related to this type of lending with FICO AB referring to higher tiered loans with FICO scores greater than or equal to 720 as compared to FICO CDE with lower FICO scores less than 720 and potentially higher risk.
Consumer indirect consists primarily of installment loans originated through selected dealerships and are generally secured by automobiles, marine and other recreational vehicles.  Collateral securing the loans was used to further disaggregate this portfolio as charge-offs can vary depending on the purpose of the loan. Non-auto loans often have longer terms, and generally have higher risk due to declines in collateral value given the nature of the property.
Consumer direct consists of all other loans to consumers such as personal installment loans and check credit lines of credit.
•
Home equity products are installment loans or lines of credit most often secured by a first or second lien position on residential real estate with terms up to 30 years.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist, including collateral type, credit ratings/scores, size, duration, interest rate structure, industry, geography, origination vintage, and payment structure. The Company has identified the following portfolio segments and classes and measures the allowance for credit losses using the following methods:

Loan Portfolio SegmentLoan Portfolio ClassAllowance for Credit Losses Methodology
Business lendingCommercial real estate multi familyCumulative loss rate
Business lendingCommercial real estate non-owner occupiedCumulative loss rate
Business lendingCommercial real estate owner occupiedCumulative loss rate
Business lendingCommercial and industrial loansVintage loss rate
Business lendingCommercial and industrial lines of creditLine loss
Business lendingMunicipalCumulative loss rate
Business lendingOther businessCumulative loss rate
Consumer mortgageConsumer mortgage FICO ABCumulative loss rate
Consumer mortgageConsumer mortgage FICO CDECumulative loss rate
Consumer indirectIndirect new autoVintage loss rate
Consumer indirectIndirect used autoVintage loss rate
Consumer indirectIndirect non-autoVintage loss rate
Consumer directConsumer check creditLine loss
Consumer directConsumer directVintage loss rate
Home equityHome equity fixed rateVintage loss rate
Home equityHome equity lines of creditLine loss

The cumulative loss rate method uses historical loss data applied against multiple pools of loans and uses a quantitatively based management overlay in order to capture the risk for a loan’s entire expected life. These loss rates are then applied to current balances to achieve a required reserve before qualitative adjustments.

The line loss method calculates the quantitative required reserve for lines of credit. This method contains several different underlying calculations including average annual loss rate, pay-down rate, cumulative loss, average draw percentage, and undrawn liability reserve.

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

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

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

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Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Certain business lending, consumer direct, and home equity loans do not have stated maturities. In determining the estimated life of these loans, management first estimates the future cash flows expected to be received and then applies those expected future cash flows to the balance. Expected credit losses for lines of credit with no stated maturity are determined by estimating the amount and timing of all principal payments expected to be received after the reporting period and allocating those principal payments between the balance outstanding as of the reporting period and the balance of future receivables expected to be originated through subsequent usage of the unconditionally cancellable loan commitment associated with the account until the expected payments have been fully allocated. An additional allowance for credit loss is recorded for the excess of the balance outstanding as of the reporting period over the expected principal payments allocated to that balance.

Troubled Debt Restructuring
A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a troubled debt restructuring (“TDR”). The allowance for credit loss on a TDR is measured using the same method as all other loans, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.

Allowance for Credit Losses – Off-balance-sheet credit exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. There are unfunded commitments for lines of credit within each of the Company’s loan portfolio segments except consumer indirect. The allowance for credit losses on off-balance-sheet credit exposures is adjusted as a provision for (or reversal of) credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics that are the same as the adjustments considered for the loan portfolio.

Purchased Credit Deteriorated (PCD) Loans
The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. The Company’s policy for reviewing what meets the threshold of the definition of a more than insignificant credit deterioration includes loans that are delinquent more than 30 days, loans that have historical delinquencies of more than 30 days at least three times since origination, risk rating downgrades since origination, loans with multiple payment deferrals, loans considered to be troubled debt restructurings, specifically impaired loans or loans with certain documented policy exceptions, further refined based on loan-specific facts and circumstances. PCD loans are initially recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense.

Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2019, $28.0March 31,2020,$25.2 million of accounts receivable, including $8.3$8.7 million of unbilled fee revenue, and $1.9$3.1 million of unearned revenue was recorded in the consolidated statements of condition. As of December 31, 2018, $26.42019,$26.8 million of accounts receivable, including $7.8$7.5 million of unbilled fee revenue, and $2.2$1.8 million of unearned revenue was recorded in the consolidated statements of condition.

Leases
The Company occupies certain offices and uses certain equipment under non-cancelable operating lease agreements. The Company determines if an arrangement is a lease at inception. The right-of-use assets associated with operating leases are recorded in premises and equipment in the Company’s consolidated statements of condition. The lease liabilities associated with operating leases are included in accrued interest and other liabilities in the Company’s consolidated statements of condition.

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Right-of-use assets represent the Company’s right to use the underlying assets for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the associated leases. Operating lease right-of-use assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company uses interest rates on advances from the Federal Home Loan Bank of New York available at the time of commencement to determine the present value of lease payments. The operating lease right-of-use assets include any lease payments made at the time of commencement and exclude lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term and is included in occupancy and equipment expense in the Company’s consolidated statements of income.

The Company elected to account for lease and non-lease components separately, applies a portfolio approach to account for the lease right-of-use assets and liabilities for certain equipment leases and elected to exclude leases with a term of 12 months or less from the recognition and measurement policies described above.

Derivative Financial Instruments and Hedging Activities
The Company accounts for derivative financial instruments at fair value.  If certain conditions are met, a derivative may be specifically designated as (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”), (2) a hedge of the exposure to variable cash flows of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”).  For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change.  For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings.  Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest revenues.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged.  Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest revenues.  Cash flows on hedges are classified in the consolidated statements of cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions at the inception of the hedging relationship.  This documentation includes linking the fair value or cash flow hedges to specific assets and liabilities on the statements of condition or to specific commitments or forecasted transactions.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded in noninterest revenues.  When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability.  When a cash flow hedge is discontinued, but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Recently Adopted Accounting Pronouncements
In February June 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new guidance supersedes the lease requirements in Topic 840, Leases and is based on the principle that a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  The accounting applied by a lessor is largely unchanged from that applied under the previous guidance.  In addition, the guidance requires an entity to separate the lease components from the nonlease components in a contract.  The ASU requires disclosures about the amount, timing, and judgments related to a reporting entity’s accounting for leases and related cash flows.  The standard is required to be applied to all leases in existence as of the date of adoption using a modified retrospective transition approach, with certain practical expedients available. The Company adopted this guidance on January 1, 2019 using the cumulative-effect adjustment method. The cumulative-effect adjustment was not material. The Company elected several practical expedients available under the standard. The Company elected to not reassess whether any expired or existing contracts are or contain leases, to not reassess the classification (operating or capital) of any expired or existing contracts, to not reassess initial direct costs for existing leases, and to use hindsight in determining the lease term. The Company has implemented processes and a lease accounting system to ensure adequate internal controls were in place to assess our contracts and enable proper accounting and reporting of financial information upon adoption. The increase in total assets and total liabilities was $34.2 million. The impact on the Company’s results of operations and cash flows was not material.

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In August 2017, the FASB issued ASU No. 2017-12, 2016Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.-  This new guidance amends current guidance to better align hedge accounting with risk management activities and reduce the complexity involved in applying hedge accounting.  Under this new guidance, the concept of hedge ineffectiveness will be eliminated.  Ineffective income generated by cash flow and net investment hedges will be recognized in the same financial reporting period and income statement line item as effective income, so as to reflect the full cost of hedging at one time and in one place. Ineffective income generated by fair value hedges will continue to be reflected in current period earnings; however, it will be recognized in the same income statement line item as effective income. The guidance will also allow any contractually specified variable rate to be designated as the hedged risk in a cash flow hedge.  With respect to fair value hedges of interest rate risk, the guidance will allow changes in the fair value of the hedged item to be calculated solely using changes in the benchmark interest rate component of the instrument’s total contractual coupon cash flows. The Company adopted this guidance on January 1, 2019 on a modified retrospective basis. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, 13,Financial Instruments – Credit Losses (Topic 326)(“ASU No. 2016-13”). This new guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This ASU will replacereplaces the “incurred loss” model under existing guidanceincurred loss methodology with an “expected loss” model, better known as CECL,a current expected credit loss (“CECL”) methodology for instruments measured at amortized cost, and requirerequires entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. CECL simplifies the accounting model for purchased credit-impaired debt securities and loans and also applies to off-balance-sheet credit exposures not accounted for as insurance. CECL requires adoption through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. CECLThis new guidance is effective for fiscal years beginning after December 15,2019, including interim periods within those fiscal years.

The Company is currently evaluating the impact CECL will haveadopted ASC 326 on the Company’s consolidatedJanuary 1,2020 using a modified retrospective approach for all financial statements,assets measured at amortized cost and expectsoff-balance-sheet credit exposures. Results for reporting periods beginning after January 1,2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a changenet cumulative-effect adjustment that increased retained earnings by $0.5 million. This adjustment was a result of a $1.4 million increase in the allowance for loancredit losses resulting from the changeand a $3.1 million adjustment to expected losses for the estimated life of the financial asset. Management has developed its CECL model for the Company’s loan portfolio, which utilizes its historical data through September 30, 2019, as well as current and expected economic conditions and forecasts. The Company has completed the evaluation of its data requirements, determined its loan segments, determined the model construct for each segment, developed its qualitative framework and produced an estimated Allowance for Credit Loss amount based on the September 30, 2019 data inputs, assumptions and mathematical calculations. The Company is in the process of evaluating the model’s sensitivity to various model inputs, as well as identifying the key controls around model development, quarterly model operations and the production of quarterly and annual financial statement disclosures.

Based on the preliminary September 30,2019 model results, the Company believes it will establish an Allowance for Credit Losses at the time of adoption of between $52 million and $60 million.  This compares to an allowance for loan losses of $49.4 million at September 30, 2019 based on the current incurred loss model and represents approximatelyloans, partially offset by a 5% to 21%$1.2 million increase in other liabilities related to the Company’s allowance. These results should be considered preliminary and may change due to factors including, butallowance for off-balance-sheet credit exposures. The adoption of ASU No. 2016-13 did not limited to, changesresult in estimated historical losses, changes in the Company’s asset quality trends, changes in current economic conditions and changes in the Company’s economic forecast.

Upon adoption, the Company does not expect to record anya material allowance for credit losses on itsthe Company’s available-for-sale debt securities or on its other instruments carried at amortized cost, other than its held-for-investment loan portfolio.cost. The Company’s regulators will permit financial institutions to “phase-in” the impact of CECL on its regulatory capital ratios over 3for up to 5  years with transitional relief of incremental capital requirements.  The Company doeshas not expect to utilizeutilized the phased-in approach and instead anticipates it will recordrecorded the entire cumulative-effect adjustment against its regulatory capital at the time of adoption.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with this standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1,2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $3.1 million of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate beginning on January 1, 2020.

In January 2017, the FASB issued ASU No. 2017-04, 2017-04,Intangibles-Goodwill and Other (Topic 350). The amendments simplify how an entity is required to test goodwill for impairment by eliminating the requirement to measure a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  Instead, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value.  Impairment loss recognized under this new guidance will be limited to the goodwill allocated to the reporting unit.  This ASU is effective prospectively for the Company for annual or interim goodwill impairment tests in fiscal years beginning after December 15,2019.  Early  The Company adopted this guidance on January 1,2020 and determined the adoption was permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  This ASU isof this guidance did not expected to have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13,Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (Topic 820).  The updated guidance removed the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels of the fair value hierarchy, and the valuation processes for Level 3 fair value measurements. The updated guidance clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurements as of the reporting date. Further, the updated guidance requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and how the weighted average of significant unobservable inputs used to develop Level 3 fair value measurements was calculated.  This new guidance is effective for fiscal years beginning after December 15,2019, including interim periods within those fiscal years.  The Company adopted this guidance on January 1,2020 and determined the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

New Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-14,Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20).  The updated guidance removed the requirements to identify amounts that are expected to be reclassified out of accumulated other comprehensive income and recognized as components of net periodic benefit cost in the next fiscal year, as well as the effects of a one-percentage-point change in assumed health care cost trend rates on service and interest cost and on the postretirement benefit obligation. The updated guidance added disclosure requirements for the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates, and explanations for significant gains and losses related to changes in the benefit obligation for the period.  This new guidance is effective retrospectively for fiscal years beginning after December 15,2020 with early adoption permitted.  The Company is currently evaluating the impacts the adoption of this guidance will have on the Company’s consolidated financial statements.

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In December 2019, the FASB issued ASU No. 2019-12,Simplifying the Accounting for Income Taxes (Topic 740).  The updated guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, and clarifying and amending existing guidance to improve consistent application.  This new guidance is effective for fiscal years beginning after December 15,2020, including interim periods within those fiscal years. Early adoption is permitted in any interim periods for which financial statements have not been issued.  The Company is currently evaluating the impact the adoption of this guidance will have on the Company’s consolidated financial statements.


NOTE D:  INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities as of September 30, 2019March 31, 2020 and December 31, 20182019 are as follows:


 September 30, 2019  December 31, 2018  March 31, 2020  December 31, 2019 
(000's omitted) 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
Available-for-Sale Portfolio:                                                
U.S. Treasury and agency securities $1,482,739  $24,122  $214  $1,506,647  $2,036,474  $2,190  $14,911  $2,023,753  $2,016,500  $122,579  $0  $2,139,079  $2,030,060  $21,674  $7,975  $2,043,759 
Obligations of state and political subdivisions  442,942   15,159   11   458,090   453,640   6,563   1,049   459,154   485,755   15,955   2   501,708   497,852   14,382   26   512,208 
Government agency mortgage-backed securities  406,329   6,330   843   411,816   390,234   1,526   9,283   382,477   433,129   15,129   10   448,248   428,491   5,478   1,107   432,862 
Corporate debt securities  2,542   0   2   2,540   2,588   0   42   2,546   2,512   0   4   2,508   2,527   1   0   2,528 
Government agency collateralized mortgage obligations  57,452   592   35   58,009   69,342   60   1,283   68,119   48,681   1,658   0   50,339   52,621   482   32   53,071 
Total available-for-sale portfolio $2,392,004  $46,203  $1,105  $2,437,102  $2,952,278  $10,339  $26,568  $2,936,049  $2,986,577  $155,321  $16  $3,141,882  $3,011,551  $42,017  $9,140  $3,044,428 
                                                                
Equity and other Securities:                                                                
Equity securities, at fair value $251  $210  $0  $461  $251  $200  $19  $432  $251  $198  $28  $421  $251  $200  $0  $451 
Federal Home Loan Bank common stock  6,912   0   0   6,912   8,768   0   0   8,768   6,857   0   0   6,857   7,246   0   0   7,246 
Federal Reserve Bank common stock  31,992   0   0   31,992   30,690   0   0   30,690   30,922   0   0   30,922   30,922   0   0   30,922 
Other equity securities, at adjusted cost  4,525   750   0   5,275   4,969   750   0   5,719   4,549   750   0   5,299   4,546   750   0   5,296 
Total equity and other securities $43,680  $960  $0  $44,640  $44,678  $950  $19  $45,609  $42,579  $948  $28  $43,499  $42,965  $950  $0  $43,915 

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

As of September 30, 2019March 31, 2020


 Less than 12 Months  12 Months or Longer  Total 
(000's omitted)  #  
Fair
Value
  
Gross
Unrealized
Losses
   #  
Fair
Value
  
Gross
Unrealized
Losses
   #  
Fair
Value
  
Gross
Unrealized
Losses
 
                               
Available-for-Sale Portfolio:                              
U.S. Treasury and agency securities  6  $77,332  $58   12  $107,840  $156   18  $185,172  $214 
Obligations of state and political subdivisions  73   7,125   11   0   0   0   73   7,125   11 
Government agency mortgage-backed securities  24   34,660   95   55   58,473   748   79   93,133   843 
Corporate debt securities  0   0   0   1   2,540   2   1   2,540   2 
Government agency collateralized mortgage obligations  5   6,662   9   7   5,357   26   12   12,019   35 
Total available-for-sale investment portfolio  108  $125,779  $173   75  $174,210  $932   183  $299,989  $1,105 

As of December 31, 2018


 Less than 12 Months  12 Months or Longer  Total  Less than 12 Months  12 Months or Longer  Total 
(000's omitted)  #  
Fair
Value
  
Gross
Unrealized
Losses
   #  
Fair
Value
  
Gross
Unrealized
Losses
   #  
Fair
Value
  
Gross
Unrealized
Losses
  
_#
  
Fair
Value
  
Gross
Unrealized
Losses
  
_#
  
Fair
Value
  
Gross
Unrealized
Losses
  
_#
  
Fair
Value
  
Gross
Unrealized
Losses
 
                                                         
Available-for-Sale Portfolio:                                                         
U.S. Treasury and agency securities  7  $473,082  $682   64  $1,213,276  $14,229   71  $1,686,358  $14,911 
Obligations of state and political subdivisions  118   55,671   216   97   51,753   833   215   107,424   1,049   9  $1,444  $2   0  $0  $0   9  $1,444  $2 
Government agency mortgage-backed securities  43   47,708   258   181   253,931   9,025   224   301,639   9,283   1   1,154   10   3   304   0   4   1,458   10 
Corporate debt securities  0   0   0   1   2,546   42   1   2,546   42   1   2,508   4   0   0   0   1   2,508   4 
Government agency collateralized mortgage obligations  1   66   0   41   63,112   1,283   42   63,178   1,283   0   0   0   2   27   0   2   27   0 
Total available-for-sale investment portfolio  169  $576,527  $1,156   384  $1,584,618  $25,412   553  $2,161,145  $26,568   11  $5,106  $16   5  $331  $0   16  $5,437  $16 
                                                                        
Equity and other Securities:                                                                        
Equity securities, at fair value  1  $82  $19   0  $0  $0   1  $82  $19   1  $73  $28   0  $0  $0   1  $73  $28 
Total equity and other securities  1  $82  $19   0  $0  $0   1  $82  $19   1  $73  $28   0  $0  $0   1  $73  $28 

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As of December 31, 2019

 Less than 12 Months  12 Months or Longer  Total 
(000's omitted)  #  
Fair
Value
  
Gross
Unrealized
Losses
   #  
Fair
Value
  
Gross
Unrealized
Losses
   #  
Fair
Value
  
Gross
Unrealized
Losses
 
                               
Available-for-Sale Portfolio:                              
U.S. Treasury and agency securities  12  $592,678  $7,970   5  $25,998  $5   17  $618,676  $7,975 
Obligations of state and political subdivisions  21   22,716   26   0   0   0   21   22,716   26 
Government agency mortgage-backed securities  50   89,237   341   52   52,975   766   102   142,212   1,107 
Government agency collateralized mortgage obligations  5   5,971   14   5   4,405   18   10   10,376   32 
Total available-for-sale investment portfolio  88  $710,602  $8,351   62  $83,378  $789   150  $793,980  $9,140 

The unrealized losses reported pertaining to securities issued by the U.S. government and its sponsored entities, include treasuries, agencies, and mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, which are currently rated AAA by Moody’s Investor Services, AA+ by Standard & Poor’s and are guaranteed by the U.S. government. The majority of the obligations of state and political subdivisions and corporations carry a credit rating of A or better. Additionally, a majority of the obligations of state and political subdivisions carry a secondarysecondary level of credit enhancement. The Company holds 1 corporate debt security which is currently rated A- or better and the issuer of the security shows no material negative trends over the last five quarters. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to recovery of the amortized cost. Timely principal and interest payments continue to be made on the securities. The unrealized losses in the portfolios are primarily attributable to changes in interest rates.  As such, management does not believe any individual unrealized loss as of September 30,March 31,2020 represents credit losses and no unrealized losses have been recognized into credit loss expense. Accordingly, there is 0 allowance for credit losses on the Company’s available-for-sale portfolio as of March 31, 2020.  As of December 31, 2019, management does not believe any individual unrealized loss represents other-than-temporary impairment.

The amortized cost and estimated fair value of debt securities at September 30, 2019,March 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity date are shown separately.


 Available-for-Sale  Available-for-Sale 
(000's omitted) 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
Due in one year or less $71,512  $71,510  $662,404  $671,422 
Due after one through five years  1,512,018   1,538,064   893,934   940,096 
Due after five years through ten years  54,176   58,251   445,987   485,140 
Due after ten years  290,517   299,452   502,442   546,637 
Subtotal  1,928,223   1,967,277   2,504,767   2,643,295 
Government agency mortgage-backed securities  406,329   411,816   433,129   448,248 
Government agency collateralized mortgage obligations  57,452   58,009   48,681   50,339 
Total $2,392,004  $2,437,102  $2,986,577  $3,141,882 

As of September 30, 2019, $245.6March 31, 2020, $215.8 million of U.S. Treasury securities were pledged as collateral for securities sold under agreement to repurchase.  All securities sold under agreement to repurchase as of September 30, 2019March 31, 2020 have an overnight and continuous maturity.

During the nine-month period ending September 30, 2019, the Company sold $590.2 million of U.S. Treasury and agency securities, recognizing $5.0 million of gross realized gains and $0.1 million of gross realized losses. The proceeds from these sales were primarily held in interest-earning cash and cash equivalents at higher net yields as of September 30, 2019.

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Table of Contents

NOTE E:  LOANS

The segments of the Company’s loan portfolio are disaggregated into the following classes that allow management to monitor risk and performance:

Consumer mortgages consist primarily of fixed rate residential instruments, typically 10 – 30 years in contractual term, secured by first liens on real property.
Business lending is comprised of general purpose commercial and industrial loans including, but not limited to, municipal lending, agricultural-related and dealer floor plans, as well as mortgages on commercial properties.
Consumer indirect consists primarily of installment loans originated through selected dealerships and are secured by automobiles, marine and other recreational vehicles.
Consumer direct consists of all other loans to consumers such as personal installment loans and lines of credit.
Home equity products are consumer purpose installment loans or lines of credit most often secured by a first or second lien position on residential real estate with terms up to 30 years.

The balances of these classes are summarized as follows:

(000's omitted) 
September 30,
2019
  
December 31,
2018
  
March 31,
2020
  
December 31,
2019
 
Business lending $2,779,612  $2,396,977  $2,789,130  $2,775,876 
Consumer mortgage  2,405,191   2,235,408   2,424,656   2,430,902 
Consumer indirect  1,091,980   1,083,207   1,087,879   1,113,062 
Consumer direct  187,379   178,820   177,844   184,378 
Home equity  389,029   386,709   386,583   386,325 
Gross loans, including deferred origination costs  6,853,191   6,281,121   6,866,092   6,890,543 
Allowance for loan losses  (49,423)  (49,284)
Loans, net of allowance for loan losses $6,803,768  $6,231,837 
Allowance for credit losses  (55,652)  (49,911)
Loans, net of allowance for credit losses $6,810,440  $6,840,632 

15
TableThe following table presents the aging of Contents
the amortized cost basis of the Company’s past due loans, by class as of March 31, 2020:

The outstanding balance related to credit impaired acquired loans was $16.7 million and $7.4 million at September 30, 2019 and December 31, 2018, respectively.  The changes in the accretable discount related to the credit impaired acquired loans are as follows:
(000’s omitted) 
Past Due
30 – 89
Days
  
90+ Days Past
Due and
Still Accruing
  Nonaccrual  
Total
Past Due
  
Purchased Credit
Deteriorated
(“PCD”) (1)
  Current  Total Loans 
Business lending $13,157  $10,111  $4,394  $27,662  $9,781  $2,751,687  $2,789,130 
Consumer mortgage  15,614   1,821   12,674   30,109   0   2,394,547   2,424,656 
Consumer indirect  11,343   418   0   11,761   0   1,076,118   1,087,879 
Consumer direct  1,197   62   52   1,311   0   176,533   177,844 
Home equity  2,951   324   1,926   5,201   0   381,382   386,583 
Total $44,262  $12,736  $19,046  $76,044  $9,781  $6,780,267  $6,866,092 

(000’s omitted)   
Balance at December 31, 2018 $437 
Accretion recognized, year-to-date  (302)
Net reclassification from non-accretable to accretable  96 
Kinderhook acquisition  512 
Balance at September 30, 2019 $743 
(1)PCD loans were not classified as nonperforming assets as the loans are considered to be performing under ASC 326-10. As a result, the noncredit discount, after the adjustment for the allowance for credit losses, is being accreted into interest income on all PCD loans.

