UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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, ~~2021~~2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto.

Commission File Number: 001-13695

(Exact name of registrant as specified in its charter)

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

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

(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 class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $1.00 par value per share		CBU		New 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~~Number of shares ~~outstanding of each of the issuer’s classes~~ of common stock, par value $1.00 per share, outstanding as of the ~~latest practicable date. 53,931,054 shares~~close of ~~Common Stock, $1.00 par value per share, were outstanding~~business on October 31, ~~2021.~~2022: 53,734,397 shares

Table of Contents

TABLE OF CONTENTS


Part I.	Financial Information	Page

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Condition September 30, ~~2021~~2022 and December 31, ~~2020~~2021	3

	Consolidated Statements of Income Three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021	4

	Consolidated Statements of Comprehensive Income (Loss) Three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021	5

	Consolidated Statements of Changes in Shareholders’ Equity Three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021	6

	Consolidated Statements of Cash Flows Nine months ended September 30, ~~2021~~2022 and ~~2020~~2021	8

	Notes to the Consolidated Financial Statements September 30, ~~2021~~2022	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3633

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6056

Item 4.	Controls and Procedures	6258

Part II.	Other Information

Item 1.	Legal Proceedings	6258

Item 1A.	Risk Factors	6258

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6258

Item 3.	Defaults Upon Senior Securities	6359

Item 4.	Mine Safety Disclosures	6359

Item 5.	Other Information	6359

Item 6.	Exhibits	6460

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)

(In Thousands, Except Share Data)


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
Assets:
Cash and cash equivalents	$	2,322,661	$	1,645,805	$	247,391	$	1,875,064
Available-for-sale investment securities (cost of $4,406,878 and $3,427,779, respectively)		4,358,371		3,547,892
Equity and other securities (cost of $44,069 and $46,511, respectively)		45,027		47,455
Loans held for sale, at fair value		117		1,622
Loans		7,282,582		7,415,952
Available-for-sale investment securities includes pledged securities that can be sold or repledged of $427,164 and $485,414, respectively (cost of $6,136,544 and $4,980,102, respectively)						5,170,689		4,934,210
Equity and other securities (cost of $55,665 and $43,917, respectively)						56,603		44,879

Loans, net						8,543,607		7,373,639
Allowance for credit losses		(49,499)		(60,869)		(60,363)		(49,869)
Net loans		7,233,083		7,355,083		8,483,244		7,323,770

Goodwill, net		799,127		793,708
Goodwill						844,984		799,109
Core deposit intangibles, net		10,165		13,831		13,550		9,087
Other intangibles, net		58,812		39,109		50,690		56,139
Intangible assets, net		868,104		846,648
Goodwill and intangible assets, net						909,224		864,335

Premises and equipment, net		160,776		165,655		161,966		160,651
Accrued interest and fees receivable		34,072		39,031		41,627		35,894
Other assets		308,887		281,903		523,803		313,854

Total assets	$	15,331,098	$	13,931,094	$	15,594,547	$	15,552,657

Liabilities:
Noninterest-bearing deposits	$	3,864,951	$	3,361,768	$	4,281,859	$	3,921,663
Interest-bearing deposits		8,858,870		7,863,206		9,204,462		8,989,505
Total deposits		12,723,821		11,224,974		13,486,321		12,911,168

Overnight borrowings						119,800		0
Securities sold under agreement to repurchase, short-term		316,763		284,008		352,772		324,720
Other Federal Home Loan Bank borrowings		2,912		6,658		19,472		1,888
Subordinated notes payable		3,283		3,303		3,256		3,277
Subordinated debt held by unconsolidated subsidiary trusts		0		77,320
Accrued interest and other liabilities		214,385		230,724		151,763		210,797
Total liabilities		13,261,164		11,826,987		14,133,384		13,451,850

Commitments and contingencies (See Note J)

Shareholders’ equity:
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued		0		0		0		0
Common stock, $1.00 par value, 75,000,000 shares authorized; 54,071,989 and 53,754,599 shares issued, respectively		54,072		53,755
Common stock, $1.00 par value, 75,000,000 shares authorized; 54,188,008 and 54,092,421 shares issued, respectively						54,188		54,092
Additional paid-in capital		1,039,146		1,025,163		1,048,444		1,041,304
Retained earnings		1,037,936		960,183		1,123,641		1,058,286
Accumulated other comprehensive (loss) income		(63,826)		62,077
Treasury stock, at cost (146,002 shares, including 145,987 shares held by deferred compensation arrangements at September 30, 2021 and 161,472 shares including 161,457 shares held by deferred compensation arrangements at December 31, 2020, respectively)		(5,693)		(6,198)
Deferred compensation arrangements (145,987 and 161,457 shares, respectively)		8,299		9,127
Accumulated other comprehensive loss						(746,381)		(50,627)
Treasury stock, at cost (451,992 shares, including 134,477 shares held by deferred compensation arrangements at September 30, 2022 and 214,374 shares including 146,860 shares held by deferred compensation arrangements at December 31, 2021, respectively)						(26,426)		(10,610)
Deferred compensation arrangements (134,477 and 146,860 shares, respectively)						7,697		8,362
Total shareholders’ equity		2,069,934		2,104,107		1,461,163		2,100,807

Total liabilities and shareholders’ equity	$	15,331,098	$	13,931,094	$	15,594,547	$	15,552,657

~~The~~See accompanying notes ~~are an integral part of the~~to consolidated financial ~~statements.~~statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In Thousands, Except Per-Share Data)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020
Interest income:








Interest and fees on loans

$
75,825

$
79,646

$
231,446

$
236,931
Interest and dividends on taxable investments

17,361

14,881

49,325

45,633
Interest and dividends on nontaxable investments

2,480

2,963

7,920

9,113
Total interest income

95,666

97,490

288,691

291,677

Interest expense:

Interest on deposits

2,822

3,655

8,897

13,373
Interest on borrowings

195

292

716

1,280
Interest on subordinated notes payable

38

184

115

553
Interest on subordinated debt held by unconsolidated subsidiary trusts

0

394

293

1,501
Total interest expense

3,055

4,525

10,021

16,707

Net interest income

92,611

92,965

278,670

274,970
Provision for credit losses

(944)

1,945

(11,001)

17,313
Net interest income after provision for credit losses

93,555

91,020

289,671

257,657

Noninterest revenues:

Deposit service fees

15,442

14,260

43,758

42,722
Mortgage banking

460

3,908

1,479

6,199
Other banking services

996

924

2,830

2,574
Employee benefit services

29,923

25,159

83,933

74,593
Insurance services

9,176

8,531

25,538

24,772
Wealth management services

8,322

6,889

24,748

20,389
Unrealized (loss) gain on equity securities

(10)

(12)

14

(30)
Total noninterest revenues

64,309

59,659

182,300

171,219

Noninterest expenses:

Salaries and employee benefits

62,883

57,280

178,407

170,252
Occupancy and equipment

9,867

10,134

31,437

30,627
Data processing and communications

12,966

12,096

38,123

33,342
Amortization of intangible assets

3,703

3,581

10,300

10,772
Legal and professional fees

3,352

2,365

8,885

8,577
Business development and marketing

2,383

3,145

7,071

7,162
Litigation accrual

(100)

2,950

(100)

2,950
Acquisition expenses

102

796

133

4,537
Other expenses

5,280

4,619

12,969

13,313
Total noninterest expenses

100,436

96,966

287,225

281,532

Income before income taxes

57,428

53,713

184,746

147,344
Income taxes

12,092

10,904

38,616

29,153
Net income

$
45,336

$
42,809

$
146,130

$
118,191

Basic earnings per share

$
0.84

$
0.80

$
2.70

$
2.23
Diluted earnings per share

$
0.83

$
0.79

$
2.68

$
2.22


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Interest income:
Interest and fees on loans	$	88,434	$	75,825	$	238,907	$	231,446
Interest and dividends on taxable investments		23,737		17,361		71,228		49,325
Interest and dividends on nontaxable investments		3,704		2,480		9,611		7,920
Total interest income		115,875		95,666		319,746		288,691

Interest expense:
Interest on deposits		3,855		2,822		9,111		8,897
Interest on borrowings		1,588		195		2,113		716
Interest on subordinated notes payable		38		38		115		115
Interest on subordinated debt held by unconsolidated subsidiary trusts		0		0		0		293
Total interest expense		5,481		3,055		11,339		10,021

Net interest income		110,394		92,611		308,407		278,670
Provision for credit losses		5,061		(944)		12,005		(11,001)
Net interest income after provision for credit losses		105,333		93,555		296,402		289,671

Noninterest revenues:
Deposit service fees		17,452		15,442		49,745		43,758
Mortgage banking		171		460		595		1,479
Other banking services		912		996		2,521		2,830
Employee benefit services		27,884		29,923		86,385		83,933
Insurance services		11,332		9,176		31,521		25,538
Wealth management services		7,502		8,322		24,276		24,748
Unrealized (loss) gain on equity securities		(4)		(10)		(24)		14
Total noninterest revenues		65,249		64,309		195,019		182,300

Noninterest expenses:
Salaries and employee benefits		66,190		62,883		193,236		178,407
Occupancy and equipment		10,364		9,867		31,740		31,437
Data processing and communications		14,184		12,966		40,454		38,123
Amortization of intangible assets		3,837		3,703		11,420		10,300
Legal and professional fees		3,194		3,352		10,196		8,885
Business development and marketing		3,616		2,383		9,975		7,071
Litigation accrual		0		(100)		0		(100)
Acquisition expenses		409		102		4,668		133
Acquisition-related contingent consideration adjustment		0		0		400		0
Other expenses		6,391		5,280		16,327		12,969
Total noninterest expenses		108,185		100,436		318,416		287,225

Income before income taxes		62,397		57,428		173,005		184,746
Income taxes		13,706		12,092		37,454		38,616
Net income	$	48,691	$	45,336	$	135,551	$	146,130