Credit Quality
Management monitors the credit quality of its loan portfolio on an ongoing basis.  Measurement of delinquency and past due status are based on the contractual terms of each loan.  Past due loans are reviewed on a monthly basis to identify loans for non-accrual status.  The following is an aged analysis of the Company’s past due loans by class as of September 30,December 31, 2019:

Legacy Loans (excludes loans acquired after January 1, 2009)

(000’s omitted) 
Past Due
30 – 89
Days
  
90+ Days Past
Due and
Still Accruing
  Nonaccrual  
Total
Past Due
  Current  Total Loans  
Past Due
30 – 89
Days
  
90+ Days Past
Due and
Still Accruing
  Nonaccrual  
Total
Past Due
  Current  Total Loans 
Business lending $2,697  $189  $4,590  $7,476  $1,778,596  $1,786,072  $3,936  $126  $3,840  $7,902  $1,848,683  $1,856,585 
Consumer mortgage  11,038   2,976   10,650   24,664   1,921,265   1,945,929   10,990   2,052   10,131   23,173   1,973,543   1,996,716 
Consumer indirect  10,307   177   0   10,484   1,074,849   1,085,333   12,673   125   0   12,798   1,094,510   1,107,308 
Consumer direct  1,046   38   0   1,084   177,242   178,326   1,455   76   0   1,531   174,445   175,976 
Home equity  1,496   354   1,404   3,254   308,375   311,629   1,508   328   1,444   3,280   310,727   314,007 
Total $26,584  $3,734  $16,644  $46,962  $5,260,327  $5,307,289  $30,562  $2,707  $15,415  $48,684  $5,401,908  $5,450,592 

Acquired Loans (includes loans acquired after January 1, 2009)

(000’s omitted) 
Past Due
30 – 89
Days
  
90+ Days Past
Due and
Still Accruing
  Nonaccrual  
Total
Past Due
  
Acquired
Impaired(1)
  Current  Total Loans  
Past Due
30 – 89
Days
  
90+ Days Past
Due and
Still Accruing
  Nonaccrual  
Total
Past Due
  
Acquired
Impaired(1)
  Current  Total Loans 
Business lending $747  $997  $3,957  $5,701  $11,508  $976,331  $993,540  $8,518  $2,173  $570  $11,261  $11,797  $896,233  $919,291 
Consumer mortgage  1,573   171   2,409   4,153   0   455,109   459,262   890   277   2,386   3,553   0   430,633   434,186 
Consumer indirect  33   32   0   65   0   6,582   6,647   79   31   0   110   0   5,644   5,754 
Consumer direct  86   5   54   145   0   8,908   9,053   59   0   52   111   0   8,291   8,402 
Home equity  279   125   546   950   0   76,450   77,400   744   238   412   1,394   0   70,924   72,318 
Total $2,718  $1,330  $6,966  $11,014  $11,508  $1,523,380  $1,545,902  $10,290  $2,719  $3,420  $16,429  $11,797  $1,411,725  $1,439,951 

(1)Acquired impaired loans were not classified as nonperforming assets as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cashflows, is being recognized on all acquired impaired loans.

The following is an aged analysis of the Company’s past due loans by class as of December 31, 2018:

Legacy Loans (excludes loans acquired after January 1, 2009)

(000’s omitted) 
Past Due
30 – 89
Days
  
90+ Days Past
Due and
Still Accruing
  Nonaccrual  
Total
Past Due
  Current  Total Loans 
Business lending $5,261  $179  $4,872  $10,312  $1,608,515  $1,618,827 
Consumer mortgage  12,468   1,393   9,872   23,733   1,824,717   1,848,450 
Consumer indirect  14,609   258   0   14,867   1,057,525   1,072,392 
Consumer direct  1,778   48   0   1,826   173,948   175,774 
Home equity  983   228   1,438   2,649   309,892   312,541 
Total $35,099  $2,106  $16,182  $53,387  $4,974,597  $5,027,984 

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Acquired Loans (includesThe delinquency status for loans acquired after January 1, 2009)on payment deferment due to COVID-19 financial hardship were reported at March 31, 2020 based on their delinquency status as of March 20, 2020, the date most borrowers were impacted by COVID-19 due to stay at home orders in various states.

(000’s omitted) 
Past Due
30 – 89
Days
  
90+ Days Past
Due and
Still Accruing
  Nonaccrual  
Total
Past Due
  
Acquired
Impaired(1)
  Current  Total Loans 
Business lending $974  $0  $3,498  $4,472  $5,446  $768,232  $778,150 
Consumer mortgage  841   232   2,390   3,463   0   383,495   386,958 
Consumer indirect  78   34   0   112   0   10,703   10,815 
Consumer direct  115   4   0   119   0   2,927   3,046 
Home equity  613   79   474   1,166   0   73,002   74,168 
Total $2,621  $349  $6,362  $9,332  $5,446  $1,238,359  $1,253,137 

NaN interest income on nonaccrual loans was recognized during the three months ended March 31, 2020. An immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income.
(1)Acquired impaired loans were not classified as nonperforming assets as the loans are considered to be performing under ASC 310-30.  As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cashflows, is being recognized on all acquired impaired loans.

The Company uses several credit quality indicators to assess credit risk in an ongoing manner.  The Company’s primary credit quality indicator for its business lending portfolio is an internal credit risk rating system that categorizes loans as “pass”, “special mention”,  “classified”, or “doubtful”.  Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation.  In general, the following are the definitions of the Company’s credit quality indicators:

PassThe condition of the borrower and the performance of the loans are satisfactory or better.
Special MentionThe condition of the borrower has deteriorated although the loan performs as agreed. Loss may be incurred at some future date, if conditions deteriorate further.
ClassifiedThe condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate and incur loss, if deficiencies are not corrected.
DoubtfulThe condition of the borrower has deteriorated to the point that collection of the balance is improbable based on current facts and conditions.conditions and loss is likely.

The following table showstables show the amount of business lending loans by credit quality category:category at March 31, 2020 and December 31, 2019:


 September 30, 2019  December 31, 2018 
(000’s omitted) Legacy  Acquired  Total  Legacy  Acquired  Total 
(000’s omitted)
 Term Loans Amortized Cost Basis by Origination Year       
March 31, 2020
 2020  2019  2018  2017  2016  Prior  
Revolving
Loans
Amortized
Cost Basis
  Total 
Business lending:                        
Risk rating                        
Pass $1,609,382  $886,363  $2,495,745  $1,439,337  $702,493  $2,141,830  $81,301  $386,281  $333,585  $239,020  $276,171  $606,390  $593,830  $2,516,578 
Special mention  91,159   61,289   152,448   105,065   40,107   145,172   4,128   12,290   6,887   13,213   4,516   52,457   31,223   124,714 
Classified  85,531   34,380   119,911   74,425   28,525   102,950   665   1,933   17,241   9,993   12,790   59,750   45,466   147,838 
Doubtful  0   0   0   0   1,579   1,579   0   0   0   0   0   0   0   0 
Acquired impaired  0   11,508   11,508   0   5,446   5,446 
Total $1,786,072  $993,540  $2,779,612  $1,618,827  $778,150  $2,396,977 
Total business lending $86,094  $400,504  $357,713  $262,226  $293,477  $718,597  $670,519  $2,789,130 

 December 31, 2019 
(000’s omitted) Legacy  Acquired  Total 
Pass $1,655,280  $832,693  $2,487,973 
Special mention  98,953   45,324   144,277 
Classified  102,352   29,477   131,829 
Doubtful  0   0   0 
Acquired impaired  0   11,797   11,797 
Total $1,856,585  $919,291  $2,775,876 

All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis.  These are typically loans to individuals in the consumer categories and are delineated as either performing or nonperforming.   Performing loans include loans classified as current as well as those classified as 30 - 89 days past due.  Nonperforming loans include 90+90+ days past due and still accruing and nonaccrual loans.

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Table of Contents

The following table details the balances in all other loan categories at September 30,March 31,2020:

(000’s omitted)
 Term Loans Amortized Cost Basis by Origination Year       
March 31, 2020 2020  2019  2018  2017  2016  Prior  
Revolving
Loans
Amortized
Cost Basis
  Total 
Consumer mortgage:                        
FICO AB                        
Risk rating                        
Performing $47,527  $252,841  $194,612  $190,316  $187,254  $651,314  $0  $1,523,864 
Nonperforming  0   0   153   299   193   2,862   0   3,507 
Total FICO AB  47,527   252,841   194,765   190,615   187,447   654,176   0   1,527,371 
                                 
FICO CDE                                
Risk rating                                
Performing  22,589   111,126   89,451   88,630   94,419   467,433   12,649   886,297 
Nonperforming  0   0   142   524   1,327   8,995   0   10,988 
Total FICO CDE  22,589   111,126   89,593   89,154   95,746   476,428   12,649   897,285 
Total consumer mortgage $70,116  $363,967  $284,358  $279,769  $283,193  $1,130,604  $12,649  $2,424,656 
                                 
Consumer indirect:                                
Risk rating                                
Performing $74,581  $397,442  $284,899  $133,402  $102,849  $94,288  $0  $1,087,461 
Nonperforming  0   98   78   63   99   80   0   418 
Total consumer indirect $74,581  $397,540  $284,977  $133,465  $102,948  $94,368   0  $1,087,879 
                                 
Consumer direct:                                
Risk rating                                
Performing $20,080  $66,306  $42,399  $21,144  $11,049  $9,121  $7,631  $177,730 
Nonperforming  0   14   1   66   3   0   30   114 
Total consumer direct $20,080  $66,320  $42,400  $21,210  $11,052  $9,121  $7,661  $177,844 
                                 
Home equity:                                
Risk rating                                
Performing $14,521  $51,149  $28,687  $23,194  $19,318  $35,395  $212,069  $384,333 
Nonperforming  0   0   0   73   118   461   1,598   2,250 
Total home equity $14,521  $51,149  $28,687  $23,267  $19,436  $35,856  $213,667  $386,583 

The following table details the balances in all other loan categories at December 31, 2019:

Legacy Loans (excludes loans acquired after January 1, 2009)

(000’s omitted) 
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Total  
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Total 
Performing $1,932,303  $1,085,156  $178,288  $309,871  $3,505,618  $1,984,533  $1,107,183  $175,900  $312,235  $3,579,851 
Nonperforming  13,626   177   38   1,758   15,599   12,183   125   76   1,772   14,156 
Total $1,945,929  $1,085,333  $178,326  $311,629  $3,521,217  $1,996,716  $1,107,308  $175,976  $314,007  $3,594,007 

Acquired Loans (includes loans acquired after January 1, 2009)

(000’s omitted) 
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Total  
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Total 
Performing $456,682  $6,615  $8,994  $76,729  $549,020  $431,523  $5,723  $8,350  $71,668  $517,264 
Nonperforming  2,580   32   59   671   3,342   2,663   31   52   650   3,396 
Total $459,262  $6,647  $9,053  $77,400  $552,362  $434,186  $5,754  $8,402  $72,318  $520,660 

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The following table details the balances in all other loan categories at December 31, 2018:

Legacy Loans (excludes loans acquired after January 1, 2009)

(000’s omitted) 
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Total 
Performing $1,837,185  $1,072,134  $175,726  $310,875  $3,395,920 
Nonperforming  11,265   258   48   1,666   13,237 
Total $1,848,450  $1,072,392  $175,774  $312,541  $3,409,157 

Acquired Loans (includes loans acquired after January 1, 2009)

(000’s omitted) 
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Total 
Performing $384,336  $10,781  $3,042  $73,615  $471,774 
Nonperforming  2,622   34   4   553   3,213 
Total $386,958  $10,815  $3,046  $74,168  $474,987 

All loan classes are collectively evaluated for impairment except business lending.  A summary of individually evaluated impaired business loans as of September 30, 2019March 31, 2020 and December 31, 20182019 follows:

(000’s omitted) 
September 30,
2019
  
December 31,
2018
  
March 31,
2020
  
December 31,
2019
 
Loans with allowance allocation $0  $3,956  $0  $0 
Loans without allowance allocation  5,172   2,230   1,771   1,414 
Carrying balance  5,172   6,186   1,771   1,414 
Contractual balance  11,896   12,078   3,305   2,944 
Specifically allocated allowance  0   956   0   0 

The average carrying balance of individually evaluated impaired loans was $2.2 million and $6.2 million for the three months ended March 31, 2020 and March 31, 2019, respectively.  NaN interest income was recognized on individually evaluated impaired loans for the three months ended March 31, 2020 and March 31, 2019.

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans.  In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan.  Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.  Terms may be modified to fit the ability of the borrower to repay in line with its current financial standing and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

In accordance with the clarified guidance issued by the Office of the Comptroller of the Currency (“OCC”), consumer mortgage loans that have been discharged in Chapter 7 bankruptcy but not reaffirmed by the borrower, are classified as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified.  The Company’s lien position against the underlying collateral remains unchanged.  Pursuant to that guidance, the Company records a charge-off equal to any portion of the carrying value that exceeds the net realizable value of the collateral.  The amount of loss incurred in the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 was immaterial.

TDRs that are less than $0.5 million are collectively included in the general loanallowance for credit loss allocation and the qualitative review.estimate. TDRs that are commercial loans and greater than $0.5 million are individually evaluated for impairment, and if necessary, a specific allocation of the allowance for loancredit losses is provided. As a result, the determination of the amount of allowance for loancredit losses related to TDRs is the same as detailed in the critical accounting policies.

With respect to the Company’s lending activities, the Company implemented a customer payment deferral program for deferrals up to three months during the first quarter of 2020 to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges.  Business lending, consumer direct, and consumer indirect loans in deferment status will continue to accrue interest on the deferred principal during the deferment period unless otherwise classified as nonaccrual. Consumer mortgage and home equity loans will not accrue interest on the deferred payments during the deferment period.  Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans throughout the agreed upon deferral period.  These payment deferrals were also deemed to be an insignificant borrower concession, and therefore, not classified as troubled-debt restructured loans during the first quarter.  Borrowers that were delinquent in their payments to the Bank, prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case by case basis for troubled debt restructure classification and non-performing loan status.

Information regarding TDRs as of September 30, 2019March 31, 2020 and December 31, 20182019 is as follows:


 September 30, 2019  December 31, 2018  March 31, 2020  December 31, 2019 
(000’s omitted) Nonaccrual  Accruing  Total  Nonaccrual  Accruing  Total  Nonaccrual  Accruing  Total  Nonaccrual  Accruing  Total 
  #  Amount   #  Amount   #  Amount   #  Amount   #  Amount   #  Amount   #  Amount   #  Amount   #  Amount   #  Amount   #  Amount   #  Amount 
Business lending  5  $662   3  $205   8  $867   4  $162   2  $165   6  $327   8  $644   3  $197   11  $841   8  $681   3  $201   11  $882 
Consumer mortgage  57   2,527   49   1,945   106   4,472   46   1,986   46   1,769   92   3,755   60   2,646   47   2,160   107   4,806   59   2,638   47   1,892   106   4,530 
Consumer indirect  0   0   77   854   77   854   0   0   77   857   77   857   0   0   89   935   89   935   0   0   84   941   84   941 
Consumer direct  0   0   22   91   22   91   0   0   22   71   22   71   0   0   23   106   23   106   0   0   23   101   23   101 
Home equity  13   230   11   310   24   540   12   240   9   275   21   515   13   298   11   233   24   531   13   290   11   238   24   528 
Total  75  $3,419   162  $3,405   237  $6,824   62  $2,388   156  $3,137   218  $5,525   81  $3,588   173  $3,631   254  $7,219   80  $3,609   168  $3,373   248  $6,982 

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The following table presents information related to loans modified in a TDR during the three months ended March 31, 2020 and nine months ended September 30, 2019 and 2018.2019.  Of the loans noted in the table below, all consumer mortgage loans for the three months ended March 31, 2020 and nine months ended September 30, 2019 and 2018 were modified due to a Chapter 7 bankruptcy as described previously.  The financial effects of these restructurings were immaterial.immaterial


 
Three Months Ended
September 30, 2019
  
Three Months Ended
September 30, 2018
  
Three Months Ended
March 31, 2020
  
Three Months Ended
March 31, 2019
 
(000’s omitted) 
Number of
loans modified
  
Outstanding
Balance
  
Number of
loans modified
  
Outstanding
Balance
  
Number of
loans modified
  
Outstanding
Balance
  
Number of
loans modified
  
Outstanding
Balance
 
Business lending  1  $415   0  $0   0  $0   0  $0 
Consumer mortgage  8   464   4   195   7   617   8   665 
Consumer indirect  10   116   14   117   14   127   11   98 
Consumer direct  2   25   2   10   1   12   0   0 
Home equity  0   0   1   0   0   0   1   4 
Total  21  $1,020   21  $322   22  $756   20  $767 



 
Nine Months Ended
September 30, 2019
  
Nine Months Ended
September 30, 2018
 
(000’s omitted) 
Number of
loans modified
  
Outstanding
Balance
  
Number of
loans modified
  
Outstanding
Balance
 
Business lending  3  $660   1  $93 
Consumer mortgage  19   1,271   7   407 
Consumer indirect  22   206   24   176 
Consumer direct  5   35   5   21 
Home equity  4   72   2   85 
Total  53  $2,244   39  $782 

Allowance for LoanCredit Losses

The allowance for loan losses is general in nature and is available to absorb losses from any loan type despite the analysis below.  The following presents by classsegment the activity in the allowance for loancredit losses:


 Three Months Ended September 30, 2019 
(000’s omitted) 
Business
Lending
  
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Unallocated  
Acquired
Impaired
  Total 
Beginning balance $17,769  $10,763  $14,345  $3,184  $2,103  $991  $155  $49,310 
Charge-offs  (305)  (200)  (2,224)  (456)  (45)  0   0   (3,230)
Recoveries  290   8   1,095   167   32   0   0   1,592 
Provision  301   (94)  1,221   383   (8)  (53)  1   1,751 
Ending balance $18,055  $10,477  $14,437  $3,278  $2,082  $938  $156  $49,423 
 Three Months Ended March 31, 2020 
(000’s omitted) 
Beginning
balance,
prior to
the
adoption
of ASC 326
  
Impact
of ASC
326
  
Beginning
balance,
after
adoption
of ASC 326
  Charge-offs  Recoveries  Provision  Ending balance 
Business lending $19,426  $288  $19,714  $(176) $138  $(187) $19,489 
Consumer mortgage  10,269   (1,051)  9,218   (186)  8   3,390   12,430 
Consumer indirect  13,712   (997)  12,715   (2,079)  1,163   1,895   13,694 
Consumer direct  3,255   (643)  2,612   (533)  182   1,476   3,737 
Home equity  2,129   808   2,937   (73)  6   (386)  2,484 
Unallocated  957   43   1,000   0   0   (228)  772 
Purchased credit deteriorated  0   3,072   3,072   0   0   (26)  3,046 
Purchased credit impaired  163   (163)  0   0   0   0   0 
Allowance for credit losses – loans  49,911   1,357   51,268   (3,047)  1,497   5,934   55,652 
Liabilities for off-balance-sheet credit exposures  0   1,185   1,185   0   0   (340)  845 
Total allowance for credit losses $49,911  $2,542  $52,453  $(3,047) $1,497  $5,594  $56,497 


 Three Months Ended September 30, 2018  Three Months Ended March 31, 2019 
(000’s omitted) 
Business
Lending
  
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Unallocated  
Acquired
Impaired
  Total  
Business
Lending
  
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Unallocated  
Acquired
Impaired
  Total 
Beginning balance $18,439  $10,473  $14,424  $3,164  $2,015  $1,070  $33  $49,618  $18,522  $10,124  $14,366  $3,095  $2,144  $1,000  $33  $49,284 
Charge-offs  (73)  (144)  (2,364)  (465)  (221)  0   0   (3,267)  (1,216)  (253)  (1,823)  (535)  (74)  0   0   (3,901)
Recoveries  93   46   1,190   223   15   0   0   1,567   134   22   962   179   5   0   0   1,302 
Provision  321   (205)  1,719   299   225   (159)  15   2,215   831   424   746   317   (8)  (10)  122   2,422 
Ending balance $18,780  $10,170  $14,969  $3,221  $2,034  $911  $48  $50,133  $18,271  $10,317  $14,251  $3,056  $2,067  $990  $155  $49,107 


 Nine Months Ended September 30, 2019 
(000’s omitted) 
Business
Lending
  
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Unallocated  
Acquired
Impaired
  Total 
Beginning balance $18,522  $10,124  $14,366  $3,095  $2,144  $1,000  $33  $49,284 
Charge-offs  (1,774)  (1,040)  (5,529)  (1,436)  (223)  0   0   (10,002)
Recoveries  593   44   3,296   567   68   0   0   4,568 
Provision  714   1,349   2,304   1,052   93   (62)  123   5,573 
Ending balance $18,055  $10,477  $14,437  $3,278  $2,082  $938  $156  $49,423 
The decline in economic conditions associated with the COVID-19 pandemic have resulted in an allowance for credit losses to total loans ratio of 0.81% at March 31, 2020, 3 basis points higher than the level at March 31, 2019 and 9 basis points higher than the level at December 31, 2019.

1921
Under CECL, the Company utilizes the historical loss rate on its loan portfolio as the initial basis for the estimate of credit losses using the cumulative loss, vintage loss and line loss methods which is derived from the Company’s historical loss experience from January 1, 2012 to December 31, 2019.  Adjustments to historical loss experience were made for differences in current loan-specific risk characteristics and to address current period delinquencies, charge-off rates, risk ratings, lack of loan level data through an entire economic cycle, changes in loan sizes and underwriting standards as well as the addition of acquired loans which were not underwritten by the Company. The Company considered historical losses immediately prior, through and following the Great Recession of 2008 compared to the historical period used for modeling  to adjust the historical information to account for longer-term expectations for loan credit performance.  Under CECL, the Company is required to consider future economic conditions to determine expected losses under a life of loan concept.  Management selected an eight quarter reasonable and supportable forecast period with a four quarter reversion to the historical mean to use as part of the economic forecast. Management determined that these qualitative adjustments  were needed to adjust historical information to reflect changes as a result of current conditions.


 Nine Months Ended September 30, 2018 
(000’s omitted) 
Business
Lending
  
Consumer
Mortgage
  
Consumer
Indirect
  
Consumer
Direct
  
Home
Equity
  Unallocated  
Acquired
Impaired
  Total 
Beginning balance $17,257  $10,465  $13,468  $3,039  $2,107  $1,100  $147  $47,583 
Charge-offs  (2,000)  (588)  (6,031)  (1,324)  (325)  0   (368)  (10,636)
Recoveries  404   109   3,688   612   31   0   0   4,844 
Provision  3,119   184   3,844   894   221   (189)  269   8,342 
Ending balance $18,780  $10,170  $14,969  $3,221  $2,034  $911  $48  $50,133 
The Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that were weighted based on guidance from  the third party provider, with forecasts available as of March 31, 2020. These forecasts included the impact of COVID-19 and were factored into the qualitative portion of the calculation of the estimated credit losses.  The scenarios utilized outline an immediate and precipitous decrease in economic activity in the second quarter of 2020 with peak unemployment ranging from 8% to 13% in that quarter and a general improvement  in unemployment levels over the subsequent seven quarters. In addition to the economic forecast, the Company also considered additional qualitative adjustments  as a result of COVID-19 and the impact on all industries, loan deferrals, delinquencies and downgrades, the Paycheck Protection Program and the Federal stimulus package.

Management developed expected loss estimates considering factors for segments as outlined below:
Business lending – non real estate:  The Company considered projected unemployment and GDP as possible indicators of forecasted losses related to business lending.  The Company also considered delinquencies, risk rating changes, recent charge-off history and acquired loans as part of the review of estimated losses.
Business lending – real estate:  The Company considered projected real estate values as possible indicators of forecasted losses related to commercial real estate loans in addition to the factors noted in business lending – non real estate.
Consumer mortgages and home equity:  The Company considered projected unemployment and real estate values as possible indicators of forecasted losses related to mortgage lending.  In addition, current delinquencies, charge-offs and acquired loans were considered.
Consumer indirect:  The Company considered projected unemployment and vehicle valuation indices as possible indicators of forecasted losses related to indirect lending.  In addition, current delinquencies, charge-offs and acquired loans were considered.
Consumer direct:  The Company considered projected unemployment as a possible indicator of forecasted losses related to direct lending.  In addition, current delinquencies, charge-offs and acquired loans were considered.


NOTE F:  GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

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


 September 30, 2019  December 31, 2018  March 31, 2020  December 31, 2019 
(000's omitted) 
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Net
Carrying
Amount
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Net
Carrying
Amount
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Net
Carrying
Amount
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Net
Carrying
Amount
 
Amortizing intangible assets:                                    
Core deposit intangibles $66,475  $(48,603) $17,872  $62,902  $(44,306) $18,596  $66,475  $(51,474) $15,001  $66,475  $(50,057) $16,418 
Other intangibles  89,266   (40,063)  49,203   87,616   (32,366)  55,250   89,266   (44,821)  44,445   89,266   (42,571)  46,695 
Total amortizing intangibles $155,741  $(88,666) $67,075  $150,518  $(76,672) $73,846  $155,741  $(96,295) $59,446  $155,741  $(92,628) $63,113 

The estimated aggregate amortization expense for each of the five succeeding fiscal years ended December 31 is as follows:

(000's omitted)(000's omitted) (000's omitted) 
Oct - Dec 2019 $3,962 
2020  13,801 
Apr - Dec 2020 $10,133 
2021  11,786   11,786 
2022  10,105   10,105 
2023  8,457   8,457 
2024  7,041 
Thereafter  18,964   11,924 
Total $67,075  $59,446 

22

Shown below are the components of the Company’s goodwill at December 31, 20182019 and September 30, 2019:March 31, 2020:

(000’s omitted) December 31, 2018  Activity  September 30, 2019 
Goodwill $738,327  $40,107  $778,434 
Accumulated impairment  (4,824)  0   (4,824)
Goodwill, net $733,503  $40,107  $773,610 


NOTE G:  LEASES

The Company has operating leases for certain offices and certain equipment. These leases have remaining terms that range from less than one year to 15 years. Options to extend the leases range from a single extension option of one year to multiple extension options for up to 40 years. Certain agreements include an option to terminate the lease within one year.

The components of lease expense are as follows:

(000’s omitted) 
Three Months Ended
September 30, 2019
  
Nine Months Ended
September 30, 2019
 
Operating lease cost $2,231  $6,493 
Variable lease cost  9   9 
Short-term lease cost (1)
  77   180 
Total lease cost $2,317  $6,682 

(1)Short-term lease cost includes the cost of leases with terms of twelve months or less, excluding leases with terms of one month or less.

20

Supplemental cash flow information related to leases is as follows:

(000’s omitted) 
Nine Months Ended
September 30, 2019
 
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash outflows for operating leases $5,987 
     
Right-of-use assets obtained in exchange for lease obligations:    
Operating leases  13,766 

Supplemental balance sheet information related to leases is as follows:

(000’s omitted, except lease term and discount rate) September 30, 2019 
Operating leases   
Operating lease right-of-use assets $41,948 
     
Operating lease liabilities  42,769 
     
Weighted average remaining lease term    
Operating leases 6.7 years 
     
Weighted average discount rate    
Operating leases  2.95%

Maturities of lease liabilities as of September 30, 2019 are as follows:

(000’s omitted) Operating Leases 
Oct - Dec 2019 $2,253 
2020  9,372 
2021  7,934 
2022  6,645 
2023  5,674 
Thereafter  15,697 
Total lease payments  47,575 
Less imputed interest  (4,806)
Total $42,769 

Included in the Company’s operating leases are related party leases where BPAS Actuarial & Pension Services, LLC and OneGroup NY, Inc., subsidiaries of the Company, lease office space from 706 North Clinton, LLC., an entity the Company holds a 50% membership interest in through its subsidiary Oneida Preferred Funding II, LLC.  As of September 30, 2019, the operating lease right-of-use assets and operating lease liabilities associated with these related party leases total $5.0 million and $5.0 million, respectively.  As of September 30, 2019, the weighted average remaining lease term and weighted average discount rate for the Company’s related party leases are 10.2 years and 3.67%, respectively.  The maturities of the Company’s related party lease liabilities as of September 30, 2019 are as follows:

(000’s omitted) 706 North Clinton, LLC 
Oct - Dec 2019 $148 
2020  591 
2021  591 
2022  591 
2023  591 
Thereafter  3,538 
Total lease payments  6,050 
Less imputed interest  (1,011)
Total $5,039 

As of September 30, 2019, the Company has an immaterial amount of additional operating leases for offices and equipment that have not yet commenced.

21
(000’s omitted) December 31, 2019  Activity  March 31, 2020 
Goodwill $778,634  $(337) $778,297 
Accumulated impairment  (4,824)  0   (4,824)
Goodwill, net $773,810  $(337) $773,473 


NOTE H:G:  MANDATORILY REDEEMABLE PREFERRED SECURITIES

As of  September 30, 2019,March 31, 2020,  the Company sponsors 1 business trust, Community Capital Trust IV (“CCT IV”), of which 100% of the common stock is owned by the Company.  The Company previously sponsored MBVT Statutory Trust I (“MBVT I”) and Kinderhook Capital Trust (“KCT”) until September 16, 2019 when the Company exercised its right to redeem all of the MBVT I and KCT debentures and associated preferred securities for a total of $20.6 million and $2.1 million, respectively.  The common stock of MBVT Statutory Trust I was acquired in the Merchants Bancshares, Inc. (“Merchants”) acquisition and the common stock of Kinderhook Capital TrustKCT was acquired in the Kinderhook Bank Corp. (“Kinderhook”) acquisition.  The trusts were formed for the purpose of issuing company-obligated mandatorily redeemable preferred securities to third-party investors and investing the proceeds from the sale of such preferred securities solely in junior subordinated debt securities of the Company.  The debentures held by each trust are the sole assets of such trust.  Distributions on the preferred securities issued by each trust are payable quarterly at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust and are recorded as interest expense in the consolidated financial statements.  The preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures.  The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the preferred securities subject to the terms of each of the guarantees. As of  September 30, 2019,March 31, 2020, the terms of the preferred securities of CCT IV are as follows:


IssuancePar Maturity 
TrustDateAmountInterest RateDateCall Price
CCT IV12/8/2006$75.0 million3 month LIBOR plus 1.65% (3.77%(2.39%)12/15/2036Par


NOTE I:H:  BENEFIT PLANS

The Company provides a qualified defined benefit pension to eligible employees and retirees, other post-retirement health and life insurance benefits to certain retirees, an unfunded supplemental pension plan for certain key executives, and an unfunded stock balance plan for certain of its nonemployee directors.  The Company accrues for the estimated cost of these benefits through charges to expense during the years that employees earn these benefits.  The service cost component of net periodic benefit income is included in the salaries and employee benefits line of the Consolidated Statementsconsolidated statements of Income,income, while the other components of net periodic benefit income are included in other expenses. The Company made a $7.3 million contribution to its defined benefit pension plan in the first quarter of 2019.

Effective June 1, 2018, The Company did 0t make a contribution to its defined benefit pension plan in the Company adopted the Community Bank System, Inc. Restoration Plan (“Restoration Plan”).  The Restoration Plan is a non-qualified deferred compensation plan for certain employees whose benefits under tax-qualified retirement plans are restricted by the Internal Revenue Code Section 401(a)(17) limitation on compensation.  Adoptionfirst quarter of the plan resulted in an unfunded initial projected benefit obligation of approximately $0.8 million that will be amortized over the average expected future years of service of active plan participants.2020.

The net periodic benefit cost for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 is as follows:


 Pension Benefits  Post-retirement Benefits 
 Three Months Ended  Nine Months Ended  Three Months Ended  Nine Months Ended  Pension Benefits  Post-retirement Benefits 
 September 30,  September 30,  September 30,  September 30,  
Three Months Ended
March 31,
  
Three Months Ended
March 31,
 
(000's omitted) 2019  2018  2019  2018  2019  2018  2019  2018  2020  2019  2020  2019 
Service cost $1,270  $1,154  $3,811  $3,396  $0  $0  $0  $0  $1,438  $1,270  $0  $0 
Interest cost  1,566   1,422   4,698   4,251   18   18   53   52   1,356   1,566   14   18 
Expected return on plan assets  (3,578)  (3,705)  (10,733)  (11,115)  0   0   0   0   (3,932)  (3,577)  0   0 
Amortization of unrecognized net loss  642   299   1,926   895   9   5   28   15   810   642   10   9 
Amortization of prior service cost  17   (60)  48   (225)  (45)  (45)  (134)  (134)  60   16   (45)  (45)
Net periodic benefit $(83) $(890) $(250) $(2,798) $(18) $(22) $(53) $(67) $(268) $(83) $(21) $(18)

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NOTE J:I:  EARNINGS PER SHARE

The two class method is used in the calculations of basic and diluted earnings per share.  Under the two class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared and participation rights in undistributed earnings.  The Company has determined that all of its outstanding non-vested stock awards are participating securities as of September 30, 2019.March 31, 2020.

Basic earnings per share are computed based on the weighted-average of the common shares outstanding for the period.  Diluted earnings per share are based on the weighted-average of the shares outstanding and the assumed exercise of stock options during the year.  The dilutive effect of options is calculated using the treasury stock method of accounting.  The treasury stock method determines the number of common shares that would be outstanding if all the dilutive options (those where the average market price is greater than the exercise price) were exercised and the proceeds were used to repurchase common shares in the open market at the average market price for the applicable time period.  There were approximately 0.2 million weighted-average anti-dilutive stock options outstanding for the three months ended March 31, 2020, compared to approximately 0.5 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30,March 31, 2019 compared to 0.4 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30, 2018 that were not included in the computation below.

The following is a reconciliation of basic to diluted earnings per share for the three and nine months ended September 30, 2019March 31, 2020 and 2018:2019:


 Three Months Ended  Nine Months Ended 
 September 30,  September 30,  
Three Months Ended
March 31,
 
(000's omitted, except per share data) 2019  2018  2019  2018  2020  2019 
Net income $39,218  $43,106  $126,179  $127,818  $40,134  $41,946 
Income attributable to unvested stock-based compensation awards  (102)  (191)  (331)  (563)  (146)  (109)
Income available to common shareholders $39,116  $42,915  $125,848  $127,255  $39,988  $41,837 
                        
Weighted-average common shares outstanding – basic  51,750   51,250   51,644   51,108   52,036   51,520 
Basic earnings per share $0.76  $0.84  $2.44  $2.49  $0.77  $0.81 
                        
Net income $39,218  $43,106  $126,179  $127,818  $40,134  $41,946 
Income attributable to unvested stock-based compensation awards  (102)  (191)  (331)  (563)  (146)  (109)
Income available to common shareholders $39,116  $42,915  $125,848  $127,255  $39,988  $41,837 
                        
Weighted-average common shares outstanding – basic  51,750   51,250   51,644   51,108   52,036   51,520 
Assumed exercise of stock options  496   608   522   590   420   541 
Weighted-average common shares outstanding – diluted  52,246   51,858   52,166   51,698   52,456   52,061 
Diluted earnings per share $0.75  $0.83  $2.41  $2.46  $0.76  $0.80 

Stock Repurchase Program
At its December 20172018 meeting, the Company’s Board of Directors (the “Board”) approved a stock repurchase program authorizing the repurchase of up to 2.5 million shares of the Company’s common stock in accordance with securities laws and regulations, through December 31, 2018.2019.  At its December 20182019 meeting, the Board approved a similar program for 2019,2020, authorizing the repurchase of up to 2.52.6 million shares of the Company’s common stock through December 31, 2019.2020. Any repurchased shares will be used for general corporate purposes, including those related to stock plan activities.  The timing and extent of repurchases will depend on market conditions and other corporate considerations as determined at the Company’s discretion.  The Company did 0t repurchase any shares under the authorized plan during the first ninethree months of 20192020 or 2018.2019.


NOTE K:J:  COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments consist primarily of commitments to extend credit and standby letters of credit.  Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee.  These commitments consist principally of unused commercial and consumer credit lines.  Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party.  The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to the Company’s normal credit policies.  Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.  The fair value of the standby letters of credit is immaterial for disclosure.

2324
Table of Contents

The contract amounts of commitments and contingencies are as follows:

(000's omitted) 
September 30,
2019
  
December 31,
2018
  
March 31,
2020
  
December 31,
2019
 
Commitments to extend credit $1,065,127  $1,134,576  $1,033,133  $1,143,780 
Standby letters of credit  37,968   33,169   39,284   37,872 
Total $1,103,095  $1,167,745  $1,072,417  $1,181,652 

The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of September 30, 2019,March 31, 2020, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. The range of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is believed to be between $0 and $1 million in the aggregate. Although the Company does not believe that the outcome of pending litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.


NOTE L:K:  FAIR VALUE

Accounting standards establish a framework for measuring fair value and require certain disclosures about such fair value instruments.  It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. exit price).  Inputs used to measure fair value are classified into the following hierarchy:

•Level 1 -Quoted prices in active markets for identical assets or liabilities.
•Level 2 -Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
•Level 3 -Significant valuation assumptions not readily observable in a market.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis.  There were no transfers between any of the levels for the periods presented.


 September 30, 2019 
(000's omitted) Level 1  Level 2  Level 3  Total Fair Value 
Available-for-sale investment securities:            
U.S. Treasury and agency securities $1,343,370  $163,277  $0  $1,506,647 
Obligations of state and political subdivisions  0   458,090   0   458,090 
Government agency mortgage-backed securities  0   411,816   0   411,816 
Corporate debt securities  0   2,540   0   2,540 
Government agency collateralized mortgage obligations  0   58,009   0   58,009 
Total available-for-sale investment securities  1,343,370   1,093,732   0   2,437,102 
Equity securities  461   0   0   461 
Interest rate swap agreements asset  0   1,095   0   1,095 
Interest rate swap agreements liability  0   (748)  0   (748)
Total $1,343,831  $1,094,079  $0  $2,437,910 

 March 31, 2020 
(000's omitted) Level 1  Level 2  Level 3  Total Fair Value 
Available-for-sale investment securities:            
U.S. Treasury and agency securities $1,986,718  $152,361  $0  $2,139,079 
Obligations of state and political subdivisions  0   501,708   0   501,708 
Government agency mortgage-backed securities  0   448,248   0   448,248 
Corporate debt securities  0   2,508   0   2,508 
Government agency collateralized mortgage obligations  0   50,339   0   50,339 
Total available-for-sale investment securities  1,986,718   1,155,164   0   3,141,882 
Equity securities  421   0   0   421 
Mortgage loans held for sale  0   3,272   0   3,272 
Commitments to originate real estate loans for sale  0   0   530   530 
Forward sales commitments  0   26   0   26 
Interest rate swap agreements asset  0   1,825   0   1,825 
Interest rate swap agreements liability  0   (1,261)  0   (1,261)
Total $1,987,139  $1,159,026  $530  $3,146,695 

2425


 December 31, 2018  December 31, 2019 
(000's omitted) Level 1  Level 2  Level 3  Total Fair Value  Level 1  Level 2  Level 3  Total Fair Value 
Available-for-sale investment securities:                        
U.S. Treasury and agency securities $1,896,931  $126,822  $0  $2,023,753  $1,878,705  $165,054  $0  $2,043,759 
Obligations of state and political subdivisions  0   459,154   0   459,154   0   512,208   0   512,208 
Government agency mortgage-backed securities  0   382,477   0   382,477   0   432,862   0   432,862 
Corporate debt securities  0   2,546   0   2,546   0   2,528   0   2,528 
Government agency collateralized mortgage obligations  0   68,119   0   68,119   0   53,071   0   53,071 
Total available-for-sale investment securities  1,896,931   1,039,118   0   2,936,049   1,878,705   1,165,723   0   3,044,428 
Equity securities  432   0   0   432   451   0   0   451 
Mortgage loans held for sale  0   83   0   83 
Interest rate swap agreements asset  0   793   0   793   0   851   0   851 
Interest rate swap agreements liability  0   (742)  0   (742)  0   (586)  0   (586)
Total $1,897,363  $1,039,252  $0  $2,936,615  $1,879,156  $1,165,988  $0  $3,045,144 

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

Available-for-sale investment securities and equity securities – The fair values of available-for-sale investment securities are based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using quoted market prices for similar securities or model-based valuation techniques.  Level 1 securities include U.S. Treasury obligations and marketable equity securities that are traded by dealers or brokers in active over-the-counter markets.  Level 2 securities include U.S. agency securities, mortgage-backed securities issued by government-sponsored entities, municipal securities and corporate debt securities that are valued by reference to prices for similar securities or through model-based techniques in which all significant inputs, such as reported trades, trade execution data, LIBOR swap yield curve, market prepayment speeds, credit information, market spreads, and security’s terms and conditions, are observable.  See Note D for further disclosure of the fair value of investment securities.

Mortgage loans held for sale – The Company has elected to value loans held for sale at fair value in order to more closely match the gains and losses associated with loans held for sale with the gains and losses on forward sales contracts.  Accordingly, the impact on the valuation will be recognized in the Company’s consolidated statement of income.  All mortgage loans held for sale are current and in performing status.  The fair value of mortgage loans held for sale is determined using quoted secondary-market prices of loans with similar characteristics and, as such, has been classified as a Level 2 valuation.  There were 0 mortgage loans held for sale at September 30, 2019.  The unpaid principal value of mortgage loans held for sale was approximately $0.1$3.0 million at March 31, 2020. The Company did 0t have any mortgage loans held for sale at December 31, 2018.2019. The unrealized gain on mortgage loans held for sale was recognized in othermortgage banking revenues in the consolidated statements of income and is immaterial.

Forward sales commitments – The Company enters into forward sales commitments to sell certain residential real estate loans.  Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated statement of condition.  The fair value of these forward sales commitments is primarily measured by obtaining pricing from certain government-sponsored entities and reflects the underlying price the entity would pay the Company for an immediate sale on these mortgages.  As such, these instruments are classified as Level 2 in the fair value hierarchy.

Commitments to originate real estate loans for sale – The Company enters into various commitments to originate residential real estate loans for sale.  Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated statement of condition.  The estimated fair value of these commitments is determined using quoted secondary market prices obtained from certain government-sponsored entities.  Additionally, accounting guidance requires the expected net future cash flows related to the associated servicing of the loan to be included in the fair value measurement of the derivative.  The expected net future cash flows are based on a valuation model that calculates the present value of estimated net servicing income.  The valuation model incorporates assumptions that market participants would use in estimating future net servicing income.  Such assumptions include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds.  The determination of expected net cash flows is considered a significant unobservable input contributing to the Level 3 classification of commitments to originate real estate loans for sale.


Interest rate swaps – The interest rate swaps are reported at their fair value utilizing Level 2 inputs from third parties. The fair value of the interest rate swaps are determined using prices obtained from a third party advisor.  The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts.  The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves.

25

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

26

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


 September 30, 2019  December 31, 2018  March 31, 2020  December 31, 2019 
(000's omitted) Level 1  Level 2  Level 3  Total Fair Value  Level 1  Level 2  Level 3  Total Fair Value  Level 1  Level 2  Level 3  Total Fair Value  Level 1  Level 2  Level 3  Total Fair Value 
Impaired loans $0  $0  $1,729  $1,729  $0  $0  $1,102  $1,102  $0  $0  $848  $848  $0  $0  $848  $848 
Other real estate owned  0   0   1,469   1,469   0   0   1,270   1,270 
Mortgage servicing rights  0   0   93   93   0   0   0   0   0   0   52   52   0   0   56   56 
Other real estate owned  0   0   1,258   1,258   0   0   1,320   1,320 
Total $0  $0  $3,080  $3,080  $0  $0  $2,422  $2,422  $0  $0  $2,369  $2,369  $0  $0  $2,174  $2,174 

Loans are generally not recorded at fair value on a recurring basis.  Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans.  Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, adjusted for non-observable inputs.  Thus, the resulting nonrecurring fair value measurements are generally classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and, therefore, such valuations classify as Level 3.

Other real estate owned (“OREO”) is valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less costs to sell. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the customer and customer’s business. Such discounts are significant, ranging from 9.0% to 85.7% at March 31, 2020 and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company recovers the carrying value of OREO through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond the Company’s control and may impact the estimated fair value of a property.

Originated mortgage servicing rights are recorded at their fair value at the time of sale of the underlying loan, and are amortized in proportion to and over the estimated period of net servicing income.  The fair value of mortgage servicing rights is based on a valuation model incorporating inputs that market participants would use in estimating future net servicing income.  Such inputs include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds and are considered to be unobservable and contribute to the Level 3 classification of mortgage servicing rights.  In accordance with GAAP, the Company must record impairment charges, on a nonrecurring basis, when the carrying value of a stratum exceeds its estimated fair value.  Impairment is recognized through a valuation allowance.  There is a valuation allowance at September 30, 2019 of approximately $0.30.2 million.  There ismillion 0 valuation allowanceand $0.3 million at March 31, 2020 and December 31, 2018.

Other real estate owned (“OREO”) is valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less costs to sell. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the customer and customer’s business. Such discounts are significant, ranging from 0.5% to 77.4% at September 30, 2019, and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company recovers the carrying value of OREO through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond the Company’s control and may impact the estimated fair value of a property.respectively.

The Company determines fair values based on quoted market values, where available, estimates of present values, or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including, but not limited to, the discount rate and estimates of future cash flows.  In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument.  The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis are as follows:

(000's omitted) 
Fair Value at
September 30, 2019
 Valuation TechniqueSignificant Unobservable Inputs 
Significant
Unobservable Input
Range
(Weighted Average)
  
Fair Value at
March 31, 2020
 Valuation TechniqueSignificant Unobservable Inputs 
Significant
Unobservable Input
Range
(Weighted Average)
 
Impaired loans $1,729 Fair value of collateralEstimated cost of disposal/market adjustment  9.0% - 40.4% (40.4%) $848 Fair value of collateralEstimated cost of disposal/market adjustment  9.0% - 35.0% (27.9%)
Other real estate owned  1,258 Fair value of collateralEstimated cost of disposal/market adjustment  0.5% - 77.4% (35.7%)  1,469 Fair value of collateralEstimated cost of disposal/market adjustment  9.0% - 85.7% (35.5%)
Commitments to originate real estate loans for sale  530 Discounted cash flowEmbedded servicing value  1%
Mortgage servicing rights  93 Discounted cash flowWeighted average constant prepayment rate  43.0%  52 Discounted cash flowWeighted average constant prepayment rate  43.0%
       Weighted average discount rate  2.69%       Weighted average discount rate  1.90%
       Adequate compensation $7/loan        Adequate compensation $7/loan 

2627

(000's omitted) 
Fair Value at
December 31, 2019
 Valuation TechniqueSignificant Unobservable Inputs 
Significant
Unobservable Input
Range
(Weighted Average)
 
Impaired loans $848 Fair value of collateralEstimated cost of disposal/market adjustment  9.0% - 35.0% (27.9%)
Other real estate owned  1,270 Fair value of collateralEstimated cost of disposal/market adjustment  9.0% - 85.7% (37.1%)
Mortgage servicing rights  56 Discounted cash flowWeighted average constant prepayment rate  52.8%
        Weighted average discount rate  3.00%
        Adequate compensation $7/loan 

(000's omitted) 
Fair Value at
December 31, 2018
 Valuation TechniqueSignificant Unobservable Inputs 
Significant
Unobservable Input
Range
(Weighted Average)
 
Impaired loans $1,102 Fair value of collateralEstimated cost of disposal/market adjustment  9.0% - 35.4% (28.8%)
Other real estate owned  1,320 Fair value of collateralEstimated cost of disposal/market adjustment  9.0% - 69.3% (23.8%)
The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that if changed could result in higher or lower fair value measurements of these assets as of the reporting date. The weighted average of the estimated cost of disposal/market adjustment for impaired loans was calculated by dividing the total of the book value of the collateral of the impaired loans classified as Level 3 by the total of the fair value of the collateral of the impaired loans classified as Level 3.  The weighted average of the estimated cost of disposal/market adjustment for other real estate owned was calculated by dividing the total of the differences between the appraisal values of the real estate and the book values of the real estate divided by the totals of the appraisal values of the real estate.

Certain financial instruments and all nonfinancial instruments are excluded from fair value disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.  The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at September 30, 2019March 31, 2020 and December 31, 20182019 are as follows:


 September 30, 2019  December 31, 2018  March 31, 2020  December 31, 2019 
(000's omitted) 
Carrying
Value
  
Fair
Value
  
Carrying
Value
  
Fair
Value
  
Carrying
Value
  
Fair
Value
  
Carrying
Value
  
Fair
Value
 
Financial assets:                        
Net loans $6,803,768  $6,971,242  $6,231,837  $6,247,939  $6,810,440  $7,063,785  $6,840,632  $7,028,663 
Financial liabilities:                                
Deposits  9,168,285   9,166,701   8,322,371   8,308,765   9,303,982   9,319,783   8,994,967   8,997,551 
Short-term borrowings  0   0   54,400   54,400 
Overnight Federal Home Loan Bank borrowings  0   0   8,300   8,300 
Securities sold under agreement to repurchase, short-term  233,333   233,333   259,367   259,367   204,991   204,991   241,708   241,708 
Other long-term debt  4,328   4,303   1,976   1,921 
Other Federal Home Loan Bank borrowings  3,727   3,789   3,750   3,755 
Subordinated notes payable  13,814   13,814   0   0   13,775   13,775   13,795   13,795 
Subordinated debt held by unconsolidated subsidiary trusts  77,320   77,320   97,939   97,939   77,320   77,320   77,320   77,320 

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

Loans have been classified as a Level 3 valuation.  Fair values for variable rate loans that reprice frequently are based on carrying values.  Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposits have been classified as a Level 2 valuation.  The fair value of demand deposits, interest-bearing checking deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date.  The fair value of time deposit obligations are based on current market rates for similar products.