Basic earnings per share	$	0.90	$	0.84	$	2.51	$	2.70
Diluted earnings per share	$	0.90	$	0.83	$	2.49	$	2.68

~~The~~See accompanying notes ~~are an integral part of the~~to consolidated financial ~~statements.~~statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In Thousands)


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Pension and other post retirement obligations:
Amortization of actuarial losses included in net periodic pension cost, gross	$	911	$	820	$	2,733	$	2,460	$	220	$	911	$	660	$	2,733
Tax effect		(219)		(197)		(657)		(591)		(53)		(219)		(160)		(657)
Amortization of actuarial losses included in net periodic pension cost, net		692		623		2,076		1,869		167		692		500		2,076
Amortization of prior service cost included in net periodic pension cost, gross		50		15		150		46		109		50		327		150
Tax effect		(12)		(4)		(36)		(11)		(26)		(12)		(79)		(36)
Amortization of prior service cost included in net periodic pension cost, net		38		11		114		35		83		38		248		114
Other comprehensive income related to pension and other post-retirement obligations, net of taxes		730		634		2,190		1,904		250		730		748		2,190

Unrealized (losses) gains on available-for-sale securities:
Net unrealized holding (losses) gains arising during period, gross		(21,268)		(8,821)		(168,621)		121,439
Unrealized losses on available-for-sale securities:
Net unrealized losses arising during period, gross										(301,023)		(21,268)		(919,962)		(168,621)
Tax effect		5,112		2,118		40,528		(29,155)		73,119		5,112		223,460		40,528
Net unrealized holding (losses) gains arising during period, net		(16,156)		(6,703)		(128,093)		92,284
Other comprehensive (loss) income related to unrealized gains (losses) on available-for-sale securities, net of taxes		(16,156)		(6,703)		(128,093)		92,284
Other comprehensive (loss) income, net of tax		(15,426)		(6,069)		(125,903)		94,188
Other comprehensive loss related to unrealized losses on available-for-sale securities, net of taxes										(227,904)		(16,156)		(696,502)		(128,093)

Other comprehensive loss, net of tax										(227,654)		(15,426)		(695,754)		(125,903)
Net income		45,336		42,809		146,130		118,191		48,691		45,336		135,551		146,130
Comprehensive income	$	29,910	$	36,740	$	20,227	$	212,379
Comprehensive (loss) income									$	(178,963)	$	29,910	$	(560,203)	$	20,227


	As of				As of
	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
Accumulated Other Comprehensive (Loss) Income By Component:
Accumulated Other Comprehensive Loss By Component:
Unrealized loss for pension and other post-retirement obligations					$	(19,637)	$	(20,624)
Tax effect						4,915		5,154
Net unrealized loss for pension and other post-retirement obligations						(14,722)		(15,470)

Unrealized (loss) for pension and other post-retirement obligations	$	(35,384)	$	(38,267)
Unrealized loss on available-for-sale securities						(965,855)		(45,893)
Tax effect		8,701		9,394		234,196		10,736
Net unrealized (loss) for pension and other post-retirement obligations		(26,683)		(28,873)
Net unrealized loss on available-for-sale securities						(731,659)		(35,157)

Unrealized (loss) gain on available-for-sale securities		(48,507)		120,114
Tax effect		11,364		(29,164)
Net unrealized (loss) gain on available-for-sale securities		(37,143)		90,950

Accumulated other comprehensive (loss) income	$	(63,826)	$	62,077
Accumulated other comprehensive loss					$	(746,381)	$	(50,627)

~~The~~See accompanying notes ~~are an integral part of the~~to consolidated financial ~~statements.~~statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Three months ended September 30, ~~2021~~2022 and ~~2020~~2021

(In Thousands, Except Share Data)


								Accumulated															Accumulated
	Common Stock			Additional				Other				Deferred				Common Stock			Additional				Other				Deferred
	Shares	Amount		Paid-In		Retained		Comprehensive		Treasury		Compensation				Shares	Amount		Paid-In		Retained		Comprehensive		Treasury		Compensation
	Outstanding	Issued		Capital		Earnings		(Loss) Income		Stock		Arrangements		Total		Outstanding	Issued		Capital		Earnings		Loss		Stock		Arrangements		Total

Balance at June 30, 2022																53,734,027	$	54,185	$	1,046,303	$	1,098,664	$	(518,727)	$	(26,369)	$	7,640	$	1,661,696

Net income																						48,691								48,691

Other comprehensive loss, net of tax																								(227,654)						(227,654)

Dividends declared:
Common, $0.44 per share																						(23,714)								(23,714)

Common stock activity under employee stock plans																2,892		3		284										287

Stock-based compensation																				1,857										1,857

Treasury stock purchased for benefit plans, net																(903)										(57)		57		0

Balance at September 30, 2022																53,736,016	$	54,188	$	1,048,444	$	1,123,641	$	(746,381)	$	(26,426)	$	7,697	$	1,461,163

Balance at June 30, 2021	53,918,695	$	54,064	$	1,037,088	$	1,015,742	$	(48,400)	$	(5,632)	$	8,238	$	2,061,100	53,918,695	$	54,064	$	1,037,088	$	1,015,742	$	(48,400)	$	(5,632)	$	8,238	$	2,061,100

Net income							45,336								45,336							45,336								45,336

Other comprehensive loss, net of tax									(15,426)						(15,426)									(15,426)						(15,426)

Dividends declared:
Common, $0.43 per share							(23,142)								(23,142)							(23,142)								(23,142)

Common stock activity under employee stock plans	8,122		8		464										472	8,122		8		464										472

Stock-based compensation					1,594										1,594					1,594										1,594

Treasury stock issued to benefit plans, net	(830)										(61)		61		0
Treasury stock purchased for benefit plans, net																(830)										(61)		61		0

Balance at September 30, 2021	53,925,987	$	54,072	$	1,039,146	$	1,037,936	$	(63,826)	$	(5,693)	$	8,299	$	2,069,934	53,925,987	$	54,072	$	1,039,146	$	1,037,936	$	(63,826)	$	(5,693)	$	8,299	$	2,069,934

Balance at June 30, 2020	53,514,216	$	53,672	$	1,019,291	$	916,002	$	90,031	$	(6,066)	$	8,995	$	2,081,925

Net income							42,809								42,809

Other comprehensive loss, net of tax									(6,069)						(6,069)

Cash dividends declared:
Common, $0.42 per share							(22,538)								(22,538)

Common stock activity under employee stock plans	24,584		26		1,092										1,118

Stock-based compensation					1,415										1,415

Treasury stock issued to benefit plans, net	(1,207)										(65)		65		0

Balance at September 30, 2020	53,537,593	$	53,698	$	1,021,798	$	936,273	$	83,962	$	(6,131)	$	9,060	$	2,098,660

~~The~~See accompanying notes ~~are an integral part of the~~to consolidated financial ~~statements.~~statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Nine months ended September 30, ~~2021~~2022 and ~~2020~~2021

(In Thousands, Except Share Data)


								Accumulated															Accumulated
	Common Stock			Additional				Other				Deferred				Common Stock			Additional				Other				Deferred
	Shares	Amount		Paid-In		Retained		Comprehensive		Treasury		Compensation				Shares	Amount		Paid-In		Retained		Comprehensive		Treasury		Compensation
	Outstanding	Issued		Capital		Earnings		Income (Loss)		Stock		Arrangements		Total		Outstanding	Issued		Capital		Earnings		(Loss) Income		Stock		Arrangements		Total

Balance at December 31, 2021																53,878,047	$	54,092	$	1,041,304	$	1,058,286	$	(50,627)	$	(10,610)	$	8,362	$	2,100,807

Net income																						135,551								135,551

Other comprehensive loss, net of tax																								(695,754)						(695,754)

Dividends declared:
Common, $1.30 per share																						(70,196)								(70,196)

Common stock activity under employee stock plans																95,586		96		990										1,086

Stock-based compensation																				6,047										6,047

Distribution of stock under deferred compensation arrangements																14,934				103						739		(842)		0

Treasury stock purchased																(250,000)										(16,378)				(16,378)

Treasury stock purchased for benefit plans, net																(2,551)										(177)		177		0

Balance at September 30, 2022																53,736,016	$	54,188	$	1,048,444	$	1,123,641	$	(746,381)	$	(26,426)	$	7,697	$	1,461,163

Balance at December 31, 2020	53,593,127	$	53,755	$	1,025,163	$	960,183	$	62,077	$	(6,198)	$	9,127	$	2,104,107	53,593,127	$	53,755	$	1,025,163	$	960,183	$	62,077	$	(6,198)	$	9,127	$	2,104,107

Net income							146,130								146,130							146,130								146,130

Other comprehensive loss, net of tax									(125,903)						(125,903)									(125,903)						(125,903)

Cash dividends declared:
Dividends declared:
Common, $1.27 per share							(68,377)								(68,377)							(68,377)								(68,377)

Common stock activity under employee stock plans	317,390		317		8,824										9,141	317,390		317		8,824										9,141

Stock-based compensation					4,836										4,836					4,836										4,836

Distribution of stock under deferred compensation arrangements	18,089				323						694		(1,017)		0	18,089				323						694		(1,017)		0

Treasury stock issued to benefit plans, net	(2,619)										(189)		189		0
Treasury stock purchased for benefit plans, net																(2,619)										(189)		189		0

Balance at September 30, 2021	53,925,987	$	54,072	$	1,039,146	$	1,037,936	$	(63,826)	$	(5,693)	$	8,299	$	2,069,934	53,925,987	$	54,072	$	1,039,146	$	1,037,936	$	(63,826)	$	(5,693)	$	8,299	$	2,069,934

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							118,191								118,191