Borrowings subordinated notes payableand subordinated debt held by unconsolidated subsidiary trusts have been classified as a Level 2 valuation.  The fair value of short-term borrowings and securities sold under agreement to repurchase, short-term, is the amount payable on demand at the reporting date.  Fair values for long-term debt subordinated notes payable and subordinated debt held by unconsolidated subsidiary trusts are estimated using discounted cash flows and interest rates currently being offered on similar securities.  The difference between the carrying values of long-term borrowingssubordinated notes payable and subordinated debt held by unconsolidated subsidiary trusts, and their fair values, are not material as of the reporting dates.

Other financial assets and liabilities – Cash and cash equivalents have been classified as a Level 1 valuation, while accrued interest receivable and accrued interest payable have been classified as a Level 2 valuation.  The fair values of each approximate the respective carrying values because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.

28


NOTE M:L:  DERIVATIVE INSTRUMENTS

The Company is party to derivative financial instruments in the normal course of its business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest rates.  These financial instruments have been limited to interest rate swap agreements, commitments to originate real estate loans held for sale and forward sales commitments.  The Company does not hold or issue derivative financial instruments for trading or other speculative purposes.

27

The Company enters into forward sales commitments for the future delivery of residential mortgage loans, and interest rate lock commitments to fund loans at a specified interest rate.  The forward sales commitments are utilized to reduce interest rate risk associated with interest rate lock commitments and loans held for sale.  Changes in the estimated fair value of the forward sales commitments and interest rate lock commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.  At inception and during the life of the interest rate lock commitment, the Company includes the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of the interest rate lock commitments.  These derivatives are recorded at fair value, which were immaterial at September 30, 2019March 31, 2020 and December 31, 2018.2019.  The effect of the changes to these derivatives for the three months ended March 31, 2020 and nine months then endedMarch 31, 2019 was also immaterial.

The Company acquired interest rate swaps in 2017 with notional amounts with certain commercial customers which totaled $16.8$16.0 million at September 30, 2019March 31, 2020 and $37.0$16.4 million at December 31, 2018.2019.  In order to minimize the Company’s risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps (pay fixed/receive floating swaps) with the Company’s counterparty totaling $16.8$16.0 million at September 30, 2019March 31, 2020 and $37.0$16.4 million at December 31, 2018.2019. At September 30,March 31, 2020, the weighted average receive rate of these interest rate swaps was 2.88%, the weighted average pay rate was 4.39% and the weighted average maturity was 5.9 years.  At December 31, 2019, the weighted average receive rate of these interest rate swaps was 4.01%3.72%, the weighted average pay rate was 4.38%4.39% and the weighted average maturity was 6.4 years.  At December 31, 2018, the weighted average receive rate of these interest rate swaps was 4.34%, the weighted average pay rate was 3.84% and the weighted average maturity was 5.56.1 years.  Hedge accounting has not been applied for these derivatives.  Since the terms of the swaps with the Company’s customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact ourthe Company’s results of operations.

The Company also acquired interest rate swaps in 2017 with notional amounts totaling $6.2 million at September 30, 2019,March 31, 2020, and $6.6$6.2 million at December 31, 2018,2019, that were designated as fair value hedges of certain fixed rate loans with municipalities which are recorded in loans in the consolidated statements of financial condition. At September 30, 2019,March 31, 2020, the weighted average receive rate of these interest rate swaps was 2.65%1.92%, the weighted average pay rate was 3.11% and the weighted average maturity was 13.813.3 years. At December 31, 2018,2019, the weighted average receive rate of these interest rate swaps was 2.92%2.47%, the weighted average pay rate was 3.11% and the weighted average maturity was 14.513.5 years.  The Company includes the gain or loss on the hedged items in interest and fees on loans, the same line item as the offsetting gain or loss on the related interest rate swaps. The effects of fair value accounting in the consolidated statementsstatement of income for the three and nine months ended September 30,March 31, 2020 and March 31, 2019 are immaterial.

As of September 30,March 31, 2020 and December 31, 2019, the following amounts were recorded in the consolidated statement of condition related to cumulative basis adjustments for fair value hedges:

(000’s omitted)      
  
Carrying
Amount of the
Hedged Assets
  
Cumulative Amount of Fair Value
Hedging Adjustment Included in the
Carrying Amount of the Hedged Assets
 
Line Item in the Consolidated Statement of Condition in Which the Hedged Item Is Included September 30, 2019  September 30, 2019 
Loans $6,307  $(347)
(000’s omitted)
 
Line Item in the Consolidated
Statement of Condition in Which
the Hedged Item Is Included
 
Carrying Amount of the Hedged
Assets
  
Cumulative Amount of Fair Value
Hedging Adjustment Included in the
Carrying Amount of the Hedged Assets
 
 March 31, 2020  December 31, 2019  March 31, 2020  December 31, 2019 
Loans $6,091  $6,390  $ (564)  $ (265) 

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Fair values of derivative instruments as of September 30,March 31, 2020 and December 31, 2019 are as follows:

(000’s omitted)September 30, 2019 March 31, 2020 
Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities 
Consolidated Statement of
Condition Location
 
Fair
Value
 
Consolidated Statement of
Condition Location
 
Fair
Value
 
Consolidated Statement of
Condition Location
 Fair Value 
Consolidated Statement of
Condition Location
 Fair Value 
Derivatives designated as hedging instruments under Subtopic 815-20              
Interest rate swapsOther assets $347    Other assets $564     
               
Derivatives not designated as hedging instruments under Subtopic 815-20               
Interest rate swapsOther assets  748 Accrued interest and other liabilities $748 Other assets 1,261 Accrued interest and other liabilities $1,261 
Commitments to originate real estate loans for saleOther assets 530     
Forward sales commitmentsOther assets 26     
Total derivatives  $1,095   $748   $2,381   $1,261 

(000’s omitted)December 31, 2019 
 Derivative Assets Derivative Liabilities 
 
Consolidated Statement of
Condition Location
 Fair Value 
Consolidated Statement of
Condition Location
 Fair Value 
Derivatives designated as hedging instruments under Subtopic 815-20        
Interest rate swapsOther assets $265     
          
Derivatives not designated as hedging instruments under Subtopic 815-20         
Interest rate swapsOther assets  586  Accrued interest and other liabilities $586 
Total derivatives  $851   $586 

The Company assessed its counterparty risk at September 30,March 31, 2020 and December 31, 2019 and determined any credit risk inherent in our derivative contracts was not material. InformationFurther information about the fair value of derivative financial instruments can be found in Note LK to these consolidated financial statements.

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NOTE N:M:  SEGMENT INFORMATION

Operating segments are components of an enterprise, which are evaluated regularly by the “chief operating decision maker” in deciding how to allocate resources and assess performance.  The Company’s chief operating decision maker is the President and Chief Executive Officer of the Company. The Company has identified Banking, Employee Benefit Services and All Other as its reportable operating business segments.  Community Bank, N.A. (the “Bank” or “CBNA”) operates the Banking segment that provides full-service banking to consumers, businesses, and governmental units in Upstate New York as well as Northeastern Pennsylvania, Vermont and Western Massachusetts.  Employee Benefit Services, which includes the operating subsidiaries Benefit Plans Administrative Services, LLC, BPAS Actuarial and Pension Services, LLC, BPAS Trust Company of Puerto Rico, Northeast Retirement Services, LLC (“NRS”), Global Trust Company, Inc. (“GTC”), and Hand Benefits & Trust Company, provides employee benefit trust, collective investment fund, retirement plan administration, fund administration, transfer agency, actuarial, VEBA/HRA, and health and welfare consulting services.  The All Other segment is comprised of: (a) wealth management services including trust services provided by the personal trust unit within the Bank, broker-dealer and investment advisory services provided by CISI and The Carta Group, Inc., as well as asset management provided by Nottingham Advisors, Inc., and (b) full-service insurance, risk management and employee benefit services provided by OneGroup.  The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies (See Note A, Summary of Significant Accounting Policies of the most recent Form 10-K for the year ended December 31, 20182019 filed with the SEC on March 1, 2019)2, 2020).

Information about reportable segments and reconciliation of the information to the consolidated financial statements follows:

(000's omitted) Banking  
Employee
Benefit Services
  All Other  Eliminations  Consolidated Total  Banking  
Employee
Benefit Services
  All Other  Eliminations  
Consolidated
Total
 
Three Months Ended September 30, 2019               
Three Months Ended March 31, 2020               
Net interest income $91,018  $209  $49  $0  $91,276  $89,763  $240  $51  $0  $90,054 
Provision for loan losses  1,751   0   0   0   1,751 
Provision for credit losses  5,594   0   0   0   5,594 
Noninterest revenues  17,790   24,830   15,143   (669)  57,094   18,680   25,925   15,536   (1,519)  58,622 
Amortization of intangible assets  1,439   1,667   854   0   3,960   1,417   1,494   756   0   3,667 
Acquisition expenses  6,061   0   0   0   6,061   369   0   0   0   369 
Other operating expenses  61,839   14,721   11,017   (669)  86,908   64,200   15,130   11,816   (1,519)  89,627 
Income before income taxes $37,718  $8,651  $3,321  $0  $49,690  $36,863  $9,541  $3,015  $0  $49,419 
Assets $11,398,191  $201,442  $74,169  $(76,505) $11,597,297  $11,633,330  $213,768  $76,525  $(114,640) $11,808,983 
Goodwill $670,023  $83,275  $20,312  $0  $773,610  $669,886  $83,275  $20,312  $0  $773,473 
Core deposit intangibles & Other intangibles $17,872  $39,440  $9,763  $0  $67,075  $15,001  $36,281  $8,164  $0  $59,446 
                                        
Three Months Ended September 30, 2018                    
Three Months Ended March 31, 2019                    
Net interest income $86,060  $102  $36  $0  $86,198  $86,715  $108  $36  $0  $86,859 
Provision for loan losses  2,215   0   0   0   2,215 
Provision for credit losses  2,422   0   0   0   2,422 
Noninterest revenues  18,002   23,815   14,737   (763)  55,791   17,348   24,670   14,447   (769)  55,696 
Amortization of intangible assets  1,535   1,970   922   0   4,427   1,483   1,769   878   0   4,130 
Acquisition expenses  (832)  0   0   0   (832)  534   0   0   0   534 
Other operating expenses  57,863   14,025   10,513   (763)  81,638   59,769   14,279   10,709   (769)  83,988 
Income before income taxes $43,281  $7,922  $3,338  $0  $54,541  $39,855  $8,730  $2,896  $0  $51,481 
Assets $10,440,732  $205,565  $66,470  $(53,200) $10,659,567  $10,699,384  $199,345  $71,047  $(53,309) $10,916,467 
Goodwill $629,916  $83,275  $20,288  $0  $733,479  $629,916  $83,275  $20,312  $0  $733,503 
Core deposit intangibles & Other intangibles $20,111  $46,514  $11,596  $0  $78,221  $17,113  $42,777  $11,026  $0  $70,916 

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(000's omitted) Banking  
Employee
Benefit Services
  All Other  Eliminations  Consolidated Total 
Nine Months Ended  September 30, 2019               
Net interest income $265,860  $448  $127  $0  $266,435 
Provision for loan losses  5,573   0   0   0   5,573 
Noninterest revenues  57,059   73,919   44,749   (2,231)  173,496 
Amortization of intangible assets  4,297   5,105   2,592   0   11,994 
Acquisition expenses  7,789   0   0   0   7,789 
Other operating expenses  182,186   43,985   33,034   (2,231)  256,974 
Income before income taxes $123,074  $25,277  $9,250  $0  $157,601 
                     
Nine Months Ended September 30, 2018                    
Net interest income $257,313  $264  $91  $0  $257,668 
Provision for loan losses  8,342   0   0   0   8,342 
Noninterest revenues  58,399   70,316   43,285   (2,159)  169,841 
Amortization of intangible assets  4,914   6,047   2,819   0   13,780 
Acquisition expenses  (782)  7   6   0   (769)
Other operating expenses  172,283   41,938   32,603   (2,159)  244,665 
Income before income taxes $130,955  $22,588  $7,948  $0  $161,491 

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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Bank System, Inc. (the “Company” or “CBSI”) as of and for the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, although in some circumstances the secondfourth quarter of 2019 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 30.31.  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 2020, “last year” and equivalent terms refer to calendar year 2019, “third“first quarter” refers to the three months ended September 30, 2019, “YTD” refers to the nine months ended September 30, 2019,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.  These forward-looking statements involve certain risks and uncertainties.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption, “Forward-Looking Statements,” on page 48.49.

Critical Accounting Policies

As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations.  The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance.  It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process.  These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period.  Actual results could meaningfully differ from these estimates.  Management believes that the critical accounting estimates include the allowance for loancredit losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation, and other-than-temporary impairment, the carrying value of goodwill and other intangible assets, and acquired loan valuations.  A summary of the accounting policies used by management is disclosed in Note A, “Summary of Significant Accounting Policies” on pages 65-75 of the most recent Form 10-K (fiscal year ended December 31, 2018)2019) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019.2, 2020. A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on pages 10-15 of this Form 10-Q.

Supplemental Reporting of Non-GAAP Results of Operations

The Company also provides supplemental reporting of its results on an “operating,” “adjusted” and“adjusted net” 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 non-impaired purchased loans, acquisition expenses, and the unrealized gain (loss) on equity securities, the net gain on sale of investment securities, and loss on debt extinguishment.securities.  Although “adjusted net income” as defined by the Company is a non-GAAP measure, the Company’s management believes this information helps investors understand the effect of acquisition and other non-recurring activity in its reported results.  Diluted adjusted net earnings per share were $0.88$0.80 in the thirdfirst quarter of 2020, compared to $0.85 in the first quarter of 2019, compared to $0.84 in the third quarter of 2018, a 4.8% increase.5.9% decrease.     Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 11.

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 to retail, commercial and municipal customers.  The Company’s banking subsidiary is Community Bank, N.A. (the “Bank” or “CBNA”).  The Company also provides employee benefit and trust related services via its Benefit Plans Administrative Services, Inc. (“BPAS”) subsidiary, and wealth management and insurance-related services.

The Company’s core operating objectives are: (i) grow the banking branch network, primarily through a disciplined acquisition strategy, and certain selective de novo expansions, (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 optimize interest rate risk, yield and liquidity, (iv) increase the noninterest component of total revenues through development of banking-related fee income, growth in existing financial services business units, and the acquisition of additional financial services and banking businesses, and (iv)(v) utilize technology to deliver customer-responsive products and services and improve efficiencies.

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Significant factors reviewed by management to evaluate achievement of the Company’s operating objectives and its operating results and financial condition include, but are not limited to: net income and earnings per share,share; return on assets and equity,equity; components of net interest margin,margin; noninterest revenues,revenues; noninterest expenses,expenses; asset quality,quality; loan and deposit growth,growth; capital management,management; performance of individual banking and financial services units,units; performance of specific product lines and customers,customers; liquidity and interest rate sensitivity,sensitivity; enhancements to customer products and services and their underlying performance characteristics,characteristics; technology advancements,advancements; market share,share; peer comparisons,comparisons; and the performance of recently acquired businesses.

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On October 21, 2019, the Company announced that it had entered into a definitive agreement to acquire Steuben Trust Corporation (“Steuben”), parent company of Steuben Trust Company, a New York State chartered bank headquartered in Hornell, New York, forYork.  Based on the Company’s closing stock price on April 30, 2020 of $62.49, the transaction was valued at approximately $106.8$106.7 million in Company stock and cash.  Steuben currently operates 14 branch locations in Western New York.  The acquisition will add 15 branch locations, extend the Company’s footprint into two new counties in Western New York State and enhance the Company’s presence in four Western New York State counties in which it currently operates. The Steuben shareholders approved the merger with the Company at its Special Meeting held on March 3, 2020.  The acquisition is expectedscheduled to close during the second quarter of 2020, pending both customary regulatory and Steuben shareholder approval. 2020. However, due to the novel coronavirus (“COVID-19”) crisis, it is uncertain as to whether or not the closing date of the merger may be delayed.The Company expects to incur certain one-time, transaction-related costs in 2019 and 2020 in connection with the Steuben acquisition.

On September 18, 2019, the Company, through its subsidiary, Community Investment Services, Inc. (“CISI”), completed its acquisition of certain assets of a practice engaged in the financial services business headquartered in Syracuse, New York. The Company paid $0.5 million in cash to acquire a customer list, and recorded a $0.5 million customer list intangible asset in conjunction with the acquisition.

On July 12, 2019, the Company completed its merger with Kinderhook Bank Corp. (“Kinderhook”), parent company of The National Union Bank of Kinderhook, headquartered in Kinderhook, New York, for $93.4 million in cash. The merger added 11 branch locations across a five county area in the Capital District of Upstate New York. The merger resulted in the acquisition of $642.9$642.8 million of assets, including $479.9 million of loans and $39.8 million of investment securities, as well as $568.1$568.2 million of deposits and $40.1$40.0 million in goodwill.

On January 2, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Wealth Resources Network, Inc. (“Wealth Resources”), a financial services business headquartered in Liverpool, New York. The Company paid $1.2 million in cash to acquire a customer list from Wealth Resources, and recorded a $1.2 million customer list intangible asset in conjunction with the acquisition.

ThirdFirst quarter and YTD net income decreased $1.8 million as compared to the 2018 timeframes by $3.9 million, or 9.0%, and $1.6 million, or 1.3%, respectively.first quarter of 2019.  Earnings per share of $0.75$0.76 for the thirdfirst quarter of 2019 was down $0.08 compared to2020 decreased $0.04 from the thirdfirst quarter of 2018, and 2019 YTD earnings per share of $2.41 was $0.05 lower than 2018 YTD earnings per share.2019.  The decreasesdecrease in net income and earnings per share werefor the quarter are primarily due tothe result of increases in noninterestthe provision for credit losses, operating expenses including acquisition expenses associated with the Kinderhook transaction and an increase in dilutedfully-diluted shares outstanding, partially offset in part by higherincreases in net interest income, a lower provision for loan losses, higher noninterest revenues and lowera decrease in income taxes.  ThirdFirst quarter and YTD net income adjusted to exclude acquisition expenses net gain on sale of investments,and unrealized gaingains and losses on equity securities and loss on debt extinguishment (“operating net income”) increased, decreased $1.9 million or 4.5%, as compared to the thirdfirst quarter of 2018 and increased $1.5 million, or 1.2%, compared to September YTD 2018.2019.  Earnings per share adjusted to exclude acquisition expenses net gain on sale of investment securities,and unrealized gaingains and losses on equity securities and loss on debt extinguishment (“operating earnings per share”) of $0.84$0.77 for the thirdfirst quarter increased $0.03decreased $0.04 compared to the thirdfirst quarter of 2018. Operating earnings per share of $2.45 for the first nine months of 2019 increased $0.01 compared to the prior year period.2019.

The Company’s loanLoans and deposit balancesdeposits increased on both an average and ending basis as compared to the corresponding prior year period and the fourthfirst quarter, of 2018.  The increase in loans was a resultreflective of the third quarter 2019 acquisition of Kinderhook acquisition completed in July 2019 combined withand organic growth.  The increase in deposit balances was also due primarily togrowth between the Kinderhook acquisition.periods.  The Company’s total cost of funds for the first nine months of 2019 increased 103 basis points from the year earlier period, as the rate paid on interest-bearing deposits increased 7 basis points, partially offset by an increase in noninterest bearing demand deposits and a 16 basis point decrease in the rate on borrowings both increased from the prior year period.first quarter.  The majority of borrowings are customer repurchase agreements, rather than wholesale borrowings obtained through capital markets and correspondent banks.  Customer repurchase agreements have deposit-like features and typically bear lower rates of interest than other types of wholesale borrowings.

The first quarter 2020 provision for loancredit losses of $1.8 million for the third quarter and $5.6 million for YTDwas $3.2 million higher than the first quarter of 2019, were $0.5 millionreflective of expected credit losses related to the COVID-19 pandemic and $2.8 million lower than comparable prior year periods, as the Company’sassociated rapid decline in economic conditions while asset quality metrics remained relatively stable.  Net charge-offs were $1.6 million for the thirdfirst quarter and $5.4 million for the first nine months of 2019,2020, compared to $1.7$2.6 million of net charge-offs for the prior year thirdfirst quarter and $5.8 million for the first nine months of 2018.  Third2019.  First quarter 20192020 nonperforming loan ratios were slightly higher than thirdincreased in comparison to the first quarter 2018 nonperforming loan ratios.of 2019 largely attributable to a single line of credit that matured on December 31, 2019 with a total outstanding balance of $9.9 million.  The Company is actively engaging with the borrower to process an extension.

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COVID-19 Pandemic

In early January 2020, the World Health Organization issued an alert that a coronavirus outbreak was emanating from the Wuhan Province in China.  Later in January, the first death related to the coronavirus, identified as COVID-19, occurred in the United States.  Over the course of the next several weeks, the outbreak continued to spread to various regions of the World prompting the World Health Organization to declare COVID-19 a global pandemic on March 11, 2020.  In the United States, the rapid spread of the COVID-19 virus invoked various Federal and State Authorities to make emergency declarations and issue executive orders to limit the spread of the disease.  Measures included restrictions on international and domestic travel, limitations on public gatherings, implementation of social distancing protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public.  Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted both domestic and international financial markets prompting Central Banks around the World to inject significant amounts of monetary stimulus into their economies.  In the United States, the Federal Reserve System’s Federal Open Market Committee, swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, including a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020.  In addition, the Federal Reserve rolled out various market support programs to ease the stress on financial markets.  The estimated value of the pandemic-related monetary stimulus package provided through the Federal Reserve’s activities was estimated at $4 trillion.  In addition, on March 27, 2020, the United States Congress passed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which is intended to provide approximately $2.5 trillion of direct support to U.S. citizens and businesses affected by the COVID-19 outbreak.  On April 21, 2020 an additional $484 billion of CARES Act funding was appropriated by Congress to provide additional support to the national economy and financial markets.

As the COVID-19 events unfolded throughout the first quarter of 2020, the Company implemented various plans, strategies and protocols to protect its employees, maintain services for customers, assure the functional continuity of the Company’s operating systems, controls and processes, and mitigate financial risks posed by changing market conditions.  In order to protect its employees and assure workforce continuity and operational redundancy, the Company imposed business travel restrictions, implemented quarantine and work from home protocols and physically separated, to the extent possible, the critical operations site workforce that are unable to work remotely.  To limit the risk of virus spread, the Company implemented drive-thru only and by appointment operating protocols for its extensive bank branch network.  The Company also maintained active communications with its primary regulatory agencies and critical vendors to assure all mission-critical activities and functions are being performed in line with regulatory expectations and the Company’s service standards.

Although there is a high degree of uncertainty around the magnitude and duration of the economic impact of the COVID-19 pandemic, the Company’s management believes that its financial position, including high levels of capital and liquidity, will allow it to successfully endure the negative economic impacts of the crisis.  The Company’s capital planning and capital management activities, coupled with its historically strong earnings performance and prudent dividend practices, have allowed it to build and maintain strong capital reserves.  At March 31, 2020, all of the Company’s regulatory capital ratios significantly exceeded all well-capitalized standards.  More specifically, the Company’s Tier 1 Leverage Ratio, a common measure to evaluate a financial institutions capital strength, was 11.10% at March 31, 2020, which represents over two times the well-capitalized regulatory standard of 5.0%.

In addition, management believes the Company’s liquidity position is strong.  The Company’s primary Bank subsidiary maintains a funding base largely comprised of core noninterest bearing demand deposit accounts and low cost interest-bearing savings, interest checking and money market deposit accounts with customers that operate, reside or work within its branch footprint.  At March 31, 2020, the Company’s cash and cash equivalents balances were $529.3 million and it maintained $260.4 million of availability at the Federal Reserve Bank’s discount window.  The Company also maintains an available-for-sale investment securities portfolio, comprised primarily of highly liquid U.S. Treasury securities, highly-rated municipal securities and U.S. agency-backed mortgage backed securities.  This portfolio not only generates interest income, but also serves as a ready source of liquidity and capital.  At March 31, 2020, the Company’s available-for-sale investment securities portfolio totaled $3.14 billion, $1.50 billion of which was unpledged as collateral.  Net unrealized gains on the portfolio were $155.3 million.  The Bank’s unused borrowing capacity at the Federal Home Loan Bank of New York at March 31, 2020 was $1.83 billion.  The Company did not experience significant draws on available working capital lines of credit and home equity lines of credit during the first quarter of 2020 due to the COVID-19 crisis.  During the first quarter of 2020, no significant or unusual customer activity was observed that portends unmanageable levels of stress on the Company’s liquidity profile. The Company also has and continues to participate in the CARES Act Paycheck Protection Program, a specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration.  The Paycheck Protection Program (“PPP”) provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs.  Through April 30, 2020, the Company has approved 3,314 PPP loans totaling $497.0million.  The Company experienced high levels of customer utilization of the PPP loan program, but also believes its liquidity resources are more than sufficient to meet the funding requirements of its borrowers.

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From a credit risk and lending perspective, the Company has taken actions to identify and assess its COVID-19 related credit exposures based on asset class and borrower type.  No specific COVID-19 related credit impairment was identified within the Company’s investment securities portfolio, including the Company’s municipal securities portfolio, during the first quarter of 2020.  With respect to the Company’s lending activities, the Company implemented a customer payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19 related challenges.  Through April 30, 2020, the Company granted payment deferral request for up to three months, for 4,376 consumer borrowers and 1,318 business borrowers, representing $734.6million of the Company’s loan balances.  Business lending, consumer direct, and consumer indirect loans in deferment status will continue to accrue interest on the deferred principal during the deferment period unless otherwise classified as nonaccrual. Consumer mortgage and home equity loans will not accrue interest on the deferred payments during the deferment period. Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans throughout the agreed upon deferral period.  These payment deferrals were also deemed to be an insignificant borrower concession, and therefore, not classified as troubled-debt restructured loans during the first quarter.  Borrowers that were delinquent in their payments to the Bank, prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case by case basis for troubled debt restructure classification and non-performing loan status.  In the instances where the Company granted a payment deferral to a delinquent borrower, the borrower’s delinquency status was frozen as of March 20, 2020, and their loans will continue to be reported as delinquent during the deferment period based on their delinquency status as of March 20, 2020.  The Company anticipates that the number and amount of COVID-19 financial hardship payment deferral requests will increase significantly during the second quarter of 2020.

The COVID-19 crisis is expected to continue to impact the Company’s financial results, as well as demand for its services and products during the second quarter of 2020 and potentially beyond.  The CARES Act is expected to have an immaterial impact as it relates to income taxes and the Company will continue to assess impacts in future periods.  The short and long-term implications of the COVID-19 crisis, and related monetary and fiscal stimulus measures, on the Company’s future revenues, earnings results, allowance for credit losses, capital reserves, and liquidity are unknown at this time.

Net Income and Profitability

As shown in Table 1, net income for the thirdfirst quarter and September YTD of $39.2$40.1 million and $126.2 million, respectively, decreased $3.9$1.8 million, or 9.0%4.3%, as compared to the thirdfirst quarter of 2018 and decreased $1.6 million, or 1.3%, compared to September YTD 2018.2019.  Earnings per share of $0.75 for the third quarter was $0.08 lower than the third quarter of 2018, while earnings per share$0.76 for the first nine months of 2019 of $2.41 was $0.05 lower thanquarter decreased $0.04 compared to the first nine monthsquarter of 2018.2019.  The decrease in net income and earnings per share for the quarter are primarily the result of higher noninterestincreases in the provision for credit losses, operating expenses including $6.1 million in acquisition expenses related to the Kinderhook acquisition and an increase in dilutedfully-diluted shares outstanding, partially offset in part by higherincreases in net interest income, a lower provision for loan losses, higher noninterest revenues and lowera decrease in income taxes.  The YTD decrease in net income and earnings per share was impacted by higher noninterest expenses including $7.8 million in acquisition expenses due to the Kinderhook transaction and an increase in diluted shares outstanding compared to the prior YTD period, partially offset by higher net interest income, a lower provision for loan losses, higher noninterest revenues and lower income taxes.  Higher noninterest revenues for the YTD period included a $4.9 million increase in net gain on sales of investment securities and a $0.10 per diluted share detriment from interchange fee reductions due to the limitations established by the Durbin amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Durbin Amendment”).  Operating net income of $44.0 million and $128.4$40.5 million for the thirdfirst quarter and September YTD, respectively, increaseddecreased $1.9 million, or 4.5%, as compared to the thirdfirst quarter of 2018 and increased $1.5 million, or 1.2%, compared to September YTD 2018.2019.  Operating earnings per share of $0.84 for the third quarter, was up $0.03 compared to the third quarter of 2018, while operating earnings per share of $2.45$0.77 for the first nine months of 2019,quarter was up $0.01down $0.04 compared to the first nine monthsquarter of 2018.2019.  See Table 11 for Reconciliation of GAAP to Non-GAAP Measures.

As reflected in Table 1, thirdfirst quarter net interest income of $91.3$90.1 million was up $5.1$3.2 million, or 5.9%3.7%, from the comparable prior year period.  Net interest income for the first nine months of 2019 increased $8.8 million, or 3.4%, versus the first nine months of 2018.  The quarterly and year-over-year improvement was primarily the result ofresulted from an increase in interest-earning assets, due to the Kinderhook acquisition as well as from organic loan growth, and an increasepartially offset by a decrease in the yield on interest-earning assets, partially offset by an increase in the average rate paid on interest-bearing liabilities, and an increase in interest-bearing liabilities.

The provision for loancredit losses for the thirdfirst quarter and September YTD decreased $0.5 million and $2.8increased $3.2 million as compared to the thirdfirst quarter and first nine months of 2018, respectively,2019, reflective of stable asset quality metrics.expected credit losses related to COVID-19 and the associated rapid decline in economic conditions.

ThirdFirst quarter and year-to-date noninterest revenues were $57.1$58.6 million, and $173.5 million, respectively, up $1.3$2.9 million, or 2.3%, from the third quarter of 2018 and up $3.7 million, or 2.2%5.3%, from the first nine monthsquarter of 2018.2019.  The increase compared to the prior quarter was primarily a result of an increaseincreases in debit interchange and ATM fees, mortgage banking revenue, employee benefit services revenue, insurancebenefits services revenue, wealth management services revenue, deposit service fee revenue and electronic bankinginsurance services revenue, partially offset by a decrease in deposit service charges and fees, other banking revenues.services revenues and unrealized gains and losses on equity securities.

Noninterest expenses of $93.7 million for the first quarter reflected an increase of $5.0 million, or 5.7%, from the first quarter of 2019.  Excluding acquisition-related expenses, first quarter 2020 operating expenses were $5.2 million, or 5.9%, higher as compared to the prior year first quarter.  The YTD increase in noninterest expenses for the quarter was due to an increase in employee benefit services revenue, insurance services revenuesalaries and the net gain on sale of investmentsbenefits, an increase in the second quarter of 2019,data processing and communications, occupancy and equipment expenses, and legal and professional fees, partially offset by a decrease in wealth management services revenueamortization of intangibles, business development and a decreasemarketing, acquisition expenses, and other expenses.  The increase in banking noninterest revenue duesalaries and benefits was related to a $6.7 million, or $0.10 per diluted share, impact of the Durbin amendment.

Noninterest expenses of $96.9 million and $276.8 million forincreased payroll costs associated with the third quarter and September YTD periods reflected an increase of $11.7 million, or 13.7%, from the third quarter of 20182019 Kinderhook Bank Corp. (“Kinderhook”) acquisition, merit-related pay increases, and an increase of $19.1 million, or 7.4%, from the first nine months of 2018.  Excluding acquisition-related expenses, 2019 operating expenses were $4.8 million, or 5.6%,in employee benefits, including significantly higher for the third quarter and $10.5 million, or 4.1%, higher for the year-to-date timeframe.  The increases in noninterest expenses were driven by an increase in compensation related expenses and other expenses due in part to operating a larger franchise subsequent to the Kinderhook acquisition.medical plan costs.

The effective incomeIncome tax rates were 21.1% and 19.9% for the third quarter and YTD 2019, respectively, as compared to 21.0% and 20.9% for theexpense decreased $0.3 million between comparable prior year periods.  The change in effective tax rates compared to the prior year periods wasquarters due to the impactlower levels of windfall tax benefits associatedrelated to stock-based compensation activity combined with accounting for share-based transactions.a lower amount of pretax income.

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A condensed income statement is as follows:

Table 1: Condensed Income Statements

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Three Months Ended
March 31,
 
(000's omitted, except per share data)20192018 20192018 2020  2019 
Net interest income$91,276$86,198 $266,435$257,668 $90,054  $86,859 
Provision for loan losses1,7512,215 5,5738,342
Provision for credit losses  5,594   2,422 
Noninterest revenues57,09455,791 173,496169,841  58,622   55,696 
Noninterest expenses96,92985,233 276,757257,676  93,663   88,652 
Income before income taxes49,69054,541 157,601161,491  49,419   51,481 
Income taxes10,47211,435 31,42233,673  9,285   9,535 
Net income$39,218$43,106 $126,179$127,818 $40,134  $41,946 
           
Diluted weighted average common shares outstanding52,38252,086 52,30151,925  52,646   52,195 
Diluted earnings per share$0.75$0.83 $2.41$2.46 $0.76  $0.80 

Net Interest Income

Net interest income is the amount by which interest and fees on earning assets (loans, investments, and cash equivalents) exceeds the cost of funds, which consists primarily of interest paid to the Company's depositors and on borrowings.  Net interest margin is the difference between the yield on earning assets and the cost of interest-bearing funds as a percentage of earning assets.

As shown in Table 2a,2, net interest income (with nontaxable income converted to a fully tax-equivalent basis) for the thirdfirst quarter was $92.3$91.1 million, a $5.0$3.2 million, or 5.7%3.7%, increase from the same period last year.  Net interest margin for the third quarter of 2019 was 3.73%, an increase of two basis points from the third quarter of 2018.  The increase in net interest income and net interest margin were driven byresulted from a $473.5$664.1 million increase in average interest-earninginterest-earnings assets, primarily related to the Kinderhook acquisition, and $43.7 million in organic loan growth, andpartially offset by a 12 basis point increasedecrease in the average yield on earning assets, from the third quarter of 2018, partially offset by a $282.0 million increase in average interest-bearing liabilities and a 14four basis point increase in the average rate paid on interest-bearing liabilities.liabilities, and a $446.1 million increase in average interest-bearing liabilities from the first quarter of 2019.  As reflected in Table 3, the third quarterfavorable impact of the volume increase in average interest-earning assets and increaseof $6.5 million was partially offset by the unfavorable impacts of the decrease in the average yield on earning assets had a $7.7of $2.2 million, favorable impactthe increase in the average rate paid on net interest income, whileinterest-bearing liabilities of $0.7 million, and the volume increase in interest-bearing liabilities and the rate increase on those liabilities had a $2.7 million unfavorable impact on net interest income.

September YTD net interest income, as reflected in Table 2b, of $269.4 million, increased $8.5 million, or 3.2%, from the year-earlier period.  Net interest margin for September YTD was 3.78%, an increase of six basis points from the prior year-to-date period.$0.4 million. The September YTD increases in net interest income and net interest margin resulted from a $148.0 million increase in average interest-earning assets, reflective of 3.65% for the Kinderhook acquisition and $41.4 million in organic loan growth, afirst quarter of 2020 was 15 basis point increasepoints lower than the comparable period of 2019.

The lower average yield on interest earning assets for the quarter was the result of a decrease in the average yield on earning assetsloans and a $30.8 million decrease ininvestments.  The average interest-bearing liabilities fromyield on loans for the first quarter decreased by 17 basis points compared to the first quarter of 2019 and the average yield on investments, including cash equivalents, decreased 13 basis points compared to the prior year partially offset byreflective of declines in market interest rates.  The decrease in the loan yield included the impact of $1.0 million in loan pre-payment fees in the first quarter of 2019.

The average rate on interest-bearing liabilities increased four basis points compared to the prior year quarter due to a 13seven basis point increase in the average rate paid on interest-bearing liabilities.  The increase in average interest-earning assets, increase in the average yield on earning assets and decrease in average interest-bearing liabilities had a $15.2 million favorable impact on September YTD net interest income, while the rate increase on interest-bearing liabilities had a $6.7 million unfavorable impact on net interest income.

The higher average yield on earning assets for the quarter was the result of an increase in the average yield on loans, partially offset by a decrease in the average yield on investments and interest-earning cash equivalents.  For the third quarter, the average yield on loans increased by 15 basis points, while the average yield on investments and interest-earning cash equivalents decreased two basis points compared to the prior year.  The 15 basis point increase in the yield on earning assets for the first nine months of 2019 was the result of an 18 basis point increase in the average yield on loans and a three basis point increase in the average yield on investments, including cash equivalents, compared to the first nine months of 2018.  The increase in the loan yield wasdeposits driven by an increase in the market rates on loans,rate for deposits and the impact of acquired Kinderhook deposits partially offset by a $1.8 million16 basis point decrease in acquired non-impaired loan accretion.  Loan prepayment fees, which are included in interest income on loans, increased $1.6 million compared to the prior YTD period.

The average rate on interest-bearing liabilities increased by 14 basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits increased 18 basis points and the average rate paid on borrowings increased 10 basis points from the period year quarter.  For the first nine months of 2019, the average rate on interest-bearing deposits increased 15 basis points from the comparable prior year period and the average rate on borrowings increased 20 basis points.borrowings.  The increasedecrease in the average cost of borrowings was primarily the result of lower cost FHLBa decrease in the variable rates paid on overnight borrowings representing a lower proportion of borrowings comparedand subordinated debt due to the prior year.

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decreases in market interest rates.

The thirdfirst quarter average balance of investments, including cash equivalents, increased $27.6 million compared to the prior year third quarter.  The cash equivalents component of average earning assets for the third quarter increased $639.0 million compared to the prior year third quarter.  The YTD average balance of investments, including cash equivalents, decreased $28.8$61.1 million as compared to YTD 2018.  The cash equivalents component of average earning assets for the YTD 2019corresponding prior year period increased $280.1 million compared to the prior year-to-date period.  The increase in cash equivalents for the quarteras investment purchases outpaced maturities, calls and YTD periods was due to the sale of available-for-sale Treasury securities during the second quarter when interest rates on the short-end of the yield curve dropped precipitously, the proceeds of which are held in interest-earning cash until more attractive securities reinvestment options become available.  The Company sold $590.2 million of its available-for-sale Treasury securities with a remaining maturity of less than five years, which generated realized gains of $4.9 million.principal payments.  Average loan balances increased $445.9$603.0 million for the quarter and $176.8 million YTD as compared to the prior year with $402.2growth in the business lending, consumer mortgage, consumer indirect, consumer direct, and home equity loan portfolios due primarily to acquired growth attributable to the acquisition of Kinderhook totaling $435.9 million, for the quarter and $135.4 million YTD as a result of the Kinderhook acquisition and the remainder due toalong with organic loan growth.

The quarterlyAverage interest-bearing deposits increased $490.4 million between the first quarter of 2019 and YTDthe first quarter of 2020 due to increases in average interest-bearinginterest checking, time, savings, and money market deposits due primarily to the acquisition of $384.6Kinderhook in the third quarter of 2019, which accounted for $441.4 million and $55.8 million, respectively, were a result of the Kinderhook transaction.  The Kinderhook transaction was responsible for the addition of $403.2 million in interest-bearing deposits for the quarter and $135.9 million for the YTD period.increase.  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, subordinated debt held by unconsolidated subsidiary trusts subordinated notes payable and securities sold under agreement to repurchase (“customer(customer repurchase agreements”)agreements), decreased $102.5 million and $86.6$44.3 million for the quarter and YTD periods respectively.  The decrease for the quarter and YTD periods wasprimarily due primarily to a decrease in average customer repurchase agreements, FHLB borrowings, and a decrease in average FHLB overnight borrowings, the redemption of $25.2 million of trust preferred subordinated debt held by Community Statutory Trust III in the third quarter of 2018 andunconsolidated subsidiary trusts associated with the redemption of $22.7$20.6 million of trust preferred subordinated debt held by MBVT Statutory Trust I (“MBVT I”) and the Kinderhook Capital Trust (“KCT”) induring the third quarter of 2019, partially offset by $13.8 million ofan increase in subordinated notes payable $2.4 million of FHLB long-term advances and $2.1 million of subordinated debt held by an unconsolidated subsidiary trust assumed within the Kinderhook acquisition.transaction in the third quarter of 2019.

Tables 2a and 2b
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Table 2 below sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated.  Interest income and yields are on a fully tax-equivalent basis (“FTE”) using marginal income tax rates of 24.5%24.1% and 24.4% in 20192020 and 2018,2019, respectively.  Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period.  Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment and other fees and the accretion of acquired loan marks.  Average loan balances include nonaccrual loans and loans held for sale.

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Table 2a:2: Quarterly Average Balance Sheet

Three Months Ended
September 30, 2019
 
Three Months Ended
September 30, 2018
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
 
(000's omitted except yields and rates)
Average
Balance
Interest
Avg.
Yield/Rate
Paid
 
Average
Balance
Interest
Avg.
Yield/Rate
Paid
 
Average
Balance
 Interest 
Avg.
Yield/Rate
Paid
 
Average
Balance
 Interest 
Avg
Yield/Rate
Paid
 
Interest-earning assets:                    
Cash equivalents$665,862$3,6702.19% $26,832$1081.60% $114,660 $256 0.90% $121,304 $695 2.33%
Taxable investment securities (1)
1,990,97912,1922.43% 2,574,11615,3132.36% 2,586,646 15,073 2.34% 2,574,902 15,392 2.42%
Nontaxable investment securities (1)
413,4373,6083.46% 441,7194,0813.67% 459,340 3,919 3.43% 403,359 3,656 3.68%
Loans (net of unearned discount)(2)
6,735,77680,1624.72% 6,289,86872,4724.57%  6,876,771 78,779 4.61%  6,273,798 73,946 4.78%
Total interest-earning assets9,806,05499,6324.03% 9,332,53591,9743.91% 10,037,417  98,027 3.93% 9,373,363  93,689 4.05%
Noninterest-earning assets1,423,865   1,287,337    1,449,967      1,314,345     
Total assets$11,229,919   $10,619,872   $11,487,384     $10,687,708     
                    
Interest-bearing liabilities:                    
Interest checking, savings, and money market deposits$5,542,3232,8080.20% $5,333,6571,5890.12% $5,668,619 2,373 0.17% $5,359,692 2,433 0.18%
Time deposits919,8203,0511.32% 743,9241,1750.63% 929,512 3,172 1.37% 748,040 1,674 0.91%
Customer repurchase agreements179,0623290.73% 216,3893930.72% 214,472 450 0.84% 248,449 441 0.72%
FHLB borrowings4,020181.78% 71,0404032.25% 23,777 108 1.84% 27,268 180 2.67%
Subordinated notes payable11,8511615.40% 000.00% 13,786 185 5.39% 0 0 0.00%
Subordinated debt held by unconsolidated subsidiary trusts96,0341,0044.15% 106,0541,1454.28%  77,320 653 3.40%  97,939 1,094 4.53%
Total interest-bearing liabilities6,753,1107,3710.43% 6,471,0644,7050.29% 6,927,486  6,941 0.40% 6,481,388  5,822 0.36%
Noninterest-bearing liabilities:                    
Noninterest checking deposits2,458,831   2,336,778   2,458,529     2,297,472     
Other liabilities193,109   147,796   199,200     182,535     
Shareholders' equity1,824,869   1,664,234    1,902,169      1,726,313     
Total liabilities and shareholders' equity$11,229,919   $10,619,872   $11,487,384     $10,687,708     
                    
Net interest earnings $92,261   $87,269    $91,086     $87,867   
                    
Net interest spread  3.60%   3.62%     3.53%     3.69%
Net interest margin on interest-earning assets  3.73%   3.71%     3.65%     3.80%
                    
Fully tax-equivalent adjustment $985   $1,071    $1,032     $1,008   

(1)Averages for investment securities are based on historical 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.

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Table 2b: Year-to-Date Average Balance Sheet

Nine Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2018
(000's omitted except yields and rates)
Average
Balance
Interest
Avg.
Yield/Rate
Paid
 
Average
Balance
Interest
Avg.
Yield/Rate
Paid
Interest-earning assets:       
Cash equivalents$375,818$6,3392.26% $95,761$1,1881.66%
Taxable investment securities (1)
2,319,99443,0372.48% 2,577,80746,2752.40%
Nontaxable investment securities (1)
404,74110,8793.59% 455,81612,6513.71%
Loans (net of unearned discount)(2)
6,436,474228,4084.74% 6,259,668213,4814.56%
Total interest-earning assets9,537,027288,6634.05% 9,389,052273,5953.90%
Noninterest-earning assets1,361,493   1,306,465  
Total assets$10,898,520   $10,695,517  
        
Interest-bearing liabilities:       
Interest checking, savings, and money market deposits$5,436,8547,8250.19% $5,438,5394,3530.11%
Time deposits811,3466,7011.10% 753,8532,9240.52%
Customer repurchase agreements215,4591,1890.74% 262,9991,1920.61%
FHLB borrowings10,9902082.53% 34,1795302.07%
Subordinated notes payable3,9941615.40% 000.00%
Subordinated debt held by unconsolidated subsidiary trusts97,2973,1614.34% 117,1703,6454.16%
Total interest-bearing liabilities6,575,94019,2450.39% 6,606,74012,6440.26%
Noninterest-bearing liabilities:       
Noninterest checking deposits2,361,569   2,298,008  
Other liabilities185,456   147,208  
Shareholders' equity1,775,555   1,643,561  
Total liabilities and shareholders' equity$10,898,520   $10,695,517  
        
Net interest earnings $269,418   $260,951 
        
Net interest spread  3.66%   3.64%
Net interest margin on interest-earning assets  3.78%   3.72%
        
Fully tax-equivalent adjustment $2,983   $3,283 

(1)Averages for investment securities are based on historical 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.

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

Table 3: Rate/Volume

 Three months ended September 30, 2019
versus September 30, 2018
Increase (Decrease) Due to Change in (1)
 
 Nine months ended September 30, 2019
versus September 30, 2018
Increase (Decrease) Due to Change in (1)
 
Three months ended March 31, 2020
versus March 31, 2019
Increase (Decrease) Due to Change in (1)
 
(000's omitted)VolumeRate
Net
Change
 VolumeRate
Net
Change
 Volume  Rate  
Net
Change
 
Interest earned on:                
Cash equivalents$3,509$53$3,562 $4,587$564$5,151 $(36) $(403) $(439)
Taxable investment securities(3,560)439(3,121) (4,743)1,505(3,238)  70   (389)  (319)
Nontaxable investment securities(254)(219)(473) (1,383)(389)(1,772)  486   (223)  263 
Loans5,2532,4377,690 6,1308,79714,927  6,953   (2,120)  4,833 
Total interest-earning assets (2)
4,7562,9027,658 4,36010,70815,068  6,522   (2,184)  4,338 
                   
Interest paid on:                   
Interest checking, savings and money market deposits641,1551,219 (1)3,4733,472  135   (195)  (60)
Time deposits3321,5441,876 2393,5383,777  474   1,024   1,498 
Customer repurchase agreements(68)4(64) (237)234(3)  (65)  74   9 
FHLB borrowings(315)(70)(385) (419)97(322)  (21)  (51)  (72)
Subordinated notes payable1610161 1610161  185   0   185 
Subordinated debt held by unconsolidated subsidiary trusts(106)(35)(141) (640)156(484)  (204)  (237)  (441)
Total interest-bearing liabilities (2)
2122,4542,666 (59)6,6606,601  413   706   1,119 
                   
Net interest earnings (2)
4,4515414,992 4,1464,3218,467 $6,088  $(2,869) $3,219 

(1)The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of such change in each component.
(2)
Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components.

Exclusive of the impact of PPP loans, the Company expects its second quarter net interest margin to decrease due to the significant and precipitous drop in the overnight Federal Funds and Prime interest rates in the latter half of the first quarter.  Expected decreases in average earning asset yields are unlikely to be fully offset by expected decreases in the average cost of funds.  Although the stated interest rate on PPP loans is fixed at 1.0%, the Company’s recognition of the interest income on origination fees, net of deferred origination costs, on PPP loans is uncertain at this time and will likely cause earning asset yield volatility as loans are forgiven by the SBA.

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Noninterest Revenues

The Company’s sources of noninterest revenues are of four primary types: 1) general banking services related to loans, deposits, and other core customer activities typically provided through the branch network and electronic banking channels (performed by CBNA); 2) employee benefit trust and benefit plan administration services (performed by BPAS and its subsidiaries); 3) wealth management services, comprised of personal trust services (performed by the trust unit within CBNA), investment products and services (performed by CISI)Community Investment Services Inc. (“CISI”) and The Carta Group, Inc.) and asset management services (performed by Nottingham Advisors, Inc.); and 4) insurance products and services (performed by OneGroup NY, Inc. (“OneGroup”)).  Additionally, the Company has periodicother transactions, most often netincluding unrealized gains or losses from the sale of investment securities and prepayment of debt instruments.

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on equity securities.