Other comprehensive income, net of tax									94,188						94,188

Cumulative effect of change in accounting Principle - Current Expected Credit Losses							1,140								1,140

Cash dividends declared:
Common, $1.24 per share							(65,909)								(65,909)

Common stock activity under employee stock ownership plans	359,934		360		13,781										14,141

Stock-based compensation					4,648										4,648

Stock issued for acquisition	1,363,259		1,363		75,579										76,942


Distribution of stock under deferred compensation arrangements	22,497				415						849		(1,264)		0

Treasury stock issued to benefit plans, net	(2,020)				38						(157)		204		85

Balance at September 30, 2020	53,537,593	$	53,698	$	1,021,798	$	936,273	$	83,962	$	(6,131)	$	9,060	$	2,098,660

~~The~~See accompanying notes ~~are an integral part of the~~to consolidated financial statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In Thousands)

Nine Months Ended

September 30,


2021

2020
Operating activities:




Net income

$
146,130

$
118,191
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

11,898

11,946
Amortization of intangible assets

10,300

10,772
Net accretion on securities, loans and borrowings

(17,260)

(7,954)
Stock-based compensation

4,836

4,648
Provision for credit losses

(11,001)

17,313
Amortization of mortgage servicing rights

397

266
Unrealized (gain) loss on equity securities

(14)

30
Income from bank-owned life insurance policies

(1,500)

(1,398)
Net gain on sale of loans and other assets

(408)

(1,633)
Change in other assets and other liabilities

9,646

(26,944)
Net cash provided by operating activities

153,024

125,237
Investing activities:




Proceeds from maturities, calls, and paydowns of available-for-sale investment securities

313,913

219,503
Proceeds from maturities and redemptions of equity and other investment securities

2,652

436
Purchases of available-for-sale investment securities

(1,284,544)

(91,381)
Purchases of equity and other securities

(210)

(3,064)
Net decrease (increase) in loans

141,491

(228,235)
Cash (paid) received for acquisitions, net of cash acquired of $541 and $55,973, respectively

(29,329)

34,360
Purchases of premises and equipment, net

(10,196)

(8,727)
Real estate tax credit investments

(586)

(1,071)
Net cash used in investing activities

(866,809)

(78,179)
Financing activities:




Net increase in deposits

1,498,847

1,609,349
Net decrease in borrowings

29,009

28,690
Payments on subordinated debt held by unconsolidated subsidiary trusts

(77,320)

(2,062)
Issuance of common stock

9,141

14,141
Purchases of treasury stock

(189)

(204)
Sales of treasury stock

0

85
Increase in deferred compensation arrangements

189

204
Cash dividends paid

(67,823)

(64,593)
Withholding taxes paid on share-based compensation

(1,213)

(1,177)
Net cash provided by financing activities

1,390,641

1,584,433
Change in cash and cash equivalents

676,856

1,631,491
Cash and cash equivalents at beginning of period

1,645,805

205,030
Cash and cash equivalents at end of period

$
2,322,661

$
1,836,521

Supplemental disclosures of cash flow information:

Cash paid for interest

$
10,722

$
16,927
Cash paid for income taxes

34,067

28,705

Supplemental disclosures of noncash financing and investing activities:

Dividends declared and unpaid

23,249

22,658
Transfers from loans to other real estate

281

1,192

Acquisitions:

Common stock issued

0

76,942
Fair value of assets acquired, excluding acquired cash and intangibles

1,324

547,654
Fair value of liabilities assumed

1,101

529,177


	Nine Months Ended
	September 30,
	2022		2021
Operating activities:
Net income	$	135,551	$	146,130
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		10,956		11,898
Amortization of intangible assets		11,420		10,300
Net accretion on securities, loans and borrowings		(14,519)		(17,260)
Stock-based compensation		6,047		4,836
Provision for credit losses		12,005		(11,001)
Amortization of mortgage servicing rights		554		397
Unrealized loss (gain) on equity securities		24		(14)
Income from bank-owned life insurance policies		(1,543)		(1,500)
Net gain on sale of assets		(570)		(408)
Change in other assets and other liabilities		(16,889)		9,646
Net cash provided by operating activities		143,036		153,024
Investing activities:
Proceeds from maturities, calls, and paydowns of available-for-sale investment securities		210,152		313,913
Proceeds from maturities and redemptions of equity and other securities		2,247		2,652
Purchases of available-for-sale investment securities		(1,348,400)		(1,284,544)
Purchases of equity and other securities		(6,108)		(210)
Net (increase) decrease in loans		(735,072)		141,491
Cash received (paid) for acquisitions, net of cash acquired of $84,988 and $541, respectively		345		(29,329)
Proceeds from sales of premises and equipment, net		1,928		103
Purchases of premises and equipment, net		(10,014)		(10,299)
Real estate tax credit investments		(247)		(586)
Net cash used in investing activities		(1,885,169)		(866,809)
Financing activities:
Net increase in deposits		52,858		1,498,847
Net increase in overnight borrowings		119,800		0
Net increase in securities sold under agreement to repurchase, short-term		28,052		32,755
Payments on other Federal Home Loan Bank borrowings		(71)		(3,746)
Payments on subordinated debt held by unconsolidated subsidiary trusts		0		(77,320)
Proceeds from the issuance of common stock		1,086		9,141
Purchases of treasury stock		(16,555)		(189)
Increase in deferred compensation arrangements		177		189
Cash dividends paid		(69,681)		(67,823)
Withholding taxes paid on share-based compensation		(1,206)		(1,213)
Net cash provided by financing activities		114,460		1,390,641
Change in cash and cash equivalents		(1,627,673)		676,856
Cash and cash equivalents at beginning of period		1,875,064		1,645,805
Cash and cash equivalents at end of period	$	247,391	$	2,322,661

Supplemental disclosures of cash flow information:
Cash paid for interest	$	11,793	$	10,722
Cash paid for income taxes		41,061		34,067
Supplemental disclosures of noncash financing and investing activities:
Dividends declared and unpaid		23,750		23,249
Transfers from loans to other real estate		303		281
Transfers from premises and equipment, net to other assets		5,113		0

Acquisitions:
Fair value of assets acquired, excluding acquired cash and intangibles		486,077		1,339
Fair value of liabilities assumed		542,668		1,164

~~The~~See accompanying notes ~~are an integral part of the~~to consolidated financial ~~statements.~~statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~SEPTEMBER~~September 30, ~~2021~~2022

NOTE A: BASIS OF PRESENTATION

The interim financial data as of and for the three and nine months ended September 30, ~~2021~~2022 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~~to present fairly the results for the interim periods in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and Article 10 of Regulation S-X. 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. The Company’s unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission (“SEC”) on March 1, ~~2021.~~2022.

NOTE B: ACQUISITIONS

~~Subsequent Event~~

On October 4, 2021, the Company announced that it had entered into an agreement to acquire Elmira Savings Bank ("Elmira"), a 12 branch banking franchise headquartered in Elmira, New York, for $82.8 million in cash. The acquisition will enhance the Company’s presence in five counties in New York’s Southern Tier and Finger Lakes regions. Elmira had total assets of $648.7 million, total deposits of $551.2 million, and net loans of $465.3 million at June 30, 2021. The Company expects to complete the acquisition in the first quarter of 2022, subject to customary closing conditions, including approval by the shareholders of Elmira and required regulatory approval.

Current and Prior Period Acquisitions

On ~~August 2, 2021,~~May 13, 2022, the Company completed the acquisition of Elmira Savings Bank (“Elmira”), a New York State chartered savings bank headquartered in Elmira, New York, for $82.2 million in cash. The acquisition enhances the Company’s presence in five counties in New York’s Southern Tier and Finger Lakes regions. In connection with the acquisition, the Company acquired approximately $579.0 million of identifiable assets, including $437.0 million of loans, $11.3 million of investment securities, and $8.0 million of core deposit intangibles, as well as $522.3 million of deposits. Preliminary goodwill of $45.8 million was recognized as a result of the merger. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. The Company also recognized a $3.9 million acquisition-related provision for credit losses for loans acquired in the transaction. Revenues of approximately $4.8 million and $7.2 million and direct expenses of approximately $1.2 million and $1.8 million from the Elmira branch network were included in the consolidated statements of income for the three and nine months ended September 30, 2022, respectively. The Company incurred certain one-time, transaction-related costs in 2022 in connection with the Elmira acquisition.

On January 1, 2022, the Company, through its subsidiary OneGroup NY, Inc. (“OneGroup”), completed acquisitions of certain assets of three insurance agencies for an aggregate amount of $2.5 million in cash. The Company recorded a $2.5 million customer list intangible asset in conjunction with the acquisitions. The effects of the acquired assets have been included in the consolidated financial statements since that date. Revenues of approximately $0.2 million and $0.8 million and direct expenses of approximately $0.1 million and $0.3 million were included in the consolidated statements of income for the three and nine months ended September 30, 2022, respectively.

On August 2, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets and liabilities of the Thomas Gregory Associates Insurance Brokers, Inc. (“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area, for $11.6 million in cash plus contingent consideration with a fair value at acquisition date of $1.5 million. The Company recorded a $10.9 million customer list intangible asset and $2.2 million of goodwill in conjunction with the acquisition. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues of approximately ~~$0.3~~$1.0 million and $3.0 million and direct expenses of approximately ~~$0.2~~$0.4 million and $1.1 million from TGA were included in the consolidated income ~~statement~~statements for the three and nine months ended September 30, ~~2021.~~2022, respectively.

The acquisition of TGA includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on the future retained revenue of TGA over a three-year period. Amounts are payable in two payments, the first of which is two years after the acquisition date, and the second is three years after the acquisition date. The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between zero and $3.4 million. The fair value of the contingent consideration recognized on the acquisition date of $1.5 million was estimated by applying the income ~~approach. That~~approach, a measure that is based on significant Level 3 inputs not readily observable in the market. Key assumptions at the date of acquisition include (1) a discount rate range of 0.82% to 1.09%, applied to present value the payments, and (2) probability adjusted level of retained revenue between $2.3 million and $3.8 million.