Table 4: Noninterest Revenues

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Three Months Ended
March 31,
 
(000's omitted)20192018 20192018 2020  2019 
Employee benefit services$24,329$23,265 $72,170$68,813 $25,366  $24,054 
Deposit service charges and fees11,32211,087 32,43532,306  10,273   10,435 
Electronic banking5,5985,040 16,34521,962
Mortgage banking  916   201 
Debit interchange and ATM fees  6,010   5,429 
Insurance services8,5278,270 24,71823,044  8,058   7,862 
Wealth management services6,3636,168 19,29019,370  7,134   6,349 
Other banking revenues9451,536 3,6283,942  895   1,335 
Subtotal57,08455,366 168,586169,437  58,652   55,665 
Gain on sale of investment securities, net0 4,8820
Unrealized gain on equity securities10743 28722
Loss on debt extinguishment0(318) 0(318)
Unrealized (loss) gain on equity securities  (30)  31 
Total noninterest revenues$57,094$55,791 $173,496$169,841 $58,622  $55,696 
           
Noninterest revenues/operating revenues (FTE basis) (1)
38.6%39.4% 38.9%39.9%  39.6%  39.1%
(1) For purposes of this ratio noninterest revenues exclude net realized gain on sale of investment securities, unrealized gain on equity securities, and loss on debt extinguishment. Operating revenues, a non-GAAP measure, is defined as net interest income on a fully-tax equivalent basis excluding acquired non-impaired loan accretion plus noninterest revenues excluding net gain on sale of investment securities, unrealized gain on equity securities, and loss on debt extinguishment.
(1) For purposes of this ratio noninterest revenues excludes unrealized gains and losses on equity securities. Operating revenues, a non-GAAP measure, is defined as net interest income on a fully-tax equivalent basis plus noninterest revenues, excluding unrealized gains and losses on equity securities and acquired non-impaired loan accretion.  See Table 11 for Reconciliation of GAAP to Non-GAAP Measures.

As displayed in Table 4, noninterest revenues excluding net gain on sale of investment securities and unrealized gain on equity securities, were $57.1 million for the third quarter of 2019 and $168.6$58.6 million for the first nine monthsquarter of 2019.2020.  This represents an increase of $1.7$2.9 million, or 3.1%5.3%, for the quarter and a decrease of $0.9 million, or 0.5%, for the YTD period in comparison to the equivalent 2018 periods.same 2019 timeframe.  The increase for the quarterly period was driven by an increasea result of increases in banking noninterest revenue, employee benefitbenefits services revenue, wealth management services revenue, and insurance services revenue, deposit service fee revenue and electronic banking revenue, partially offset by a decrease in other banking services revenue.  The decrease for the YTD period was due to the impact that the decrease in debit card-related revenue due to the Durbin amendment hadunrealized gains and losses on electronic banking revenue, a decrease in wealth management services revenue and a decrease in other banking services revenues, partially offset by increases in employee benefit services revenue, insurance services revenue and deposit service fee revenue.  In addition to noninterest revenues from recurring banking noninterest revenue and financial services revenues, the Company sold $590.2 million of its available-for-sale Treasury securities in the second quarter of 2019 resulting in a net realized gain of $4.9 million.equity securities.

General recurring bankingBanking noninterest revenue of $17.9 million for the third quarter and $52.4$18.1 million for the first nine monthsquarter of 20192020 increased $0.2$0.7 million, or 1.1%, and decreased $5.8 million, or 10.0%, respectively,4.0% as compared to the corresponding prior year periods.  The quarterlyperiod.  This year-over-year increase was primarily driven by an increase in deposit service fees and electronic banking due to an expanded customer based following the Kinderhook transaction, partially offset by a decreaseincreases in mortgage banking revenue, between the periods. The YTD decrease was primarily driven by the impactreflective of the Durbin amendment mandatedCompany’s increased commitment to sell secondary market eligible residential mortgage loans, and debit interchange price restrictions that were effective at the beginningand ATM fees, reflective of the third quarteraddition of 2018,new deposit relationships from the Kinderhook acquisition, partially offset by the impact of the Kinderhook acquisitiondecreases in the third quarter of 2019.other banking revenue and deposit service charges and fees.

Employee benefit services revenue increased $1.1$1.3 million, or 4.6%5.5%, and $3.4 million, or 4.9%, for the three and nine months ended September 30, 2019, respectively, as compared to the prior year periods.  This growthfirst quarter primarily related to growthincreases in the collective investment fundplan administration, actuarial and the institutionalrecord-keeping fees, as well as increases in employee benefit trust business.  Insurance servicesand transfer agent fees.  Wealth management revenue was up $0.3$0.8 million, or 3.1%12.4%, as compared to the prior year first quarter primarily driven by increases in investment management and $1.7 million, or 7.3%, for the third quarter and YTD periods, respectively. Wealth managementtrust services revenues.  Insurance services revenue was up $0.2 million, or 3.2%2.5%, for the thirdfirst quarter of 2019, but was down $0.1 million for 2019 YTD2020 as compared to the same time periodfirst quarter of 2018.2019 due primarily to an increase in group medical and property and casualty insurance revenues.

The ratio of noninterest revenues to operating revenues (FTE basis) was 38.6%39.6% for the quarter and 38.9%ended March 31, 2020 versus 39.1% for the nine months ended September 30, 2019, respectively, versus 39.4% and 39.9% for the comparable periodsequivalent period of 2018.2019.  The decrease for the year-to-date periodincrease is due to a function of a decrease of 0.5%5.4% increase in adjusted noninterest revenues, primarily due to the impact of the Durbin amendment mandated debit interchange price restrictions, while adjusted net interest income (FTE basis) increased 4.0%3.7%.

Due to the economic impacts of the COVID-19 crisis, the Company expects that its noninterest revenues will decrease in the second quarter of 2020 and potentially beyond.  Due to decreased levels of commerce, deposit service fees, including debit card related interchange revenues will likely decrease in the second quarter of 2020.  Wealth management revenues are also likely to decrease in the second quarter of 2020 due to a decrease in asset-based fees and a general decline in the U.S. and international equity markets.

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Noninterest Expenses

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.

Table 5: Noninterest Expenses

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Three Months Ended
March 31,
 
(000's omitted)20192018 20192018 2020  2019 
Salaries and employee benefits$56,061$51,062 $163,448$155,323 $58,251  $53,379 
Occupancy and equipment9,8019,770 29,70829,738  10,739   10,288 
Data processing and communications10,67510,509 30,47529,463  10,413   9,399 
Amortization of intangible assets3,9604,427 11,99413,780  3,667   4,130 
Legal and professional fees2,5952,522 7,9998,047  3,151   2,720 
Business development and marketing2,6042,587 8,5327,301  2,513   2,788 
Acquisition expenses6,061(832) 7,789(769)  369   534 
Other5,1725,188 16,81214,793  4,560   5,414 
Total noninterest expenses$96,929$85,233 $276,757$257,676 $93,663  $88,652 
    
Operating expenses(1)/average assets
3.07%3.05% 3.15%3.06%  3.14%  3.19%
Efficiency ratio(2)
58.8%58.0% 59.2%57.7%  60.4%  59.1%

(1)Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses and amortization of intangibles.  See Table 11 for Reconciliation of GAAP to Non-GAAP Measures.
(2)
Efficiency ratio, a non-GAAP measure, is calculated as operating expenses as defined in (1) above divided by net interest income on a fully tax-equivalent basis excluding acquired non-impaired loan accretion plus noninterest revenues excluding net gain on sale of investment securities, unrealized gains and losses on equity securities, and loss on debt extinguishment.securities.  See Table 11 for Reconciliation of GAAP to Non-GAAP Measures.

As shown in Table 5, the Company recorded noninterest expenses of $96.9 million and $276.8$93.7 million for the thirdfirst quarter and YTD periods of 2019, respectively,2020, representing an increase of $11.7$5.0 million, or 13.7%, and $19.1 million, or 7.4%5.7%, from the prior year periods.  Acquisition-relatedfirst quarter.  Included in the first quarter 2020 noninterest expenses are $0.2 million of acquisition-related expenses associated with the Kinderhook acquisition and $0.2 million of $6.1acquisition-related expenses associated with the pending Steuben Trust Corporation (“Steuben”) acquisition.  This compares to $0.5 million and $7.8 million are includedof acquisition-related expenses associated with the Kinderhook acquisition in thirdthe first quarter and YTD 2019 noninterest expenses, respectively.of 2019.  Salaries and employee benefits increased $5.0$4.9 million, or 9.8%, and $8.1 million, or 5.2%9.1%, for the thirdfirst quarter and YTD periods of 2019, respectively,2020 as compared to the corresponding periodsperiod of 2018. The increase in salaries and benefits was due primarily to an increase in average full-time equivalent employees due to2019 reflective of the increased payroll costs associated with the third quarter 2019 Kinderhook acquisition, annual merit-based personnel costmerit-related pay increases, and an increase in employee benefitbenefits, including significantly higher medical plan costs including a significant.  The remaining increase in employee health care costs.  The remaining change to noninterestoperating expenses can be attributed to occupancy and equipment (up slightly for the quarter and down slightly YTD),higher data processing and communications (up $0.2 million for the quarter$1.0 million), occupancy and $1.0 million YTD)equipment (up $0.5 million) and legal and professional fees (up $0.4 million), partially offset by lower other expenses (down $0.8 million) primarily related to a decrease in FDIC insurance premiums, amortization of intangible assets (down $0.5 million for the quartermillion) and $1.8 million YTD), legal and professional fees (up $0.1 million for the quarter and down slightly YTD), business development and marketing (up slightly for(down $0.3 million).  These remaining increases were primarily the quarter and $1.2 million YTD) and otherresult of the expenses (down slightly for the quarter and up $2.0 million YTD).  Included in other expenses was an increase in expense associated with operating an expanded branch network from the non-service related components of net periodic pension benefit (up $0.7 million for the quarter and $2.1 million YTD).Kinderhook acquisition.

The Company’s efficiency ratio (as defined in the table above) was 58.8%60.4% for the thirdfirst quarter 0.8%of 2020, 1.3% unfavorable to the comparable quarter of 2018.2019.  This resulted from operating expenses (as described above) increasing 6.5%6.7%, while operating revenuesrevenue (as described above) increased by a lesser 5.0%4.3%.  The efficiency ratio of 59.2% for the first nine months of 2019 was 1.5% unfavorable compared to the first nine months of 2018 due to 5.0% higher operating expenses (as described above), while operating revenues (as described above) increased by a lesser 2.2% including the impact of the Durbin-related reductions in interchange revenues.  Current year operating expenses, excluding intangible amortization and acquisition expenses, as a percentage of average assets increased twodecreased five basis points versus the prior year quarter.  First quarter and was nine basis points higher than the prior year-to-date period.  Operatingoperating expenses (as defined above) increased 6.5% for the quarter and 5.0% for the year-to-date period,6.7% year-over-year, while average assets increased 5.7%7.5%.

Income Taxes

The first quarter 2020 effective income tax rate was 18.8%, compared to 18.5% for the first quarter of 2019.  The increase in the rate is attributable to a lower level of benefit related to stock based compensation activity in the first quarter of 2020.  The Company recorded a $1.0 million and increased 1.9%$1.7 million reduction in income tax expense associated with the stock-based compensation tax benefits for the year-to-date period.first quarter of 2020 and 2019, respectively. The effective tax rates adjusted for stock-based compensation tax benefits were 20.9% for the first quarter of 2020 and 21.8% for the first quarter of 2019.

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Income Taxes

The third quarter and YTD 2019 effective income tax rates were 21.1% and 19.9%, respectively, as compared to the 21.0% and 20.9% for the comparable periods of 2018.  The increase in the third quarter 2019 effective income tax rate is attributable to a slight decrease in the windfall tax benefit associated with the accounting for share-based transactions.  The decrease in the YTD 2019 effective income tax rate is attributable to an increase in the YTD windfall tax benefit as compared to the prior year period, combined with lower state taxes.  The effective tax rate adjusted to exclude windfall tax benefits was 21.5% for both third quarter and YTD 2019, as compared to 21.5% and 22.2% for the comparable periods of 2018, respectively.

Investment SecuritiesInvestments

The carrying value of investmentsinvestment securities (including unrealized gains and losses on available-for-sale securities) was $2.48$3.19 billion at the end of the thirdfirst quarter, a decreasean increase of $499.9$97.0 million from December 31, 20182019 and $466.3$219.2 million higher than March 31, 2019.  The carrying value of cash equivalents was $342.3 million at the end of the first quarter, an increase of $299.1 million from December 31, 2019 and $1.1 million lower than September 30, 2018.March 31, 2019.  The book value (excluding unrealized gains and losses) of investmentsinvestment securities decreased $561.3$25.4 million from December 31, 20182019 and decreased $564.4increased $71.6 million from September 30, 2018.March 31, 2019.  During the first nine monthsquarter of 2019,2020, the Company purchased $55.3$23.3 million of government agency mortgage-backed securities with an average yield of 3.19%, $55.52.69% and $11.3 million of obligations of state and political subdivisions with an average fully tax-equivalent yield of 3.52% and $49.9 million in U.S. agency securities with an average yield of 2.49%3.37%.  The Company also acquired $37.7 million of available-for-sale securities and $2.1 million of equity and other securities as part of the Kinderhook transaction.  These additions were offset by $148.9proceeds of $62.2 million offrom investment maturities, calls, and principal payments during the first ninethree months of 2019, and the sale of $590.2 million of available-for-sale Treasury securities with a remaining maturity of less than five years and a 2.09% yield to maturity.  The sale of investment securities in the second quarter of 2019 resulted in a $4.9 million net realized gain.  The effective duration of the securities portfolio was 2.5 years at the end of the third quarter of 2019, as compared to 2.7 years at year end 2018 and 2.9 years at the end of the third quarter of 2018.2020.

The change in the carrying value of investmentsinvestment securities is also impacted by the amount of net unrealized gains or losses.  At September 30, 2019,March 31, 2020, the portfolio had a $46.1$156.2 million net unrealized gain, an increase of $61.4$122.4 million from the unrealized lossgain at December 31, 20182019 and a $98.1$147.6 million increase from the unrealized lossgain at September 30, 2018.March 31, 2019.  These changes in the net unrealized position of the portfolio were principally driven by the movements in marketmedium to long-term interest rates.

Table 6: Investment Securities

September 30, 2019 December 31, 2018 September 30, 2018 March 31, 2020  December 31, 2019  March 31, 2019 
(000's omitted)
Amortized
Cost
Fair
Value
 
Amortized
Cost
Fair
Value
 
Amortized
Cost
Fair
Value
 
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
  
Amortized
Cost
  
Fair
Value
 
                  
Available-for-Sale Portfolio:                         
U.S. Treasury and agency securities$1,482,739$1,506,647 $2,036,474$2,023,753 $2,039,086$1,998,095 $2,016,500  $2,139,079  $2,030,060  $2,043,759  $2,033,399  $2,034,972 
Obligations of state and political subdivisions442,942458,090 453,640459,154 473,048475,365  485,755   501,708   497,852   512,208   423,916   433,159 
Government agency mortgage-backed securities406,329411,816 390,234382,477 369,970358,063  433,129   448,248   428,491   432,862   389,154   386,543 
Corporate debt securities2,5422,540 2,5882,546 2,6032,550  2,512   2,508   2,527   2,528   2,572   2,553 
Government agency collateralized mortgage obligations57,45258,009 69,34268,119 73,11270,706  48,681   50,339   52,621   53,071   66,226   65,716 
Total available-for-sale portfolio2,392,0042,437,102 2,952,2782,936,049 2,957,8192,904,779  2,986,577   3,141,882   3,011,551   3,044,428   2,915,267   2,922,943 
                               
Equity and other Securities:                               
Equity securities, at fair value251461 251432 251498  251   421   251   451   251   464 
Federal Home Loan Bank common stock6,912 8,7688,768 6,3436,343  6,857   6,857   7,246   7,246   6,308   6,308 
Federal Reserve Bank common stock31,992 30,69030,690 30,69030,690  30,922   30,922   30,922   30,922   30,690   30,690 
Other equity securities, at adjusted cost4,5255,275 4,9695,719 4,9975,747  4,549   5,299   4,546   5,296   4,992   5,742 
Total equity and other securities43,68044,640 44,67845,609 42,28143,278  42,579   43,499   42,965   43,915   42,241   43,204 
                               
Total investments$2,435,684$2,481,742 $2,996,956$2,981,658 $3,000,100$2,948,057 $3,029,156  $3,185,381  $3,054,516  $3,088,343  $2,957,508  $2,966,147 

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Loans

As shown in Table 7, loans ended the thirdfirst quarter at $6.85$6.87 billion, up $552.3$600.0 million, or 8.8%9.6%, from one year earlier and up $572.1down $24.5 million, or 9.1%0.4%, from the end of 2018.2019.  The growth during the last nine and twelve months was attributable to both organic and acquired growth, with $471.7growth. $425.9 million of the increase was attributable to the Kinderhook acquisition.acquisition combined with organic growth in the business lending, consumer mortgage and consumer indirect portfolios, partially offset by organic decreases in the home equity and consumer direct portfolios. The decrease in loans during the first three months of 2020 occurred primarily in the consumer indirect, consumer direct and consumer mortgage portfolios, while the business lending and home equity portfolios increased.

Table 7: Loans

(000's omitted)September 30, 2019 December 31, 2018 September 30, 2018 March 31, 2020  December 31, 2019  March 31, 2019 
Business lending$2,779,61240.6% $2,396,97738.2% $2,403,62438.2% $2,789,130   40.6% $2,775,876   40.3% $2,410,477   38.5%
Consumer mortgage2,405,19135.1% 2,235,40835.6% 2,220,02235.2%  2,424,656   35.3%  2,430,902   35.3%  2,237,430   35.7%
Consumer indirect1,091,98015.9% 1,083,20717.2% 1,098,94317.4%  1,087,879   15.9%  1,113,062   16.1%  1,070,840   17.1%
Consumer direct187,3792.7% 178,8202.8% 184,3492.9%  177,844   2.6%  184,378   2.7%  173,042   2.7%
Home equity389,0295.7% 386,7096.2% 393,9506.3%  386,583   5.6%  386,325   5.6%  374,297   6.0%
Total loans$6,853,191100.0% $6,281,121100.0% $6,300,888100.0% $6,866,092   100.0% $6,890,543   100.0% $6,266,086   100.0%

The business lending portfolio consists of general-purpose business lending to commercial and industrial customers, municipal lending, mortgages on commercial property, and dealer floor plan financing.  The business lending portfolio increased $376.0$378.7 million, or 15.6%15.7%, from September 30, 2018 and increased $382.6 million from DecemberMarch 31, 2018,2019, with $327.5$290.8 million of the increase from Kinderhook.Kinderhook, and increased $13.3 million, or 0.5%, from December 31, 2019, due to organic growth.  Highly competitive conditions continue to prevail in the markets in which the Company operates.  The Company operatesstrives to generate growth in highly competitive markets forits business loansportfolio in a manner that adheres to its goals of maintaining strong asset quality and investsproducing profitable margins.  The Company continues to invest in additional personnel, technology and business development resources to generate organic growthfurther strengthen its capabilities in its business lending portfolio while adhering to its goals or maintaining strong asset quality and producing profitable margins.this important product category.

Consumer mortgages increased $185.2$187.2 million, or 8.3%8.4%, from one year ago, with $111.9 million of the increase from Kinderhook, and increased $169.8decreased $6.2 million or 7.6%, from December 31, 2018.  Excluding the $120.0 million in consumer mortgages from Kinderhook, consumer mortgages increased $65.2 million, or 2.9%, from one year ago and increased $49.8 million, or 2.2%, from December 31, 2018.2019.  Consumer mortgage volume has been relatively strong over the last several years due to historically low long-term rates and comparatively stable real estate valuations in the Company’s primary markets.  Interest rate levels and expected duration continue to be the most significant factors in determining whether the Company chooses to retain, versus sell and service, portions of its new mortgage production.  The Company is currently holding primarily all of its new consumer mortgage production due to current market conditions.  Home equity loans decreased $4.9increased $12.3 million, or 1.2%3.3%, from one year ago, with $16.2 million from Kinderhook, and increased $2.3$0.3 million, or 0.6%0.1%, from December 31, 2018, including2019.  Similar to refinance origination volumes in the $16.6 million of home equity loans acquired withCompany’s consumer mortgage portfolio, interest rates have impacted the Kinderhook transaction.  The Company continues to experience a low level of utilization of the Company’s home equity loans due to the current level of market interest rates.loan products.

Consumer installment loans, both those originated directly in the branches (referred to as “consumer direct”) and indirectly in automobile, marine, and recreational vehicle dealerships (referred to as “consumer indirect”), decreased $3.9increased $21.8 million, or 0.3%1.8%, from one year ago, with $7.0 million from Kinderhook, and increased $17.3decreased $31.7 million, or 1.4%2.4%, from December 31, 2018, with $7.6 million of the increase relating to consumer direct loans acquired with the Kinderhook transaction.2019.  Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable, in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network.  Consumer direct loans provide attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category.

Due to the COVID-19 crisis and its related impact on business activities, the demand for consumer loans and credit has decreased significantly.  The ultimate impact the decrease in loan demand will have on the Company’s loan balances in future quarters is uncertain at this time.  The Company’s business lending balances will be favorably impacted during the second quarter of 2020 due to originations associated with the high demand for PPP loans.  However, the longer term implications on business lending loan demand are highly uncertain at this time.

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Asset Quality

Table 8 below exhibits the major components of nonperforming loans and assets and key asset quality metrics for the periods ending September 30,March 31, 2020 and 2019 and 2018 and December 31, 2018.2019.

Table 8: Nonperforming Assets

(000's omitted)
September 30,
2019
 
December 31,
2018
 
September 30,
2018
Nonaccrual loans     
Business lending$8,547 $8,370 $7,046
Consumer mortgage13,059 12,262 12,353
Consumer indirect0 0 0
Consumer direct54 0 0
Home equity1,950 1,912 2,583
Total nonaccrual loans23,610 22,544 21,982
Accruing loans 90+ days delinquent     
Business lending1,186 179 355
Consumer mortgage3,147 1,625 1,982
Consumer indirect209 292 209
Consumer direct43 52 20
Home equity479 307 385
Total accruing loans 90+ days delinquent5,064 2,455 2,951
Nonperforming loans     
Business lending9,733 8,549 7,401
Consumer mortgage16,206 13,887 14,335
Consumer indirect209 292 209
Consumer direct97 52 20
Home equity2,429 2,219 2,968
Total nonperforming loans28,674 24,999 24,933
Other real estate owned (OREO)1,258 1,320 1,142
Total nonperforming assets$29,932 $26,319 $26,075
      
Nonperforming loans / total loans0.42% 0.40% 0.40%
Nonperforming assets / total loans and other real estate0.44% 0.42% 0.41%
Delinquent loans (30 days old to nonaccruing) to total loans0.85% 1.00% 0.93%
Net charge-offs to average loans outstanding (quarterly)0.10% 0.21% 0.11%
Legacy net charge-offs to average legacy loans outstanding (quarterly)0.12% 0.24% 0.12%
Provision for loan losses to net charge-offs (quarterly)107% 75% 130%
Legacy provision for loan losses to net charge-offs (quarterly) (1)
51% 76% 138%
(1)Legacy loans exclude loans acquired after January 1, 2009.  These ratios are included for comparative purposes to prior periods.
  March 31,  December 31,  March 31, 
(000's omitted) 2020  2019  2019 
Nonaccrual loans         
Business lending $4,394  $4,410  $7,401 
Consumer mortgage  12,674   12,517   11,748 
Consumer indirect  0   0   0 
Consumer direct  52   52   0 
Home equity  1,926   1,856   2,103 
Total nonaccrual loans  19,046   18,835   21,252 
Accruing loans 90+ days delinquent            
Business lending  10,111   2,299   134 
Consumer mortgage  1,821   2,329   2,247 
Consumer indirect  418   156   234 
Consumer direct  62   76   66 
Home equity  324   566   338 
Total accruing loans 90+ days delinquent  12,736   5,426   3,019 
Nonperforming loans            
Business lending  14,505   6,709   7,535 
Consumer mortgage  14,495   14,846   13,995 
Consumer indirect  418   156   234 
Consumer direct  114   128   66 
Home equity  2,250   2,422   2,441 
Total nonperforming loans  31,782   24,261   24,271 
Other real estate owned (OREO)  1,469   1,270   1,524 
Total nonperforming assets $33,251  $25,531  $25,795 
Nonperforming loans / total loans  0.46%  0.35%  0.39%
Nonperforming assets / total loans and other real estate  0.48%  0.37%  0.41%
Delinquent loans (30 days old to nonaccruing) to total loans  1.11%  0.94%  0.88%
Net charge-offs to average loans outstanding (quarterly)  0.09%  0.14%  0.17%
Provision for loan losses to net charge-offs (quarterly)  361%  121%  93%

The Company’s asset quality profile in the thirdfirst quarter of 20192020 continued to illustrate the long-term effectiveness of the Company’s disciplined credit risk management and underwriting standards.  As displayed in Table 8, nonperforming assets at September 30, 2019March 31, 2020 were $29.9 million,$33.3 million.  This represents a $3.6$7.7 million increase versusas compared to the level at the end of 20182019 and a $3.9$7.5 million increase as compared to one year earlier.  Nonperforming loans increased $3.7$7.5 million from both year-end 20182019 and increased $3.7 million from September 30, 2018.March 31, 2019.  The delinquency status for loans on payment deferment due to COVID-19 financial hardship were reported at March 31, 2020 based on their delinquency status as of March 20, 2020, the date most borrowers were impacted by COVID-19 due to stay at home orders in various states.  The increase in nonperforming assets and loans is largely attributable to a single line of credit that matured on December 31, 2019 with a total outstanding balance of $9.9 million.  The Company is actively engaging with the borrower to process an extension but the financial status of the borrower is uncertain at this time, which may result in this loan becoming classified as nonaccrual in the second quarter of 2020. Other real estate owned (“OREO”) at September 30, 2019 ofMarch 31, 2020 was $1.5 million.  This compares to $1.3 million decreased $0.1 million fromat December 31, 20182019 and increased $0.1$1.5 million from September 30, 2018.as of March 31, 2019.  At September 30, 2019,March 31, 2020, OREO consisted of 1718 residential properties with a total value of $1.2 million and two commercial properties with a value of $0.3 million.  This compares to 16 residential properties with a total value of $1.0 million and two commercial properties with a value of $0.3 million.  This compares to 18million at December 31, 2019, and 21 residential properties with a total value of $1.3$1.4 million and one commercial property with a value of $0.1 million at DecemberMarch 31, 2018, and 23 residential properties with a total value of $1.1 million at September 30, 2018.2019.  Nonperforming loans were 0.42%0.46% of total loans outstanding at the end of the thirdfirst quarter, two11 basis points abovehigher than the level at December 31, 20182019 and September 30, 2018.seven basis points higher than the level at March 31, 2019.

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Approximately 57%46% of nonperforming loans at September 30, 2019 are related to theMarch 31, 2020 were comprised of consumer mortgage portfolio.mortgages.  Collateral values of residential properties within the Company’s market area have generally remained stable over the past several years.  Additionally, economic conditions prior to COVID-19, including lower unemployment levels, havehad positively impacted consumers and resulted in relatively stablemore favorable nonperforming mortgage ratiosratios.  The Company will continue to monitor the impact that the decline in recent years,economic conditions associated with only a modest increase in the ratio for the third quarterCOVID-19 pandemic could have on its level of 2019 compared to the prior year third quarter.delinquent loans, nonperforming assets and ultimately credit-related losses. Approximately 34%46% of the nonperforming loans at September 30, 2019March 31, 2020 were related to the business lending portfolio, of which approximately 69% of the balance is attributable to a single line of credit that matured on December 31, 2019 with a total outstanding balance of $9.9 million. The remaining 31% of the balance is comprised of business loans broadly diversified by industry type.  The remaining 9%8% of nonperforming loans relate to consumer installment and home equity loans, with home equity non-performingnonperforming loan levels being driven by the same factors that were identified for consumer mortgages.  The allowance for loancredit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 172%175% at the end of the thirdfirst quarter, as compared to 197%206% at year-end 20182019 and 201%202% at September 30, 2018.March 31, 2019.

The Company’s senior management, special asset officers and lenders review all delinquent and nonaccrual loans and OREO regularly in order to identify deteriorating situations, monitor known problem credits and discuss any needed changes to collection efforts, if warranted.  Based on the group’s consensus, 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 commercial lending management to monitor their status and discuss credit management plans.  Commercial lending management reviews the criticized business loan portfolio on a monthly basis.

Delinquent loans (30 days past due through non-accruing)nonaccruing) as a percent of total loans was 0.85%1.11% at the end of the thirdfirst quarter, 1517 basis points belowabove the 1.00%0.94% at year-end 20182019 and eight23 basis points belowabove the 0.93%0.88% at September 30, 2018.March 31, 2019.  The business lending delinquency ratio at the end of the thirdfirst quarter was 1530 basis points belowabove the level at December 31, 20182019 and 1232 basis points belowabove the level at September 30, 2018.March 31, 2019, largely attributable to the previously mentioned single line of credit that matured on December 31, 2019 with a total outstanding balance of $9.9 million.  The delinquency ratiosrates for theconsumer direct and consumer indirect and consumer direct loan portfolios decreased as compared to the levels at December 31, 2018 and September 30, 2018. The delinquency ratio for the consumer mortgage loan portfolioloans decreased as compared to the level at December 31, 2018,2019, but was slightly higher thanincreased in comparison to the delinquency ratio at September 30, 2018.level one year ago.  The delinquency ratioratios for the consumer mortgage and home equity portfolioportfolios increased as compared to December 31, 2018, while the ratio was below2019, and in comparison to the level one year ago.at March 31, 2019.  The Company’s historic success at keeping the nonperforming and delinquency ratios at favorable levels has been the result of its continued focus on maintaining strict underwriting standards, as well as the effective utilization of its collection and recovery capabilities.

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Table 9: Allowance for LoanCredit Losses Activity

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Three Months Ended
March 31,
 
(000's omitted)20192018 20192018 2020  2019 
Allowance for loan losses at beginning of period$49,310$49,618 $49,284$47,583
Allowance for credit losses at beginning of period $49,911  $49,284 
Impact of adopting ASC 326  1,357   0 
Charge-offs:             
Business lending30573 1,7742,368  176   1,216 
Consumer mortgage200144 1,040588  186   253 
Consumer indirect2,2242,364 5,5296,031  2,079   1,823 
Consumer direct456465 1,4361,324  533   535 
Home equity45221 223325  73   74 
Total charge-offs3,2303,267 10,00210,636  3,047   3,901 
Recoveries:             
Business lending29093 593404  138   134 
Consumer mortgage846 44109  8   22 
Consumer indirect1,0951,190 3,2963,688  1,163   962 
Consumer direct167223 567612  182   179 
Home equity3215 6831  6   5 
Total recoveries1,5921,567 4,5684,844  1,497   1,302 
             
Net charge-offs1,6381,700 5,4345,792  1,550   2,599 
Provision for loans losses1,7512,215 5,5738,342
Provision for credit losses  5,594   2,422 
Provision for credit losses related to off-balance sheet credit exposures  (340)  0 
             
Allowance for loan losses at end of period$49,423$50,133 $49,423$50,133
Allowance for loan losses / total loans0.72%0.80% 0.72%0.80%
Allowance for legacy loan losses / total legacy loans (1)
0.89%0.96% 0.89%0.96%
Allowance for loan losses / nonperforming loans172%201% 172%201%
Allowance for legacy loan losses / legacy nonperforming loans (1)
231%274% 231%274%
Allowance for credit losses at end of period $55,652  $49,107 
Allowance for credit losses / total loans  0.81%  0.78%
Allowance for credit losses / nonperforming loans  175%  202%
Net charge-offs (annualized) to average loans outstanding:             
Business lending0.00%0.00% 0.06%0.11%  0.01%  0.18%
Consumer mortgage0.03%0.02% 0.06%0.03%  0.03%  0.04%
Consumer indirect0.41%0.43% 0.28%0.30%  0.33%  0.33%
Consumer direct0.59%0.50% 0.63%0.51%  0.76%  0.81%
Home equity0.01%0.21% 0.05%0.10%  0.07%  0.07%
Total loans0.10%0.11% 0.11%0.12%  0.09%  0.17%

(1)Legacy loans exclude loans acquired after January 1, 2009.  These ratios are included for comparative purposes to prior periods.
During the first quarter, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses, also known as Current Expected Credit Losses (“CECL”).  Upon the adoption of CECL, the Company recorded a net cumulative-effect adjustment that increased retained earnings by $0.5 million.  This adjustment was the result of a $1.4 million net increase in the allowance for credit losses, from $49.9 million at December 31, 2019 to $51.3 million upon adoption, including a $3.1 million adjustment to loans, partially offset by a $1.2 million increase in other liabilities related to the allowance for off-balance sheet credit exposures.  Due largely to the expectation of increased credit losses due to COVID-19’s adverse impact on economic and business operating conditions, the Company’s Allowance for Credit Losses increased an additional $4.4 million, or 8.6%, in the first quarter of 2020.

As displayed in Table 9, net charge-offs during the thirdfirst quarter of 20192020 were $1.6 million, $0.1$1.0 million lower than the thirdfirst quarter of 2018.  Net2019.  The business lending, consumer mortgage, consumer direct and home equity portfolios experienced lower net charge-offs for the nine months ended September 30, 2019 were $5.4 million, a $0.4 million decrease fromduring the first nine monthsquarter of 2018.  The consumer mortgage and consumer direct portfolios experienced higher levels of net charge-offs through the first nine months of 2019,2020, as compared to the first nine monthsquarter of 2018,2019, while the business lending, home equity and consumer indirect portfoliosportfolio experienced lowerhigher net charge-offs than the prior year-to-date period.  The annualized net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the thirdfirst quarter of 20192020 was 0.10%0.09%, oneeight basis pointpoints lower than the thirdfirst quarter of 2018.2019.  Net charge-off ratios for the thirdfirst quarter of 20192020 for the business lending, consumer mortgage, consumer direct and home equity portfolios were below the Company’s average for the trailing eight quarters.  Due to the highly seasonal nature ofquarters, while the net charge-off ratioratios for the consumer indirect portfolio it is compared to like quarters in previous periods, and it was belowabove the Company’s average for the third quarters of the previous two years.  The September YTD annualized net charge-off ratio of 0.11% for total loans was one basis point lower than the equivalent prior year period.trailing eight quarters.

The Company recorded a $5.6 million provision for loancredit losses was $1.8 million in the thirdfirst quarter, with $0.8including a $0.3 million reversal of provisioncredit loss expense related to legacy loans and $1.0 million of provision related to acquired loans.off-balance sheet credit exposures.  The thirdfirst quarter provision was $0.5$3.2 million lowerhigher than the equivalent prior year period.  The thirdfirst quarter 20192020 loan loss provision was $0.1$4.0 million more than the level of net charge-offs for the quarter.  The allowance for loancredit losses of $49.4$55.7 million as of September 30, 2019 decreased $0.7March 31, 2020 increased $6.5 million from the level one year ago.  Stable asset quality metricsThe decline in economic conditions associated with the COVID-19 pandemic have resulted in an allowance for loancredit losses to total loans ratio of 0.72%0.81% at September 30, 2019, eightMarch 31, 2020, three basis points lowerhigher than the level at September 30, 2018March 31, 2019 and sixnine basis points lowerhigher than the level at December 31, 2018.

As of September 30, 2019, the purchase discount related to the $1.56 billion of remaining non-impaired loan balances acquired from the National Union Bank of Kinderhook, Merchants Bank, Oneida Savings Bank, HSBC Bank USA, N.A., First Niagara Bank, N.A., and Wilber National Bank was approximately $21.8 million, or 1.4% of that portfolio, with $2.3 million included in the allowance for loan losses for acquired loans where the carrying value exceeded the estimated net recoverable value.2019.

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Refer to Note E: Loans of the notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

As of March 31, 2020, the purchase discount related to the $1.37 billion of remaining non-credit deteriorated loan balances acquired from the National Union Bank of Kinderhook in 2019, Merchants Bank in 2017, Oneida Savings Bank in 2015, HSBC Bank USA, N.A. in 2012, First Niagara Bank, N.A. in 2012, and Wilber National Bank in 2011 was approximately $18.4 million, or 1.3% of that portfolio.

Deposits

As shown in Table 10, average deposits of $8.92$9.06 billion in the thirdfirst quarter were $506.6$651.5 million, or 6.0%7.8%, higher than the thirdfirst quarter of 2018, and increased $564.52019, with $518.1 million of the increase attributable to the Kinderhook acquisition.  This compares to a decrease of $45.0 million, or 6.8%0.5%, from the fourth quarter of last year, with $482.8 million of the increase from the third quarter of 2018 and the fourth quarter of last year relating to the Kinderhook acquisition.year.  The mix of average deposit balances inchanged as the third quarter is largely consistent with the prior year quarter and the fourth quarterweighting of 2018.  Corecore deposits (noninterest checking, interest checking, savings and money markets) represent approximately 90%has decreased slightly from the prior year levels.  Conversely, the proportion of the Company’s deposit funding base, while non-core time deposits represent 10% of total average deposits.increased over the past 12 months.  The quarterly average cost of deposits was 0.26%0.25% for the thirdfirst quarter of 2020, compared to 0.20% in the first quarter of 2019, compared to 0.13% in the third quarter of 2018, reflective of the general increase in rates in the deposit marketaverage interest rate on interest bearing deposits and inclusion of acquired Kinderhook deposit liabilities between the periods.  The Company continues to focus heavily on growing its core deposit relationships through its proactive marketing efforts, competitive product offerings and high quality customer service.

Average nonpublic fund deposits for the thirdfirst quarter of 2019 increased $601.72020 decreased $82.3 million, or 8.1%1.0%, versus the fourth quarter of 20182019 and increased $500.4$606.5 million, or 6.7%8.2%, versus the year-earlier period, with $448.6$481.5 million of the increase overversus the fourth quarter and year-earlier periodsperiod attributable to the Kinderhook acquisition.  Average public fund deposits for the thirdfirst quarter decreased $37.2increased $37.4 million, or 3.8%3.6%, from the fourth quarter of 20182019 and increased $6.2$45.0 million, or 0.7%4.4%, from the thirdfirst quarter of 2018.  The Kinderhook acquisition was responsible for the addition of $34.22019, with $36.6 million of average public fund deposits in the thirdincrease from the first quarter of 2019.2019 attributable to the Kinderhook acquisition.  Public fund deposits as a percentage of total deposits decreased from 11.0%12.1% in the thirdfirst quarter of 20182019 to 10.5%11.8% in the thirdfirst quarter of 2019.

2020.

Table 10: Quarterly Average Deposits

(000's omitted)
September 30,
2019
 
December 31,
2018
 
September 30,
2018
 
March 31,
2020
  
December 31,
2019
  
March 31,
2019
 
Noninterest checking deposits$2,458,831 $2,317,042 $2,336,778 $2,458,529  $2,519,645  $2,297,472 
Interest checking deposits2,075,009 1,880,610 1,890,900  2,189,060   2,131,866   1,975,091 
Savings deposits1,540,896 1,450,707 1,464,272  1,550,663   1,536,271   1,461,847 
Money market deposits1,926,418 1,966,279 1,978,485  1,928,896   1,976,819   1,922,754 
Time deposits919,820 741,794 743,924  929,512   937,023   748,040 
Total deposits$8,920,974 $8,356,432 $8,414,359 $9,056,660  $9,101,624  $8,405,204 
     
Nonpublic fund deposits$7,988,718 $7,386,943 $7,488,333 $7,991,934  $8,074,262  $7,385,439 
Public fund deposits932,256 969,489 926,026  1,064,726   1,027,362   1,019,765 
Total deposits$8,920,974 $8,356,432 $8,414,359 $9,056,660  $9,101,624  $8,405,204 

Borrowings

Borrowings, excluding securities sold under agreement to repurchase, at the end of the first quarter of 2020 totaled $94.8 million. This was $8.3 million, or 8.1%, lower than borrowings at December 31, 2019 and $5.1 million, or 5.1%, below the end of the first quarter of 2019.  The decrease from the prior year first quarter was primarily due to the redemption of the trust preferred subordinated debt held by MBVT Statutory Trust I, an unconsolidated subsidiary trust, during the third quarter of 2019 partially offset by the acquisition of subordinated notes payable and Federal Home Loan Bank borrowings assumed with the Kinderhook acquisition during the third quarter of 2019, while the decrease from the fourth quarter of 2019 was related to an $8.3 million decrease in overnight FHLB 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 $233.3$205.0 million at the end of the thirdfirst quarter of 2019,2020, a decrease of $26.0$36.7 million from December 31, 20182019 and $41.2$44.9 million below September 30, 2018.

Borrowings, excluding customer repurchase agreements, at the end of the third quarter of 2019 totaled $95.5 million. This was $58.9 million, or 38.1%, lower than borrowings at DecemberMarch 31, 2018 and $4.5 million, or 4.5%, below the end of the third quarter of 2018.  The decrease from the prior year third quarter was primarily due to the $22.7 million redemption of trust preferred subordinated debt held by MBVT I and KCT in the third quarter of 2019, partially offset by $13.8 million in subordinated notes payable, $2.4 million of FHLB long-term advances and $2.1 million of trust preferred subordinated debt assumed in the third quarter of 2019 as part of the Kinderhook acquisition.  The trust preferred debt held by MBVT I was assumed in the second quarter of 2017 as part of the Merchants Bancshares acquisition, and the trust preferred debt held by KCT was acquired in third quarter of 2019 as part of the Kinderhook acquisition.  The decrease from the fourth quarter of 2018 reflected the impact of the aforementioned redemptions of trust preferred subordinated debt in the third quarter of 2019 and a $54.4 million decrease in FHLB overnight borrowings, partially offset by the subordinated notes, FHLB long-term advances and trust preferred subordinated debt assumed as part of the Kinderhook acquisition.2019.

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Shareholders’ Equity

Total shareholders’ equity was $1.84of $1.98 billion at the end of the third quarter.  This was up $126.6first quarter of 2020 represents an increase of $121.4 million from the balance at December 31, 2018.  During the first nine months of 2019,2019.  Several factors contributed to this increase including, the Company recorded net income of $126.2$40.1 million, issued $6.7accumulated other comprehensive income increased $93.7 million, net activity under the Company’s employee stock plan increased $6.4 million, $2.0 million was recorded from employee stock options earned, and $0.1 million of treasury stock was issued to the Company’s benefit plans, issued $2.5plans. Further, the implementation of CECL resulted in a $0.5 million of shares under the long-term incentive stock plan, recorded $4.0 million from long-term incentive stock options earned and other comprehensive income increased $47.7 million.increase to retained earnings.  These amounts were partially offset by dividends declared of $60.5$21.4 million.  The change in accumulated other comprehensive income was comprised of a $46.3$93.0 million increase in the after-tax market value adjustment on the available-for-sale investment portfolio and a positive $1.4$0.7 million adjustment to the funded status of the Company’s retirement plans.  Over the past 12 months, total shareholders’ equity increased by $172.1$219.5 million, as net income, the issuance of common stock in association with the Company’semployee stock plan and the Company’s benefit plans and an increase in the market value adjustment on investments, more than offset dividends declared and the change in the funded status of the Company’s defined benefit pension and other postretirement plans.

The Company’s Tier 1 leverage ratio, a primary measure of regulatory capital for which 5% is the requirement to be “well-capitalized”, was 10.76%11.10% at the end of the thirdfirst quarter, down 32up 30 basis points from year-end 20182019 and four17 basis points abovebelow its level one year earlier.  The decreaseincrease in the Tier 1 leverage ratio in comparison to December 31, 20182019 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income items, increasing 2.7%, primarily due to an increase infrom net earnings retention, while average assets, excluding intangibles and the market value adjustment on investments, of 5.3% primarily due to the Kinderhook acquisition, while ending shareholders’ equity, excluding intangibles and other comprehensive income items, increased 2.3%, primarily from net earnings retention.decreased 0.1%.  The Tier 1 leverage ratio increaseddecreased compared to the prior year’s thirdfirst quarter as shareholders’ equity, excluding intangibles and other comprehensive income, increased 5.4%5.3% primarily due to earnings retention, while average assets excluding intangibles and the market value adjustment, increased 5.1%.6.9% primarily due to the Kinderhook acquisition.  The net tangible equity-to-assets ratio (a non-GAAP measure) of 9.68% decreased 0.88%10.78% increased 77 basis points from December 31, 2018 due primarily to the assets added in the Kinderhook acquisition,2019 and increased 0.55%95 basis points versus September 30, 2018March 31, 2019 (See Table 11 for Reconciliation of Quarterly GAAP to Non-GAAP Measures).  The increase in the net tangible equity-to-assetsequity ratio over the past 12 months was due to a proportionally larger increase in tangible equity levels than the increase in tangible assets, primarily driven by net earnings retention, as well as the increase in the market value adjustment on available-for-sale securities.assets.

The dividend payout ratio (dividends declared divided by net income) for the first nine monthsquarter of 20192020 was 47.9%53.2%, compared to 42.4% for the nine months ended September 30, 2018.  Dividends declared46.7% for the first nine monthsquarter of 20192019.  First quarter dividends declared increased 11.6% compared to the first nine months of 2018,9.1% versus one year earlier, as the Company’s quarterly dividend per share was raised from $0.34 to $0.38 in August 2018 and was raised from $0.38 to $0.41 in August 2019, while net income decreased 1.3%4.3% over the equivalent year-to-date period primarily due to the impact of the Durbin amendment and the acquisition expenses related to the Kinderhook acquisition.prior year period.  The 2019 dividend increase marked the Company’s 27th consecutive year of increased dividend payouts to common shareholders.  Additionally, the number of common shares outstanding increased 1.0%1.1% over the last twelve months.

Liquidity

Liquidity risk is a measure of the Company’s ability to raise cash when needed at a reasonable cost and minimize any loss.  The BankCompany maintains appropriate liquidity levels in both normal operating environments as well as stressed environments.  The Company must be capable of meeting all obligations to its customers at any time and, therefore, the active management of its liquidity position remains an important management objective.  The Bank has appointed the Asset Liability Committee (“ALCO”) to manage liquidity risk using policy guidelines and limits on indicators of potential liquidity risk.  The indicators are monitored using a scorecard with three risk level limits.  These risk indicators measure core liquidity and funding needs, capital at risk and change in available funding sources.  The risk indicators are monitored using such statistics as the core basic surplus ratio, unencumbered securities to average assets, free loan collateral to average assets, loans to deposits, deposits to total funding and borrowings to total funding ratios.

Given the uncertain nature of the Company’s customers' demands, as well as the Company's desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on and off-balance sheet funds available that can be utilized in time of need.  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 Bank of New York (“Federal Reserve”).  Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements, large certificates of deposit and the brokered CD market.  The primary source of non-deposit funds is FHLB overnight advances, of which there were no outstanding borrowings at September 30, 2019.March 31, 2020.

The Bank’sCompany’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, 2019,March 31, 2020, the Bank had $1.01 billion$529.3 million of cash and cash equivalents of which $781.7$342.3 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks.  The BankCompany also had $1.8 billion in unused FHLB borrowing capacity based on the Company’s quarter-end collateral levels.  Additionally, the Company has $939.3 million$1.6 billion of unencumbered securities that could be pledged at the FHLB or Federal Reserve to obtain additional funding.  There is $25.0 million available in unsecured lines of credit with other correspondent banks.

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The Company’s primary approach to measuring short-term liquidity is known as the Basic Surplus/Deficit model.  It is used to calculate liquidity over two time periods: first, the amount of cash that could be made available within 30 days (calculated as liquid assets less short-term liabilities as a percentage of average assets); and second, a projection of subsequent cash availability over an additional 60 days.  As of September 30, 2019,March 31, 2020, this ratio was 13.8%14.0% for 30-days and 13.8%14.1% 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, 2019,March 31, 2020, 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, 2019March 31, 2020 indicate the BankCompany has sufficient sources of funds for the next year in all simulated stressed scenarios.

To measure longer-term liquidity, a baseline projection of loan and deposit growth for five years is made to reflect how liquidity levels could change over time.  This five-year measure reflects ample liquidity for loan and other asset growth over the next five years.

Though remote, the possibility of a funding crisis exists at all financial institutions.  Accordingly, management has addressed this issue by formulating a Liquidity Contingency Plan, which has been reviewed and approved by both the Company’s Board of Directors (the “Board”) and the Company’s ALCO.  The plan addresses the actions that the Company would take in response to both a short-term and long-term funding crisis.

A short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly short-term funding operations.  Such a crisis would likely be temporary in nature and would not involve a change in credit ratings.  A long-term funding crisis would most likely be the result of drastic credit deterioration at the Company.  Management believes that both potential circumstances have been fully addressed through detailed action plans and the establishment of trigger points for monitoring such events.