Table of Contents

The contingent consideration related to the TGA acquisition was revalued at June 30, 2022. The range of the undiscounted amounts the Company could pay under the agreement remained at between zero and $3.4 million. Key assumptions include (1) a discount rate range of 4.44% to 4.55% applied to present value the payments, and (2) probability adjusted level of retained revenue between $3.3 million and $3.7 million. Based on the results of the revaluation, the Company recorded a $0.5 million acquisition-related contingent consideration adjustment as of June 30, 2022 in the consolidated statements of income related to the TGA acquisition, for an adjusted fair value of $2.0 million at June 30, 2022. No adjustments were made to the fair value of the contingent consideration related to the TGA acquisition during the three months ended September 30, 2022.

On July 1, 2021, the Company, through its subsidiary Benefit Plans Administrative Services, Inc. (“BPA”), completed its acquisition of Fringe Benefits Design of Minnesota, Inc. ~~("FBD"~~(“FBD”) for $15.4 million in cash plus contingent consideration with a fair value at acquisition date of $1.4 million. The Company recorded a $14.0 million customer list intangible asset and $2.1 million of goodwill in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date. Revenues of approximately ~~$1.4~~$0.8 million and $3.3 million and direct expenses of approximately ~~$1.1~~$1.0 million and $3.2 million from FBD were included in the consolidated statements of income ~~statement~~ for the three and nine months ended September 30, ~~2021.~~2022, respectively.

~~Table of Contents~~

The acquisition of FBD includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on the future retained revenue of FBD over a two-year period. Amounts are payable three years after the acquisition date. The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between zero and $2.7 million. The fair value of the contingent consideration recognized on the acquisition date of $1.4 million was estimated by applying the income ~~approach. That~~approach; a measure that is based on significant Level 3 inputs not readily observable in the market. Key assumptions at the date of acquisition include (1) a discount rate of 1.05%, applied to present value the payment, and (2) probability adjusted level of retained revenue between $5.6 million and $5.8 million.

The contingent consideration related to the FBD acquisition was revalued at June 30, 2022. The range of the undiscounted amounts the Company could pay under the agreement remained at between zero and $2.7 million. Key assumptions include (1) a discount rate of 4.51% applied to present value the payment, and (2) probability adjusted level of retained revenue between $5.2 million and $5.4 million. Based on the results of the revaluation, the Company recorded a reduction to the fair value by $0.1 million as of June 30, 2022 as an acquisition-related contingent consideration adjustment in the consolidated statements of income related to the FBD acquisition, for an adjusted fair value of $1.5 million at June 30, 2022. No adjustments were made to the fair value of the contingent consideration related to the FBD acquisition during the three months ended September 30, 2022.

On June 1, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets and liabilities of NuVantage Insurance Corp. ~~("NuVantage"~~(“NuVantage”), an insurance agency headquartered in Melbourne, Florida. The Company paid $2.9 million in cash and recorded a $1.4 million customer list intangible asset and $1.4 million of goodwill in conjunction with the acquisition. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues of approximately $0.3 million and ~~$0.4~~$0.9 million and direct expenses of approximately $0.3 million and $0.9 million from NuVantage were included in the consolidated statements of income ~~statement~~ for the three and nine months ended September 30, ~~2021, respectively.~~

On June 12, 2020, the Company completed its merger with Steuben Trust Corporation (“Steuben”), parent company of Steuben Trust Company, a New York State chartered bank headquartered in Hornell, New York, for $98.6 million in Company stock and cash, comprised of $21.6 million in cash and the issuance of 1.36 million shares of common stock. The merger extended the Company’s footprint into 2 new counties in Western New York State, and enhanced the Company’s presence in 4 Western New York State counties in which it had already operated. In connection with the merger, the Company added 11 full-service offices to its branch service network and acquired $607.8 million of assets, including $339.7 million of loans and $180.5 million of investment securities, as well as $516.3 million of deposits. Goodwill of $20.0 million was recognized as a result of the merger. 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, interest income on acquired consumer indirect loans, and revenues associated with acquired loans and deposits consolidated into the legacy branch network, of approximately $3.3 million and $9.8 million, and direct expenses, which may not include certain shared expenses, of approximately $1.4 million and $3.9 million from Steuben were included in the consolidated income statement for the three and nine months ended September 30, 2021. The Company incurred certain one-time, transaction-related costs in 2020 in connection with the Steuben acquisition.2022.

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 are subject to adjustment based on updated information not available at the time of the acquisitions. ~~Through~~Accrued income taxes and deferred taxes associated with the Elmira acquisition were recorded on a provisional basis and could vary from the actual recorded balance once finalized. During the first and third quarter of ~~2021,~~2022, the carrying amount of other liabilities associated with the ~~Steuben~~FBD acquisition ~~decreased by $0.3 million~~was adjusted as a result of an adjustment to ~~accrued income taxes~~working capital based on the purchase agreement, for a total net increase to goodwill of $0.1 million. During the third quarter of 2022, the carrying amount of premises and equipment, other assets, and other liabilities related to the Elmira acquisition were adjusted upon receipt of new information as a result of adjustments to fair value and deferred income taxes. ~~Goodwill associated with~~The adjustments resulted in a net decrease of $4.9 million to goodwill recognized from the ~~Steuben~~Elmira acquisition ~~decreased $0.3 million as a result of this adjustment.~~at September 30, 2022.

The acquisitions generally expanded the Company’s ~~geographical~~geographic presence in New York, Florida, Massachusetts, and Minnesota, and management expects that the Company will benefit from greater geographic diversity and the advantages of other synergistic business development opportunities.

Table of Contents

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

2021

2020
(000s omitted)

TGA

FBD

NuVantage

Total

Steuben
Consideration:








Cash

$
11,620

$
15,350

$
2,900

$
29,870

$
21,613
Community Bank System, Inc. common stock

0

0

0

0

76,942
Contingent consideration

1,500

1,400

0

2,900

0
Total net consideration

13,120

16,750

2,900

32,770

98,555
Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and cash equivalents

0

541

0

541

55,973
Investment securities

0

0

0

0

180,497
Loans, net of allowance for credit losses on PCD loans

0

0

0

0

339,017
Premises and equipment, net

279

282

199

760

7,764
Accrued interest and fees receivable

0

0

0

0

2,701
Other assets

0

564

0

564

17,675
Core deposit intangibles

0

0

0

0

2,928
Other intangibles

10,900

14,000

1,437

26,337

1,196
Deposits

0

0

0

0

(516,274)
Other liabilities

(229)

(698)

(174)

(1,101)

(4,841)
Other Federal Home Loan Bank borrowings

0

0

0

0

(6,000)
Subordinated debt held by unconsolidated subsidiary trusts

0

0

0

0

(2,062)
Total identifiable assets, net

10,950

14,689

1,462

27,101

78,574
Goodwill

$
2,170

$
2,061

$
1,438

$
5,669

$
19,981


	2022						2021
(000s omitted)	Elmira		Other⁽¹⁾		Total		TGA		FBD		NuVantage		Total
Consideration:
Cash	$	82,179	$	2,464	$	84,643	$	11,620	$	15,350	$	2,900	$	29,870
Contingent consideration		0		0		0		1,500		1,400		0		2,900
Total net consideration		82,179		2,464		84,643		13,120		16,750		2,900		32,770
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents		84,988		0		84,988		0		541		0		541
Investment securities		11,305		0		11,305		0		0		0		0
Loans, net of allowance for credit losses on PCD loans		436,948		0		436,948		0		0		0		0
Premises and equipment, net		11,303		0		11,303		279		282		199		760
Accrued interest and fees receivable		884		0		884		0		0		0		0
Other assets		25,637		0		25,637		0		579		0		579
Core deposit intangibles		7,970		0		7,970		0		0		0		0
Other intangibles		0		2,464		2,464		10,900		14,000		1,437		26,337
Deposits		(522,295)		0		(522,295)		0		0		0		0
Other liabilities		(2,757)		0		(2,757)		(229)		(761)		(174)		(1,164)
Other Federal Home Loan Bank borrowings		(17,616)		0		(17,616)		0		0		0		0
Total identifiable assets, net		36,367		2,464		38,831		10,950		14,641		1,462		27,053
Goodwill	$	45,812	$	0	$	45,812	$	2,170	$	2,109	$	1,438	$	5,717

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

The Company has acquired loans from ~~Steuben~~Elmira for which there was evidence of a more-than-insignificant deterioration in credit quality since origination (purchased credit deteriorated (“PCD”) loans). 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 losses. There were no investment securities acquired from ~~Steuben~~Elmira for which there was evidence of a more-than-insignificant deterioration in credit quality since origination. The carrying amount of those loans is as follows at the date of acquisition:


(000s omitted)	PCD Loans		PCD Loans
Par value of PCD loans at acquisition	$	35,906	$	2,184
Allowance for credit losses at acquisition		(668)		(71)
Non-credit premium at acquisition		103
Non-credit discount at acquisition				(81)
Fair value of PCD loans at acquisition	$	35,341	$	2,032

~~Table of Contents~~

Acquired loans that are deemed to not have experienced a more-than-insignificant credit deterioration since origination are considered non-PCD. At the acquisition date, a fair value adjustment is recorded that includes both credit and interest rate considerations. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to interest income over the loan’s remaining life. Fair value adjustments for revolving loans are accreted (or amortized) using a straight line method. Term loans are accreted (or amortized) using the constant effective yield method. A provision for credit losses is also recorded at acquisition for the credit considerations on non-PCD loans. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans are the same as originated loans and subsequent changes to the allowance for credit losses are recorded as provision for (or reversal of) credit losses. The following is a summary of the remaining loans acquired from Steuben for which there was no evidence of a more-than-insignificant deterioration in credit quality since origination at the date of acquisition:

(000s omitted)

Non-PCD Loans
Contractually required principal and interest at acquisition

$
400,738
Contractual cash flows not expected to be collected

(2,994)
Expected cash flows at acquisition

397,744
Interest component of expected cash flows

(94,068)
Fair value of non-PCD loans at acquisition

$
303,676

~~The fair value of the Company’s common stock issued for the Steuben acquisition was determined using the market close price of the stock on June 12, 2020.~~

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.

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

The core deposit intangibles ~~and~~related to the Elmira acquisition are being amortized using an accelerated method over an estimated useful life of eight years. The other intangibles related to the ~~Steuben~~NuVantage acquisition and ~~NuVantage~~the OneGroup asset acquisitions completed in 2022 are being amortized using an accelerated method over their estimated useful of life of eight ~~years.~~years for NuVantage and two of the 2022 OneGroup asset acquisitions, and ten years for the third 2022 OneGroup asset acquisition. The other intangibles related to the TGA and FBD acquisitions are being amortized using an accelerated method over their estimated useful life of 13 years and 15 years, respectively. ~~The goodwill,~~Goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the ~~Steuben~~Elmira acquisition, the All Other segment for the NuVantage and TGA acquisitions, and the Employee Benefit Services segment for the FBD acquisition. Goodwill arising from the ~~Steuben~~Elmira and FBD acquisitions is not deductible for tax purposes. Goodwill arising from the NuVantage and TGA acquisitions is deductible for tax purposes.

Direct costs related to the acquisitions were expensed as incurred. Merger and acquisition integration-related expenses were $0.4 million and $4.7 million during the three and nine months ended September 30, 2022, respectively, and were $0.1 million during the three and nine months ended September 30, ~~2021 and amounted to $0.8 million and $4.5 million during the three and nine months ended September 30, 2020, respectively, and~~2021. These amounts have been separately stated in the consolidated statements of income.

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Supplemental Pro Forma Financial Information

The following unaudited condensed pro forma information assumes the ~~Steuben~~Elmira acquisition had been completed as of January 1, ~~2019~~2021 for the three and nine months ended September 30, ~~2020~~2022 and ~~September 30, 2019.~~2021. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the year presented, nor is it indicative of the Company’s future results. 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.~~acquisition.

~~Table of Contents~~

The pro forma information set forth below reflects the historical results of ~~Steuben~~Elmira combined with the Company’s consolidated statements of income with adjustments related to (a) certain purchase accounting fair value adjustments and (b) amortization of ~~customer lists and~~ core deposit intangibles. Acquisition-related expenses totaling ~~$0.8~~$0.4 million and ~~$4.4~~$4.7 million for the three and nine months ended September 30, ~~2020~~2022, respectively, related to ~~Steuben~~Elmira were included in the pro forma information as if they were incurred in the first quarter of ~~2019.~~2021.

Pro Forma (Unaudited)

Pro Forma (Unaudited)

Three Months Ended

Nine Months Ended
(000’s omitted)

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019
Total revenue, net of interest expense

$
152,634

$
154,221

$
456,740

$
457,399
Net income

43,472

40,695

124,338

126,874


	Pro Forma (Unaudited)				Pro Forma (Unaudited)
	Three Months Ended				Nine Months Ended
(000’s omitted)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Total revenue, net of interest expense	$	175,595	$	163,627	$	512,687	$	480,668
Net income		49,016		46,838		141,138		146,529

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 7976 through 9288 of the Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission (“SEC”) on March 1, ~~2021~~2022 except as noted below.

The extent to which the novel coronavirus (“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 of COVID-19 as of September 30, 2021 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 three and nine months ended September 30, 2021, 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.

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, ~~2021, $33.9~~2022, $32.7 million of accounts receivable, including ~~$8.5~~$9.9 million of unbilled fee revenue, and ~~$3.1~~$3.5 million of unearned revenue, was recorded in the consolidated statements of condition. As of December 31, ~~2020, $30.3~~2021, $31.6 million of accounts receivable, including ~~$7.7~~$9.1 million of unbilled fee revenue and ~~$1.4~~$2.2 million of unearned revenue, was recorded in the consolidated statements of condition.

~~Recently Adopted Accounting Pronouncements~~Premises and Equipment Held for Sale

~~In August 2018, the FASB issued ASU No. 2018-14,~~ ~~Disclosure Framework - Changes to the Disclosure Requirements~~Premises and equipment designated as held for ~~Defined Benefit Plans (Subtopic 715-20)~~~~. The updated guidance removed the requirements to identify amounts that~~sale totaling $5.1 million at September 30, 2022 are ~~expected to be reclassified out of accumulated~~included in 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 andassets on the ~~postretirement benefit obligation. The updated guidance added annual disclosure requirements for~~consolidated statements of condition and are carried at 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 adopted this guidance on January 1, 2021 and determined the adoptionlower of ~~this guidance did not have a material impact on the Company’s consolidated financial statements.~~cost or fair value.

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~~In December 2019, the FASB issued ASU No. 2019-12,~~ ~~Simplifying the~~Recently Adopted 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 adopted this guidance on January 1, 2021 and determined the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

~~New Accounting~~ Pronouncements

In March 2020, the FASB issued ASU No. 2020-04,Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The updated guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this guidance apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This new guidance is effective as of March 12, 2020 through December 31, 2022. Adoption is permitted in any interim periods for which financial statements have not been issued. ~~While~~The Company has established a working group that includes multiple functions to guide the transition from LIBOR to alternative reference rates. The Company has identified all known LIBOR exposures, created a preliminary plan to address the exposures, and new originations either do not ~~expected~~utilize LIBOR, or replacement rate language, provisions, and conventions have been specified. The Company continues to beevaluate its exposure to LIBOR and communicate with all stakeholders in order to facilitate the transition. The Company adopted this guidance on January 1, 2022 and determined that this guidance does not have a material toimpact on the ~~Company due to its insignificant~~Company’s consolidated financial statements as the Company’s exposure to LIBOR-based loans and financial instruments ~~the Company~~ is ~~currently evaluating the impact the adoption of this guidance will have on the Company’s consolidated financial statements.~~insignificant.

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205),Financial Services-Depository and Lending (Topic 942), and ~~and~~Financial Services-Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. ~~33-~~33-10835~~10835~~, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments in this update are effective upon addition to the FASB Codification and the Company determined that this guidance does not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In March 2022, the FASB issued ASU 2022-02,Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the current expected credit losses (“CECL”) model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross charge-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities that have adopted the CECL accounting standard. Early adoption, however, is permitted if an entity has adopted the CECL accounting standard. While the guidance will result in expanded disclosures, the Company does not expect the adoption of this standard will have a material impact on the Company’s consolidated financial statements.

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NOTE D: INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows:


	September 30, 2021								December 31, 2020								September 30, 2022								December 31, 2021
			Gross		Gross						Gross		Gross						Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(000’s omitted)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value		Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Available-for-Sale Portfolio:
U.S. Treasury and agency securities	$	3,467,053	$	44,279	$	118,072	$	3,393,260	$	2,423,236	$	94,741	$	16,595	$	2,501,382	$	5,103,053	$	0	$	827,613	$	4,275,440	$	4,064,624	$	39,997	$	106,057	$	3,998,564
Obligations of state and political subdivisions		404,531		17,654		220		421,965		451,028		24,632		0		475,660		561,464		496		72,050		489,910		413,019		17,326		56		430,289
Government agency mortgage-backed securities		503,548		11,232		4,104		510,676		506,540		16,280		182		522,638		449,808		57		64,974		384,891		474,506		7,615		5,065		477,056
Corporate debt securities		8,000		84		6		8,078		4,499		137		1		4,635		8,000		0		967		7,033		8,000		39		77		7,962
Government agency collateralized mortgage obligations		23,746		647		1		24,392		42,476		1,111		10		43,577		14,219		1		805		13,415		19,953		410		24		20,339
Total available-for-sale portfolio	$	4,406,878	$	73,896	$	122,403	$	4,358,371	$	3,427,779	$	136,901	$	16,788	$	3,547,892
Total available-for-sale investment portfolio																	$	6,136,544	$	554	$	966,409	$	5,170,689	$	4,980,102	$	65,387	$	111,279	$	4,934,210

Equity and other Securities:
Equity securities, at fair value	$	251	$	208	$	0	$	459	$	251	$	194	$	0	$	445	$	251	$	198	$	10	$	439	$	251	$	212	$	0	$	463
Federal Home Loan Bank common stock		7,251		0		0		7,251		7,468		0		0		7,468		18,438		0		0		18,438		7,188		0		0		7,188
Federal Reserve Bank common stock		33,916		0		0		33,916		33,916		0		0		33,916		33,568		0		0		33,568		33,916		0		0		33,916
Other equity securities, at adjusted cost		2,651		750		0		3,401		4,876		750		0		5,626		3,408		750		0		4,158		2,562		750		0		3,312
Total equity and other securities	$	44,069	$	958	$	0	$	45,027	$	46,511	$	944	$	0	$	47,455	$	55,665	$	948	$	10	$	56,603	$	43,917	$	962	$	0	$	44,879

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

As of September 30, ~~2021~~2022


	Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer					Total
				Gross					Gross					Gross					Gross					Gross					Gross
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(000’s omitted)	#	Value		Losses		#	Value		Losses		#	Value		Losses		#	Value		Losses		#	Value		Losses		#	Value		Losses