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Forward-Looking Statements

This documentreport contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties.  Forward-looking statements often use words such as “anticipate,” “could,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “forecast,” “believe,” or other words of similar meaning.  These statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties.  Actual results may differ materially from the results discussed in the forward-looking statements.  Moreover, the Company’s plans, objectives and intentions are subject to change based on various factors (some of which are beyond the Company’s control).  Factors that could cause actual results to differ from those discussed in the forward-looking statements include:  (1) risks related to credit quality, interest rate sensitivity and liquidity;  (2) the strengtheffect of the U.S. economy in generalCOVID-19 pandemic, including the negative impacts and disruptions on the Company’s colleagues, the communities it serves, and the strengthdomestic and global economy, which may have an adverse effect on the Company’s business; (2) current and future economic and market conditions, including the effects of the local economies where the Company conducts its business;declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth; (3) the effect of, and changes in, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (4) the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin; (5) future provisions for credit losses on loans and debt securities; (6) changes in nonperforming assets; (7) the effect of a fall in stock market prices on the Company’s fee income businesses, including its employee benefit services, wealth management, and insurance businesses; (8) risks related to credit quality, (9) inflation, interest rate, liquidity, market and monetary fluctuations;  (5)(10) the strength of the U.S. economy in general and the strength of the local economies where the Company conducts its business;  (11) the timely development of new products and services and customer perception of the overall value thereof (including features, pricing and quality) compared to competing products and services;  (6)(12) changes in consumer spending, borrowing and savings habits;  (7)(13) technological changes and implementation and financial risks associated with transitioning to new technology-based systems involving large multi-year contracts;  (8)(14) the ability of the Company to maintain the security of its financial, accounting, technology, data processing and other operating systems and facilities;  (9)(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 loancredit losses and the accuracy of the assumptions or estimates used in preparing the Company’s financial statements and disclosures; (10)(16) failure of third parties to provide various services that are important to the Company’s operations;  (11)(17) any acquisitions or mergers that might be considered or consummated by the Company and the costs and factors associated therewith, including differences in the actual financial results of the acquisition or merger compared to expectations and the realization of anticipated cost savings and revenue enhancements;  (12)(18) the ability to maintain and increase market share and control expenses;  (13)(19) the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of the Company and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, risk management, securities and other aspects of the financial services industry, specifically the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;  (14)2010 or those emanating from COVID-19;  (20) changes in the Company’s organization, compensation and benefit plans and in the availability of, and compensation levels for, employees in its geographic markets;  (15)(21) the outcome of pending or future litigation and government proceedings; (16)(22) other risk factors outlined in the Company’s filings with the SEC from time to time; and (17)(23) the success of the Company at managing the risks of the foregoing.

The foregoing list of important factors is not all-inclusive.  SuchFor more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to its reports filed with the Securities and Exchange Commission, including the discussion under “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2019 and this Quarterly Report on Form 10-Q, as filed with the Securities and Exchange Commission and available on its website at www.sec.gov.  Further, any forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made.  If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.

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Reconciliation of GAAP to Non-GAAP Measures

Table 11: GAAP to Non-GAAP Reconciliations

Three Months Ended
September 30,
Nine Months Ended
September 30,
(000's omitted)2019201820192018
Income statement data    
Net income    
Net income (GAAP)$39,218$43,106$126,179$127,818
Acquisition expenses6,061(832)7,789(769)
Tax effect of acquisition expenses(1,277)174(1,618)163
Subtotal (non-GAAP)44,00242,448132,350127,212
Gain on sales of investment securities, net00(4,882)0
Tax effect of gain on sales of investment securities, net009880
Subtotal (non-GAAP)44,00242,448128,456127,212
Unrealized gain on equity securities(10)(743)(28)(722)
Tax effect of unrealized gain on equity securities21565152
Subtotal (non-GAAP)43,99441,861128,433126,642
Loss on debt extinguishment03180318
Tax effect of loss on debt extinguishment0(67)0(67)
Operating net income (non-GAAP)43,99442,112128,433126,893
Amortization of intangibles3,9604,42711,99413,780
Tax effect of amortization of intangibles(835)(928)(2,390)(2,883)
Subtotal (non-GAAP)47,11945,611138,037137,790
Acquired non-impaired loan accretion(1,637)(1,980)(4,269)(6,083)
Tax effect of acquired non-impaired loan accretion3454158541,271
Adjusted net income (non-GAAP)$45,827$44,046$134,622$132,978
 
Return on average assets
    
Adjusted net income (non-GAAP)    $45,827$44,046$134,622$132,978
Average total assets11,229,91910,619,87210,898,52010,695,517
Adjusted return on average assets (non-GAAP)1.62%1.65%1.65%1.66%
 
Return on average equity
    
Adjusted net income (non-GAAP)    $45,827$44,046$134,622$132,978
Average total equity     1,824,8691,664,2341,775,5551,643,561
Adjusted return on average equity (non-GAAP)9.96%10.50%10.14%10.82%
     
Earnings per common share    
Diluted earnings per share (GAAP)$0.75$0.83$2.41$2.46
Acquisition expenses0.12(0.02)0.15(0.02)
Tax effect of acquisition expenses(0.03)0.00(0.03)0.00
Subtotal (non-GAAP)0.840.812.532.44
Gain on sales of investment securities, net0.000.00(0.10)0.00
Tax effect of gain on sales of investment securities, net0.000.000.020.00
Subtotal (non-GAAP)0.840.812.452.44
Unrealized gain on equity securities0.00(0.01)0.00(0.01)
Tax effect of unrealized gain on equity securities0.000.000.000.00
Subtotal (non-GAAP)0.840.802.452.43
Loss on debt extinguishment0.000.010.000.01
Tax effect of loss on debt extinguishment0.000.000.000.00
Operating earnings per share (non-GAAP)0.840.812.452.44
Amortization of intangibles0.080.080.230.27
Tax effect of amortization of intangibles(0.02)(0.02)(0.05)(0.06)
Subtotal (non-GAAP)0.900.872.632.65
Acquired non-impaired loan accretion(0.03)(0.04)(0.08)(0.12)
Tax effect of acquired non-impaired loan accretion0.010.010.020.02
Diluted adjusted net earnings per share (non-GAAP)$0.88$0.84$2.57$2.55

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Three Months Ended
September 30,
Nine Months Ended
September 30,
(000's omitted)2019201820192018
Noninterest operating expenses    
Noninterest expenses (GAAP)    $96,929$85,233$276,757$257,676
Amortization of intangibles(3,960)(4,427)(11,994)(13,780)
Acquisition expenses(6,061)832(7,789)769
Total operating expenses (non-GAAP)     $86,908$81,638$256,974$244,665
     
Efficiency ratio    
Operating expenses (non-GAAP) - numerator     $86,908$81,638$256,974$244,665
Fully tax-equivalent net interest income92,26187,269269,418260,951
Noninterest revenues      57,09455,791173,496169,841
Acquired non-impaired loan accretion(1,637)(1,980)(4,269)(6,083)
Gain on sales of investment securities, net00(4,882)0
Unrealized gain on equity securities(10)(743)(28)(722)
Loss on debt extinguishment03180318
Operating revenues (non-GAAP) - denominator    $147,708$140,655$433,735$424,305
Efficiency ratio (non-GAAP)58.8%58.0%59.2%57.7%
     

(000's omitted)
September 30,
2019
December 31,
2018
September 30,
2018
Balance sheet data – at end of quarter   
Total assets   
Total assets (GAAP)$11,597,297  $10,607,295$10,659,567
Intangible assets(840,685)(807,349)(811,700)
Deferred taxes on intangible assets      46,048       46,37046,882
Total tangible assets (non-GAAP) $10,802,660  $9,846,316$9,894,749
    
Total common equity   
Shareholders' Equity (GAAP) 1,840,421  1,713,783$1,668,345
Intangible assets(840,685)(807,349)(811,700)
Deferred taxes on intangible assets46,048       46,37046,882
Total tangible common equity (non-GAAP)    $1,045,784     $952,804$903,527
    
Net tangible equity-to-assets ratio at quarter end   
Total tangible common equity (non-GAAP) - numerator    $1,045,784     $952,804$903,527
Total tangible assets (non-GAAP) - denominator $10,802,660  $9,846,316$9,894,749
Net tangible equity-to-assets ratio at quarter end (non-GAAP)9.68%9.68%9.13%
    
 
Three Months Ended
March 31,
 
(000's omitted) 2020  2019 
Income statement data      
Net income      
Net income (GAAP) $40,134  $41,946 
Acquisition expenses  369   534 
Tax effect of acquisition expenses  (69)  (99)
Subtotal (non-GAAP)  40,434   42,381 
Unrealized loss(gain) on equity securities  30   (31)
Tax effect of unrealized gain on equity securities  (6)  6 
Operating net income (non-GAAP)  40,458   42,356 
Amortization of intangibles  3,667   4,130 
Tax effect of amortization of intangibles  (689)  (765)
Subtotal (non-GAAP)  43,436   45,721 
Acquired non-impaired loan accretion  (1,465)  (1,330)
Tax effect of acquired non-impaired loan accretion  275   246 
Adjusted net income (non-GAAP) $42,246  $44,637 
 
Return on average assets
        
Adjusted net income (non-GAAP) $42,246  $44,637 
Average total assets  11,487,384   10,687,708 
Adjusted return on average assets (non-GAAP)  1.48%  1.69%
 
Return on average equity
        
Adjusted net income (non-GAAP) $42,246  $44,637 
Average total equity  1,902,169   1,726,313 
Adjusted return on average equity (non-GAAP)  8.93%  10.49%
         
Earnings per common share        
Diluted earnings per share (GAAP) $0.76  $0.80 
Acquisition expenses  0.01   0.01 
Tax effect of acquisition expenses  0.00   0.00 
Subtotal (non-GAAP)  0.77   0.81 
Unrealized loss(gain) on equity securities  0.00   0.00 
Tax effect of unrealized gain on equity securities  0.00   0.00 
Operating earnings per share (non-GAAP)  0.77   0.81 
Amortization of intangibles  0.07   0.08 
Tax effect of amortization of intangibles  (0.01)  (0.01)
Subtotal (non-GAAP)  0.83   0.88 
Acquired non-impaired loan accretion  (0.03)  (0.03)
Tax effect of acquired non-impaired loan accretion  0.00   0.00 
Diluted adjusted net earnings per share (non-GAAP) $0.80  $0.85 

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Three Months Ended
March 31,
 
(000's omitted) 2020  2019 
Noninterest operating expenses      
Noninterest expenses (GAAP) $93,663  $88,652 
Amortization of intangibles  (3,667)  (4,130)
Acquisition expenses  (369)  (534)
Total adjusted noninterest expenses (non-GAAP) $89,627  $83,988 
         
Efficiency ratio        
Adjusted noninterest expenses (non-GAAP) - numerator $89,627  $83,988 
Fully tax-equivalent net interest income  91,086   87,867 
Noninterest revenues  58,622   55,696 
Acquired non-impaired loan accretion  (1,465)  (1,330)
Unrealized loss(gain) on equity securities  30   (31)
Operating revenues (non-GAAP) - denominator $148,273  $142,202 
Efficiency ratio (non-GAAP)  60.4%  59.1%

(000's omitted) 
March 31,
2020
  
December 31,
2019
  
March 31,
2019
 
Balance sheet data – at end of quarter         
Total assets         
Total assets (GAAP) $11,808,983  $11,410,295  $10,916,467 
Intangible assets  (832,919)  (836,923)  (804,419)
Deferred taxes on intangible assets  44,494   44,742   45,994 
Total tangible assets (non-GAAP)  11,020,558   10,618,114  $10,158,042 
             
Total common equity            
Shareholders' Equity (GAAP)  1,976,631   1,855,234   1,757,128 
Intangible assets  (832,919)  (836,923)  (804,419)
Deferred taxes on intangible assets  44,494   44,742   45,994 
Total tangible common equity (non-GAAP)  1,188,206   1,063,053  $998,703 
             
Net tangible equity-to-assets ratio at quarter end            
Total tangible common equity (non-GAAP) - numerator $1,188,206  $1,063,053  $998,703 
Total tangible assets (non-GAAP) - denominator $11,020,558  $10,618,114  $10,158,042 
Net tangible equity-to-assets ratio at quarter end (non-GAAP)  10.78%  10.01%  9.83%

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates, prices or credit risk.  Credit risk associated with the Company’s loan portfolio has been previously discussed in the asset quality section of the MD&A.  Management believes that the tax risk of the Company’s municipal investments associated with potential future changes in statutory, judicial and regulatory actions is minimal.  Treasury, agency, mortgage-backed and CMO securities issued by government agencies comprise 80%83% of the total portfolio and are currently rated AAA by Moody’s Investor Services and AA+ by Standard & Poor’s.  Municipal and corporate bonds account for 18%16% of the total portfolio, of which, 98% carry a minimum rating of A-.  The remaining 2%1% of the portfolio is comprised of other investment grade securities.  The Company does not have material foreign currency exchange rate risk exposure.  Therefore, almost all the market risk in the investment portfolio is related to interest rates.

The ongoing monitoring and management of both interest rate risk and liquidity, in the short and long term time horizons is an important component of the Company's asset/liability management process, which is governed by limits established in the policies reviewed and approved annually by the Company’s Board.  The Board delegates responsibility for carrying out the policies to the ALCO, which meets each month.  The committee is made up of the Company's senior management as well as regional and line-of-business managers who oversee specific earning asset classes and various funding sources.  As the Company does not believe it is possible to reliably predict future interest rate movements, it has maintained an appropriate process and set of measurement tools, which enables it to identify and quantify sources of interest rate risk in varying rate environments.  The primary tool used by the Company in managing interest rate risk is income simulation.

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While a wide variety of strategic balance sheet and treasury yield curve scenarios are tested on an ongoing basis, the following reflects the Company's estimated net interest income sensitivity over the subsequent twelve months based on:

Asset and liability levels using September 30, 2019March 31, 2020 as a starting point.

The model assumes the Company’s average deposit balances will increase approximately 2.0% over the next twelve months.

The model assumes the Company’s average earning asset balances will increase approximately 1.0% to 3.0% over the next twelve months.

ThereBusiness lending balances are assumedanticipated to increase $366 million during the second quarter of 2020 due largely to PPP loan originations with anticipated forgiveness and full repayment of the balances during the third quarter of 2020.  Upon repayment, the PPP loan balances are largely anticipated to be conservativereinvested in cash equivalents and investment securities.  All other loan balances are projected to remain flat or decrease modestly throughout the forecast period due to lower anticipated levels of balance sheet growth, low-to-mid single digit growthloan demand reflective of an expected decline in loanseconomic activity and deposits, while using the cashother COVID-19 related factors.  Cash flows from investment contractual maturities and prepayments toare reinvested into securities or cash equivalents and repay short-term capital market borrowings or reinvest into securities or cash equivalents.
borrowings.

TheIn the rising rates scenarios, the prime rate and federal funds rates are assumed to move up over a 12-month period while moving the long end of the treasury curve to spreads over the three month treasury that are more consistent with historical norms based on the last three years (normalized yield curve).  Deposit rates are assumed to move in a manner that reflects the historical relationship between deposit rate movement and changes in the federal funds rate.
In the falling rate environment, the prime and federal funds rate decline 25 basis points and the treasury yield curve is assumed to move to zero basis points.

Cash flows are based on contractual maturity, optionality, and amortization schedules along with applicable prepayments derived from internal historical data and external sources.

The model results exclude acquisitions.

Net Interest Income Sensitivity Model

Change in interest rates
 
Calculated annualized increase
(decrease) in projected net interest
income at September 30, 2019
(000’s omitted)
  
Calculated annualized increase
(decrease) in projected net interest
income at March 31, 2020
(000’s omitted)
 
+200 basis points $7,834  $3,590 
+100 basis points $5,427  $1,491 
-100 basis points $(2,963)
-175 basis points $(7,499)
-25 basis points $(1,853)

The short term modeled net interest income (NII) increases in the rising rate environments largely due to assumed higher rates on new loans, including variable and adjustable rate loans.  Additionally, slower prepayment speeds result in higher loan balances that provide higher returns as compared to current reinvestment opportunities.  These increases are partially offset by anticipated higher deposit and borrowing costs.  Over the longer time period, the growth in NII continues to improve in both rising rate environments as lower yielding assets mature and are replaced at higher rates.

In the falling rate environments,environment, the Bank shows interest rate risk exposure to lower short term rates.  During the first twelve months, net interest income declines largely due to lower assumed rates on reinvestment opportunities and new loans, including adjustable and variable rate assets.  Modestly lower funding costs associated with deposits and borrowings only partially offset the decrease in interest income.

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The analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results.  These hypothetical estimates are based upon numerous assumptions: the nature and timing of interest rate levels (including yield curve shape), prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and other factors.  While the assumptions are developed based upon reasonable economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.  Furthermore, the sensitivity analysis does not reflect actions that the ALCO might take in responding to or anticipating changes in interest rates.

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Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as defined in Rule 13a -15(e) and 15d – 15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”), designed to ensure information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is: (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.  Based on management’s evaluation of the effectiveness of the Company’s disclosure controls and procedures, with the participation of the Chief Executive Officer and the Chief Financial Officer, it has concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, these disclosure controls and procedures were effective as of September 30, 2019.March 31, 2020.

Changes in Internal Control over Financial Reporting
The Company regularly assesses the adequacy of its internal controls over financial reporting.  There have been no changes in the Company’s internal controls over financial reporting in connection with the evaluation referenced in the paragraph above that occurred during the Company’s quarter ended September 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.Other Information

Item 1.Legal Proceedings

The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of September 30, 2019,March 31, 2020, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. The range of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is believed to be between $0 and $1 million in the aggregate. Although the Company does not believe that the outcome of pending litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

Item 1A.Risk Factors

There has not been anyIn addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material change inupdates and additions to the risk factors disclosure from that containedpreviously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 as filed with the SECSecurities and Exchange Commission on March 1,2, 2020.  Additional risks not presently known to the Company, or that are currently deem immaterial, may also adversely affect the Company’s business, financial condition or results of operations.  Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

The Company’s business, financial condition, and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has created unprecedented economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the Company’s business, financial condition, and results of operations.  The extent to which the COVID-19 pandemic will continue to negatively affect the Company’s business, financial condition, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the duration of the pandemic, the continued effectiveness of the Company’s measures to implement its business continuity and pandemic plans and provide for the continuation of uninterrupted services, the direct and indirect impact of the pandemic on the Company’s customers, third-party vendors and other stakeholders, and the impact of actions taken by governmental authorities and other third parties in response to the pandemic.  Even after the COVID-19 outbreak has subsided, the Company’s business may continue to experience materially adverse impacts as a result of virus’ economic impact, including the availability and cost of funding and any recession that has occurred or may occur in the  future.  There are no comparable recent events that provide guidance as to the effect COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change.

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The COVID-19 pandemic has negatively impacted the global economy, lowered equity market valuations, created significant volatility and disruption in financial markets, increased unemployment levels, and resulted in significant action by the federal government to stimulate the economy.  Due to the pandemic, many governmental authorities have implemented temporary closures of certain businesses and instituted social distancing and sheltering in place requirements which may result in the demand for the Company’s products and services to be significantly impacted, which could adversely affect the Company’s revenue.  The Company may continue to experience negative impacts which include, but are not limited to: (1) the pandemic could continue to result in the recognition of credit losses in the Company’s loan portfolios and increases in its allowance for credit losses, particularly if businesses remain closed, unemployment continues at heightened levels and for a prolonged period of time, the impact on the economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses; (2) negative impact on businesses’ and consumers’ desire or financial ability to borrow money, which would negatively impact loan volumes; (3) a decline in the growth of the Company’s interest income due to reductions in benchmark interest rates and an expectation that the Company will provide, for a temporary period of time, fee waivers, payment deferrals, and other expanded assistance for automobile, mortgage, business and personal lending customers, and future governmental actions may require these and other types of customer-related responses which may further impact interest income; (4) a reduction in stock market prices affecting related fee income businesses, including the Company’s employee benefit services, wealth management, and insurance businesses, and a reduction in the demand for the Company’s services; (5) increased cyber and payment fraud risk related to COVID-19, as cybercriminals attempt to profit from the disruption, given increased online banking, e-commerce, other online activity and other factors; (6) the requirement to recognize impairments on the securities the Company holds, as well as reductions in other comprehensive income, due to changing economic and market conditions affecting issuers.

In response to the COVID-19 pandemic, governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets and support economic growth.  The success of these measures is unknown and they may not be sufficient to fully mitigate the negative impact of the COVID-19 pandemic.  Additionally, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on the Company’s business, financial condition, and results of operations.  The Company also faces an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on market and economic conditions and actions governmental authorities take in response to those conditions.

In addition, the spread of the virus and the imposition of social distancing and sheltering in place requirements have caused the Company to modify its business practices (including closing lobbies and instituting drive-thru only operations and limiting face-to-face customer interaction, developing social distancing and work-from-home plans for its employees, restricting employee travel, and cancelling physical participation in meetings), and the Company may take further actions as may be required by governmental authorities or as it determines are in the best interests of its employees, customers, and stakeholders.  The outbreak has adversely impacted and may further adversely impact the Company’s workforce and operations and the operations of its customers, suppliers and third-party vendors, throughout the time period during which the spread of COVID-19 continues and related restrictions remain in place, and even after the COVID-19 outbreak has subsided.

The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.  The Company does not yet know the full extent of the impacts on its business, its operations, or the economy as a whole.  However, the effects are likely to have a material impact on the Company’s results of operations and heighten many of its known risks described in the section entitled “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2019.

The Company, as a participating lender in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), may be subject to increased operational, financial, reputational, and other unforeseen risks including, but not limited to the risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP.  On April 24, 2020, an additional $310 billion of funding was authorized for the PPP.  Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.  The Bank is participating as a lender in the PPP and there are heightened concerns associated with processing the loan applications which expose the Company to risks relating to noncompliance with the PPP, including the ambiguity in the laws, the rules and guidance regarding the operation of the PPP, and the risk that the SBA may not fund some or all of the PPP loan guaranties.

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

a)  Not applicable.

a)b)  Not applicable.

b)Not applicable.

c)  At its December 20182019 meeting, the Board approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,500,0002,600,000 shares of the Company’s common stock, in accordance with securities laws and regulations, during a twelve-month period beginning January 1, 2019.2020.  Any repurchased shares will be used for general corporate purposes, including those related to stock plan activities.  The timing and extent of repurchases will depend on market conditions and other corporate considerations as determined at the Company’s discretion.

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The following table presents stock purchases made during the thirdfirst quarter of 2019:2020:

Issuer Purchases of Equity Securities

Period
Total
Number of
Shares
Purchased
Average
Price Paid
Per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number of
Shares That May Yet Be
Purchased Under the Plans
or Programs
July 1-31, 20191,028$65.5502,500,000
August 1-31, 201900.0002,500,000
September 1-30, 201900.0002,500,000
Total (1)
1,028$65.55  
Period 
Total
Number of
Shares
Purchased
  
Average
Price Paid
Per Share
  
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
  
Maximum Number of
Shares That May Yet Be
Purchased Under the Plans
or Programs
 
January 1-31, 2020  1,041  $70.70   0   2,600,000 
February 1-29, 2020  0   0.00   0   2,600,000 
March 1-31, 2020  0   0.00   0   2,600,000 
Total (1)
  1,041  $70.70         

(1) Included in the common shares repurchased were 1,0281,041 shares acquired by the Company in connection with the administration of a deferred compensation plan.  These shares were not repurchased as part of the publicly announced repurchase plan described above.

Item 3.Defaults Upon Senior Securities
Not applicable.

Item 4.Mine Safety Disclosures
Not applicable.

Item 5.Other Information
Not applicable.

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Item 6.Exhibits

Exhibit No.Description

10.1
Employment Agreement, dated December 31, 2019, by and among Community Bank System, Inc., Community Bank, N.A. and Scott A. Kingsley.  Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on January 7, 2020 (Registration No. 001-13695). (1)
10.2
Employment Agreement, dated December 31, 2019, by and among Community Bank System, Inc., Community Bank, N.A. and George J. Getman.  Incorporated by reference to Exhibit No. 10.2 to the Current Report on Form 8-K filed on January 7, 2020 (Registration No. 001-13695). (1)
10.3
Retirement and Release Agreement, dated March 13, 2020, by and among Community Bank System, Inc., Community Bank, N.A. and Scott A. Kingsley.  Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on March 19, 2020 (Registration No. 001-13695). (1)
10.4
Amendment to Employment Agreement, dated March 13, 2020, by and among Community Bank System, Inc., Community Bank, N.A. and Joseph F. Serbun.  Incorporated by reference to Exhibit No. 10.2 to the Current Report on Form 8-K filed on March 19, 2020 (Registration No. 001-13695). (1)
31.1
Certification of Mark E. Tryniski, President and Chief Executive Officer of the Registrant, pursuant to Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)(2)
31.2
Certification of Joseph E. Sutaris, Treasurer and Chief Financial Officer of the Registrant, pursuant to Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)(2)
32.1
Certification of Mark E. Tryniski, President and Chief Executive Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)(3)
32.2
Certification of Joseph E. Sutaris, Treasurer and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)(3)
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. (3)(4)
101.SCH
Inline XBRL Taxonomy Extension Schema Document (3)(4)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document (3)(4)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document (3)(4)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document (3)(4)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document (3)(4)
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) (3)(4)

(1) Denotes management contract or compensatory plan or arrangement.
(2) Filed herewith.
(2)(3) Furnished herewith.
(3)(4) XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Community Bank System, Inc.

Date: November 12, 2019May 11, 2020/s/ Mark E. Tryniski
 Mark E. Tryniski, President and Chief Executive Officer

Date: November 12, 2019May 11, 2020/s/ Joseph E. Sutaris
 Joseph E. Sutaris, Treasurer and Chief
Financial Officer



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