Available-for-Sale Portfolio:
U.S. Treasury and agency securities	38	$	1,223,230	$	41,243	8	$	579,793	$	76,829	46	$	1,803,023	$	118,072	76	$	2,797,064	$	321,932	51	$	1,478,376	$	505,681	127	$	4,275,440	$	827,613
Obligations of state and political subdivisions	21		16,608		220	0		0		0	21		16,608		220	701		407,699		65,889	27		17,786		6,161	728		425,485		72,050
Government agency mortgage-backed securities	117		169,915		3,528	20		18,069		576	137		187,984		4,104	636		241,348		30,136	142		140,785		34,838	778		382,133		64,974
Corporate debt securities	1		4,994		6	0		0		0	1		4,994		6	1		2,746		254	1		4,287		713	2		7,033		967
Government agency collateralized mortgage obligations	5		1,088		1	1		73		0	6		1,161		1	37		11,761		634	10		1,623		171	47		13,384		805
Total available-for-sale investment portfolio	182	$	1,415,835	$	44,998	29	$	597,935	$	77,405	211	$	2,013,770	$	122,403	1,451	$	3,460,618	$	418,845	231	$	1,642,857	$	547,564	1,682	$	5,103,475	$	966,409

Equity and other Securities:
Equity securities, at fair value																1	$	91	$	10	0	$	0	$	0	1	$	91	$	10
Total equity and other securities																1	$	91	$	10	0	$	0	$	0	1	$	91	$	10

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As of December 31, ~~2020~~2021


	Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer					Total
				Gross					Gross					Gross					Gross					Gross					Gross
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(000’s omitted)	#	Value		Losses		#	Value		Losses		#	Value		Losses		#	Value		Losses		#	Value		Losses		#	Value		Losses

Available-for-Sale Portfolio:
U.S. Treasury and agency securities	13	$	831,015	$	16,595	0	$	0	$	0	13	$	831,015	$	16,595	47	$	1,224,101	$	14,873	13	$	900,462	$	91,184	60	$	2,124,563	$	106,057
Obligations of state and political subdivisions	1		358		0	0		0		0	1		358		0	27		23,966		56	0		0		0	27		23,966		56
Government agency mortgage-backed securities	89		75,992		182	2		14		0	91		76,006		182	147		139,442		2,475	52		67,273		2,590	199		206,715		5,065
Corporate debt securities	1		1,001		1	0		0		0	1		1,001		1	1		4,923		77	0		0		0	1		4,923		77
Government agency collateralized mortgage obligations	13		5,246		10	1		0		0	14		5,246		10	18		3,146		24	1		53		0	19		3,199		24
Total available-for-sale investment portfolio	117	$	913,612	$	16,788	3	$	14	$	0	120	$	913,626	$	16,788	240	$	1,395,578	$	17,505	66	$	967,788	$	93,774	306	$	2,363,366	$	111,279

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 AA- or ~~better. Additionally, a portion of the obligations of state and political subdivisions~~better as well as carry a secondary level of credit enhancement. The Company holds two corporate debt securities in an unrealized loss position, which are currently rated A- or better, and the issuers of the securities both show a low risk of default. 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, ~~2021~~2022 represents credit losses and no unrealized losses have been recognized ~~into~~in the provision for credit ~~loss expense.~~losses. Accordingly, there is 0no allowance for credit losses on the Company’s available-for-sale investment portfolio as of September 30, ~~2021.~~2022. Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled ~~$12.5~~$18.5 million at September 30, ~~2021~~2022 and is excluded from the estimate of credit losses.

The amortized cost and estimated fair value of debt securities at September 30, ~~2021,~~2022, 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, including government agency mortgage-backed securities and government agency collateralized mortgage obligations, are shown separately.


	Available-for-Sale				Available-for-Sale
	Amortized		Fair		Amortized		Fair
(000’s omitted)	Cost		Value		Cost		Value
Due in one year or less	$	187,457	$	189,642	$	546,740	$	541,161
Due after one through five years		693,642		715,779		1,420,259		1,297,201
Due after five years through ten years		1,506,410		1,515,582		2,055,716		1,762,074
Due after ten years		1,492,075		1,402,300		1,649,802		1,171,947
Subtotal		3,879,584		3,823,303		5,672,517		4,772,383
Government agency mortgage-backed securities		503,548		510,676		449,808		384,891
Government agency collateralized mortgage obligations		23,746		24,392		14,219		13,415
Total	$	4,406,878	$	4,358,371	$	6,136,544	$	5,170,689

Investment securities with a carrying value of ~~$2.48~~$2.41 billion and ~~$2.03~~$2.32 billion at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, were pledged to collateralize certain deposits and borrowings. Securities pledged to collateralize certain deposits and borrowings included ~~$475.0~~$427.2 million and ~~$473.4~~$485.4 million of U.S. Treasury securities that were pledged as collateral for securities sold under agreement to repurchase at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. All securities sold under agreement to repurchase as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 have an overnight and continuous maturity.

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NOTE E: LOANS AND ALLOWANCE FOR CREDIT LOSSES

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


	September 30,		December 31,		September 30,		December 31,
(000’s omitted)	2021		2020		2022		2021
Business lending	$	3,092,177	$	3,440,077	$	3,494,425	$	3,075,904
Consumer mortgage		2,470,974		2,401,499		2,975,521		2,556,114
Consumer indirect		1,168,378		1,021,885		1,461,235		1,189,749
Consumer direct		155,602		152,657		179,399		153,811
Home equity		395,451		399,834		433,027		398,061
Gross loans, including deferred origination costs		7,282,582		7,415,952		8,543,607		7,373,639
Allowance for credit losses		(49,499)		(60,869)		(60,363)		(49,869)
Loans, net of allowance for credit losses	$	7,233,083	$	7,355,083	$	8,483,244	$	7,323,770

The following table presents the aging of the amortized cost basis of the Company’s past due loans ~~including PCD loans,~~ by segment as of September 30, ~~2021:~~2022:


	Past Due		90+ Days Past										Past Due		90+ Days Past
	30 – 89		Due and				Total						30 – 89		Due and				Total
(000’s omitted)	Days		Still Accruing		Nonaccrual		Past Due		Current		Total Loans		Days		Still Accruing		Nonaccrual		Past Due		Current		Total Loans
Business lending	$	5,109	$	148	$	47,820	$	53,077	$	3,039,100	$	3,092,177	$	1,039	$	0	$	4,848	$	5,887	$	3,488,538	$	3,494,425
Consumer mortgage		8,869		1,288		15,605		25,762		2,445,212		2,470,974		12,138		3,997		20,890		37,025		2,938,496		2,975,521
Consumer indirect		8,638		131		0		8,769		1,159,609		1,168,378		11,938		215		0		12,153		1,449,082		1,461,235
Consumer direct		608		19		1		628		154,974		155,602		956		38		29		1,023		178,376		179,399
Home equity		1,991		288		2,541		4,820		390,631		395,451		1,761		166		2,309		4,236		428,791		433,027
Total	$	25,215	$	1,874	$	65,967	$	93,056	$	7,189,526	$	7,282,582	$	27,832	$	4,416	$	28,076	$	60,324	$	8,483,283	$	8,543,607

The following table presents the aging of the amortized cost basis of the Company’s past due loans ~~including PCD loans,~~ by segment as of December 31, ~~2020:~~2021:


	Past Due		90+ Days Past										Past Due		90+ Days Past
	30 – 89		Due and				Total						30 – 89		Due and				Total
(000’s omitted)	Days		Still Accruing		Nonaccrual		Past Due		Current		Total Loans		Days		Still Accruing		Nonaccrual		Past Due		Current		Total Loans
Business lending	$	4,896	$	59	$	55,709	$	60,664	$	3,379,413	$	3,440,077	$	5,540	$	99	$	24,105	$	29,744	$	3,046,160	$	3,075,904
Consumer mortgage		13,236		3,051		14,970		31,257		2,370,242		2,401,499		10,297		3,328		15,027		28,652		2,527,462		2,556,114
Consumer indirect		13,161		219		1		13,381		1,008,504		1,021,885		9,611		87		0		9,698		1,180,051		1,189,749
Consumer direct		1,170		28		3		1,201		151,456		152,657		796		22		1		819		152,992		153,811
Home equity		2,296		565		2,246		5,107		394,727		399,834		1,778		272		2,532		4,582		393,479		398,061
Total	$	34,759	$	3,922	$	72,929	$	111,610	$	7,304,342	$	7,415,952	$	28,022	$	3,808	$	41,665	$	73,495	$	7,300,144	$	7,373,639

The delinquency status for loans on payment deferment due to COVID-19 financial hardship were reported at September 30, 2021 based on their delinquency status at the execution date of the payment deferment, unless subsequent to the execution date of the payment deferment, the borrower made all required past due payments to bring the loan to current status. Certain loans under extended pandemic-related forbearance were reclassified to nonaccrual status.

~~NaN~~No interest income on nonaccrual loans was recognized during the three and nine months ended September 30, ~~2021 and 2020.~~2022. An immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest ~~income in both periods.~~income.

1716

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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 to loans individually ~~to those classes of loans that have significant or unique credit characteristics that benefit from~~based on a case-by-case evaluation. Loans that were granted COVID-19 related financial hardship payment deferrals were reviewed on a case-by-case basis for credit risk ratings. Loans on payment deferral will continue to be monitored for indications of deterioration that could result in future downgrades. In general, the following are the definitions of the Company’s credit quality indicators:


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

The following tables show the amount of business lending loans by credit quality category at September 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


																	Term Loans Amortized Cost Basis by Origination Year
													Revolving																Revolving
													Loans																Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized																Amortized
September 30, 2021	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
September 30, 2022																	2022		2021		2020		2019		2018		Prior		Cost Basis		Total
Business lending:
Risk rating
Pass	$	418,709	$	365,951	$	339,050	$	261,444	$	179,753	$	624,089	$	501,995	$	2,690,991	$	617,776	$	422,638	$	306,960	$	325,181	$	249,442	$	710,320	$	636,686	$	3,269,003
Special mention		4,877		12,376		11,965		39,450		34,331		64,406		26,468		193,873		2,236		5,229		3,988		4,442		13,155		64,432		31,447		124,929
Classified		788		1,797		20,851		47,749		25,280		74,205		34,856		205,526		836		948		1,259		3,840		28,498		56,395		8,717		100,493
Doubtful		0		0		15		916		0		0		856		1,787		0		0		0		0		0		0		0		0
Total business lending	$	424,374	$	380,124	$	371,881	$	349,559	$	239,364	$	762,700	$	564,175	$	3,092,177	$	620,848	$	428,815	$	312,207	$	333,463	$	291,095	$	831,147	$	676,850	$	3,494,425


																	Term Loans Amortized Cost Basis by Origination Year
													Revolving																Revolving
													Loans																Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized																Amortized
December 31, 2020	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
December 31, 2021																	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
Business lending:
Risk rating
Pass	$	860,178	$	351,350	$	312,087	$	217,138	$	231,453	$	543,999	$	483,018	$	2,999,223	$	524,302	$	328,885	$	320,638	$	248,175	$	186,074	$	584,912	$	524,553	$	2,717,539
Special mention		14,687		36,041		28,410		21,875		29,386		51,657		52,732		234,788		5,969		11,013		10,111		46,318		22,524		57,134		27,444		180,513
Classified		6,336		4,560		30,422		24,807		14,891		65,157		56,000		202,173		1,870		1,767		20,315		40,235		21,904		63,685		27,511		177,287
Doubtful		0		18		2,888		0		0		108		879		3,893		0		0		0		62		0		0		503		565
Total business lending	$	881,201	$	391,969	$	373,807	$	263,820	$	275,730	$	660,921	$	592,629	$	3,440,077	$	532,141	$	341,665	$	351,064	$	334,790	$	230,502	$	705,731	$	580,011	$	3,075,904

The business lending portfolio experienced an improvement in credit quality as a higher proportion of loans were classified as Pass at September 30, 2022 as compared to December 31, 2021. This change was the result of improvements in economic conditions, leading to improvements in the financial condition of the borrowers.

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+ days past due and still accruing and nonaccrual loans.

1817

Table of Contents

The following table details the balances in all other loan categories at September 30, ~~2021:~~2022:

Revolving

Loans

(000’s omitted)

Term Loans Amortized Cost Basis by Origination Year

Amortized

September 30, 2021

2021

2020

2019

2018

2017

Prior

Cost Basis

Total
Consumer mortgage:

















FICO AB⁽¹⁾

















Performing

$
360,580

$
237,931

$
195,086

$
127,786

$
125,836

$
612,420

$
0

$
1,659,639
Nonperforming

0

0

0

256

475

2,851

0

3,582
Total FICO AB

360,580

237,931

195,086

128,042

126,311

615,271

0

1,663,221
FICO CDE⁽²⁾

Performing

109,400

125,742

91,312

65,967

58,841

323,974

19,206

794,442
Nonperforming

80

232

977

679

781

10,562

0

13,311
Total FICO CDE

109,480

125,974

92,289

66,646

59,622

334,536

19,206

807,753
Total consumer mortgage

$
470,060

$
363,905

$
287,375

$
194,688

$
185,933

$
949,807

$
19,206

$
2,470,974

Consumer indirect:

Performing

$
480,254

$
229,368

$
209,894

$
126,128

$
48,624

$
73,979

$
0

$
1,168,247
Nonperforming

0

39

74

9

9

0

0

131
Total consumer indirect

$
480,254

$
229,407

$
209,968

$
126,137

$
48,633

$
73,979

$
0

$
1,168,378

Consumer direct:

Performing

$
61,119

$
32,913

$
29,379

$
15,118

$
5,668

$
5,259

$
6,126

$
155,582
Nonperforming

0

0

1

4

0

14

1

20
Total consumer direct

$
61,119

$
32,913

$
29,380

$
15,122

$
5,668

$
5,273

$
6,127

$
155,602

Home equity:

Performing

$
56,317

$
45,314

$
39,025

$
21,292

$
17,137

$
39,052

$
174,485

$
392,622
Nonperforming

0

118

21

104

96

793

1,697

2,829
Total home equity

$
56,317

$
45,432

$
39,046

$
21,396

$
17,233

$
39,845

$
176,182

$
395,451


	Term Loans Amortized Cost Basis by Origination Year
													Revolving
													Loans
(000’s omitted)													Amortized
September 30, 2022	2022		2021		2020		2019		2018		Prior		Cost Basis		Total
Consumer mortgage:
FICO AB⁽¹⁾
Performing	$	346,061	$	516,066	$	231,558	$	182,908	$	103,874	$	629,948	$	1,799	$	2,012,214
Nonperforming		0		0		392		422		407		4,619		0		5,840
Total FICO AB		346,061		516,066		231,950		183,330		104,281		634,567		1,799		2,018,054
FICO CDE⁽²⁾
Performing		125,340		190,264		120,575		85,509		57,082		336,435		23,215		938,420
Nonperforming		238		1,061		1,701		1,443		1,467		13,137		0		19,047
Total FICO CDE		125,578		191,325		122,276		86,952		58,549		349,572		23,215		957,467
Total consumer mortgage	$	471,639	$	707,391	$	354,226	$	270,282	$	162,830	$	984,139	$	25,014	$	2,975,521

Consumer indirect:
Performing	$	620,692	$	453,478	$	143,702	$	115,304	$	62,534	$	65,310	$	0	$	1,461,020
Nonperforming		26		135		35		8		11		0		0		215
Total consumer indirect	$	620,718	$	453,613	$	143,737	$	115,312	$	62,545	$	65,310	$	0	$	1,461,235

Consumer direct:
Performing	$	72,531	$	52,234	$	19,832	$	15,548	$	7,045	$	5,615	$	6,527	$	179,332
Nonperforming		0		0		5		1		29		12		20		67
Total consumer direct	$	72,531	$	52,234	$	19,837	$	15,549	$	7,074	$	5,627	$	6,547	$	179,399

Home equity:
Performing	$	55,553	$	74,656	$	39,458	$	33,137	$	17,175	$	44,513	$	166,060	$	430,552
Nonperforming		0		10		122		198		153		661		1,331		2,475
Total home equity	$	55,553	$	74,666	$	39,580	$	33,335	$	17,328	$	45,174	$	167,391	$	433,027

(1)

FICO AB refers to higher tiered loans with FICO scores greater than or equal to ~~720.~~720 at origination.

(2)

FICO CDE refers to loans with FICO scores less than 720 at origination and potentially higher risk.

1918

Table of Contents

The following table details the balances in all other loan categories at December 31, ~~2020:~~2021:

Revolving

Loans

(000’s omitted)

Term Loans Amortized Cost Basis by Origination Year

Amortized

December 31, 2020

2020

2019

2018

2017

2016

Prior

Cost Basis

Total
Consumer mortgage:
















FICO AB⁽¹⁾
















Performing

$
260,588

$
227,027

$
166,638

$
163,653

$
160,911

$
614,976

$
321

$
1,594,114
Nonperforming

0

0

275

398

345

2,709

0

3,727
Total FICO AB

260,588

227,027

166,913

164,051

161,256

617,685

321

1,597,841
FICO CDE⁽²⁾

Performing

115,049

102,788

80,973

75,289

83,214

314,668

17,382

789,363
Nonperforming

0

1,010

582

877

1,786

10,040

0

14,295
Total FICO CDE

115,049

103,798

81,555

76,166

85,000

324,708

17,382

803,658
Total consumer mortgage

$
375,637

$
330,825

$
248,468

$
240,217

$
246,256

$
942,393

$
17,703

$
2,401,499

Consumer indirect:

Performing

$
303,471

$
305,901

$
202,373

$
86,497

$
61,449

$
61,975

$
0

$
1,021,666
Nonperforming

51

52

82

17

16

1

0

219
Total consumer indirect

$
303,522

$
305,953

$
202,455

$
86,514

$
61,465

$
61,976

$
0

$
1,021,885

Consumer direct:

Performing

$
49,181

$
46,992

$
27,872

$
12,326

$
5,232

$
4,146

$
6,878

$
152,627
Nonperforming

1

19

2

5

0

3

0

30
Total consumer direct

$
49,182

$
47,011

$
27,874

$
12,331

$
5,232

$
4,149

$
6,878

$
152,657

Home equity:

Performing

$
48,145

$
48,780

$
28,074

$
23,524

$
17,828

$
35,900

$
194,773

$
397,024
Nonperforming

0

24

73

104

183

490

1,936

2,810
Total home equity

$
48,145

$
48,804

$
28,147

$
23,628

$
18,011

$
36,390

$
196,709

$
399,834


	Term Loans Amortized Cost Basis by Origination Year
													Revolving
													Loans
(000’s omitted)													Amortized
December 31, 2021	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
Consumer mortgage:
FICO AB⁽¹⁾
Performing	$	514,680	$	229,039	$	183,469	$	113,618	$	116,417	$	566,129	$	0	$	1,723,352
Nonperforming		0		266		0		131		435		3,236		0		4,068
Total FICO AB		514,680		229,305		183,469		113,749		116,852		569,365		0		1,727,420
FICO CDE⁽²⁾
Performing		168,870		122,546		85,253		57,973		54,396		300,341		25,028		814,407
Nonperforming		0		522		972		1,465		939		10,389		0		14,287
Total FICO CDE		168,870		123,068		86,225		59,438		55,335		310,730		25,028		828,694
Total consumer mortgage	$	683,550	$	352,373	$	269,694	$	173,187	$	172,187	$	880,095	$	25,028	$	2,556,114

Consumer indirect:
Performing	$	590,857	$	204,529	$	182,458	$	107,683	$	39,385	$	64,750	$	0	$	1,189,662
Nonperforming		0		34		0		24		17		12		0		87
Total consumer indirect	$	590,857	$	204,563	$	182,458	$	107,707	$	39,402	$	64,762	$	0	$	1,189,749

Consumer direct:
Performing	$	72,584	$	28,905	$	24,770	$	12,340	$	4,396	$	4,575	$	6,218	$	153,788
Nonperforming		0		4		18		1		0		0		0		23
Total consumer direct	$	72,584	$	28,909	$	24,788	$	12,341	$	4,396	$	4,575	$	6,218	$	153,811

Home equity:
Performing	$	76,041	$	43,106	$	35,990	$	18,824	$	15,134	$	35,740	$	170,422	$	395,257
Nonperforming		0		64		47		102		131		679		1,781		2,804
Total home equity	$	76,041	$	43,170	$	36,037	$	18,926	$	15,265	$	36,419	$	172,203	$	398,061

(1)

FICO AB refers to higher tiered loans with FICO scores greater than or equal to ~~720.~~720 at origination.

(2)

FICO CDE refers to loans with FICO scores less than 720 at origination and potentially higher risk.

~~All loan classes~~Commercial loans greater than $0.5 million that are ~~collectively evaluated~~on nonaccrual are individually assessed, and if necessary, a specific allocation of the allowance for credit losses ~~except business lending.~~is provided. A summary of individually assessed business loans as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 follows:


	September 30,		December 31,		September 30,		December 31,
(000’s omitted)	2021		2020		2022		2021
Loans with allowance allocation	$	21,688	$	27,437	$	0	$	7,102
Loans without allowance allocation		9,145		8,138		3,232		7,417
Carrying balance		30,833		35,575		3,232		14,519
Contractual balance		33,357		38,362		4,201		16,963
Specifically allocated allowance		1,834		3,874		0		566

The average carrying balance of individually assessed loans was ~~$31.5~~$3.2 million and ~~$8.8~~$31.5 million for the three months ended September 30, ~~2021~~2022 and ~~September 30, 2020,~~2021, respectively. The average carrying balance of individually assessed loans was ~~$34.1~~$12.2 million and ~~$4.2~~$34.1 million for the nine months ended September 30, 2022 and 2021, ~~and September 30, 2020,~~ respectively. ~~NaN~~No interest income was recognized on individually assessed loans for the three or nine months ended September 30, ~~2021~~2022 and ~~September 30, 2020.~~2021.

2019

Table of Contents

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”), 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, ~~2021~~2022 and ~~2020~~2021 was immaterial.

TDRs less than $0.5 million are collectively included in the allowance for credit loss estimate. Commercial loans greater than $0.5 million are individually assessed, and if necessary, a specific allocation of the allowance for credit losses is provided. With regard to determination of the amount of the allowance for credit losses, TDR loans are considered to be impaired. As a result, the determination of the amount of allowance for credit losses related to impaired loans for each portfolio segment within TDRs is the same as detailed previously.

With respect to the Company’s lending activities, the Company implemented a customer forbearance program allowing for loan payment deferrals up to three months per request during 2020 to assist both consumer and business borrowers that were experiencing financial hardship due to COVID-19 related challenges. Business lending, consumer direct, and consumer indirect loans in deferment status continued to accrue interest on the deferred principal during the deferment period unless otherwise classified as nonaccrual. Consumer mortgage and home equity loans did not accrue interest on the deferred payments during the deferment period. Consistent with the Coronavirus Aid, Relief and Economic Security Act ( “CARES Act”), the Consolidated Appropriations Act of 2021 (“CAA”), and industry regulatory guidance, borrowers that were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period and were not classified as TDRs. Borrowers that were delinquent in their payments to the Company prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case-by-case basis for TDR classification and non-performing loan status.

As of September 30, 2021, the Company had 4 borrowers in forbearance due to COVID-19 related financial hardship, representing $3.9 million in outstanding loan balances, or 0.1% of total loans outstanding. These forbearances were comprised of 3 business borrowers representing $3.8 million in outstanding loan balances and 1 consumer borrower representing approximately $0.1 million in outstanding loan balances. As of December 31, 2020, the Company had 74 borrowers in forbearance due to COVID-19 related financial hardship, representing $66.5 million in outstanding loan balances, or 0.9% of total loans outstanding. These forbearances were comprised of 63 business borrowers representing $65.7 million in outstanding loan balances and 11 consumer borrowers representing approximately $0.8 million in outstanding loan balances.

Information regarding TDRs as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 is as follows:


	September 30, 2021									December 31, 2020									September 30, 2022									December 31, 2021
(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	10	$	458	5	$	175	15	$	633	6	$	529	4	$	191	10	$	720	2	$	161	3	$	282	5	$	443	10	$	1,011	4	$	811	14	$	1,822
Consumer mortgage	62		2,828	44		2,307	106		5,135	56		2,413	48		2,266	104		4,679	56		2,408	44		2,041	100		4,449	61		2,694	47		2,420	108		5,114
Consumer indirect	0		0	73		816	73		816	0		0	86		951	86		951	0		0	59		628	59		628	0		0	72		829	72		829
Consumer direct	0		0	17		10	17		10	0		0	23		85	23		85	0		0	11		4	11		4	0		0	16		7	16		7
Home equity	10		244	12		240	22		484	11		285	13		264	24		549	9		116	10		217	19		333	10		235	12		232	22		467
Total	82	$	3,530	151	$	3,548	233	$	7,078	73	$	3,227	174	$	3,757	247	$	6,984	67	$	2,685	127	$	3,172	194	$	5,857	81	$	3,940	151	$	4,299	232	$	8,239

~~Table of Contents~~

The following table presents information related to loans modified in a TDR during the three months and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021. Of the loans noted in the table below, all consumer mortgage loans for the three months and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.


	Three Months Ended			Three Months Ended			Three Months Ended			Three Months Ended
	September 30, 2021			September 30, 2020			September 30, 2022			September 30, 2021
	Number of	Outstanding		Number of	Outstanding		Number of	Outstanding		Number of	Outstanding
(000’s omitted)	loans modified	Balance		loans modified	Balance		loans modified	Balance		loans modified	Balance
Business lending	5	$	1,925	0	$	0	0	$	0	5	$	1,925
Consumer mortgage	9		728	8		646	1		184	9		728
Consumer indirect	5		78	14		131	6		71	5		78
Consumer direct	1		2	1		2	2		3	1		2
Home equity	0		0	2		56	0		0	0		0
Total	20	$	2,733	25	$	835	9	$	258	20	$	2,733

Nine Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

Number of

Outstanding

Number of

Outstanding
(000’s omitted)

loans modified

Balance

loans modified

Balance
Business lending

5

$
1,925

0

$
0
Consumer mortgage

19

1,193

17

1,378
Consumer indirect

17

222

25

261
Consumer direct

2

8

2

12
Home equity

0

0

2

56
Total

43

$
3,348

46

$
1,707

~~Allowance for Credit Losses~~

~~The following presents by segment the activity in the allowance for credit losses during the three months and nine months ended September 30, 2021 and 2020:~~


											Nine Months Ended			Nine Months Ended
	Three Months Ended September 30, 2021										September 30, 2022			September 30, 2021
	Beginning		Charge-						Ending		Number of	Outstanding		Number of		Outstanding
(000’s omitted)	balance		offs		Recoveries		Provision		balance		loans modified	Balance		loans modified		Balance
Business lending	$	23,417	$	(872)	$	169	$	(2,688)	$	20,026	0	$	0		5	$	1,925
Consumer mortgage		10,001		(127)		3		(132)		9,745	5		459		19		1,193
Consumer indirect		11,103		(1,365)		973		1,334		12,045	12		127		17		222
Consumer direct		2,548		(309)		163		268		2,670	2		3		2		8
Home equity		1,796		(30)		10		(56)		1,720	1		6		0		0
Unallocated		1,000		0		0		0		1,000
Purchased credit deteriorated		1,885		0		35		373		2,293
Allowance for credit losses – loans		51,750		(2,703)		1,353		(901)		49,499
Liabilities for off-balance-sheet credit exposures		762		0		0		(43)		719
Total allowance for credit losses	$	52,512	$	(2,703)	$	1,353	$	(944)	$	50,218
Total											20	$	595		43	$	3,348

2220

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Three Months Ended September 30, 2020


Beginning

Charge-





Ending
(000’s omitted)

balance

offs

Recoveries

Provision

balance
Business lending

$
24,204

$
(736)

$
67

$
3,539

$
27,074
Consumer mortgage

13,088

(248)

23

(599)

12,264
Consumer indirect

15,866

(1,281)

1,111

(963)

14,733
Consumer direct

4,028

(340)

225

(120)

3,793
Home equity

2,690

(24)

5

(124)

2,547
Unallocated

1,000

0

0

4

1,004
Purchased credit deteriorated

3,561

(91)

32

45

3,547
Allowance for credit losses – loans

64,437

(2,720)

1,463

1,782

64,962
Liabilities for off-balance-sheet credit exposures

1,452

0

0

163

1,615
Total allowance for credit losses

$
65,889

$
(2,720)

$
1,463

$
1,945

$
66,577

Nine Months Ended September 30, 2021


Beginning

Charge-




Ending
(000’s omitted)

balance

offs

Recoveries

Provision

balance
Business lending

$
28,190

$
(925)

$
491

$
(7,730)

$
20,026
Consumer mortgage

10,672

(369)

22

(580)

9,745
Consumer indirect

13,696

(3,514)

3,402

(1,539)

12,045
Consumer direct

3,207

(822)

607

(322)

2,670
Home equity

2,222

(145)

19

(376)

1,720
Unallocated

1,000

0

0

0

1,000
Purchased credit deteriorated

1,882

0

95

316

2,293
Allowance for credit losses – loans

60,869

(5,775)

4,636

(10,231)

49,499
Liabilities for off-balance-sheet credit exposures

1,489

0

0

(770)

719
Total allowance for credit losses

$
62,358

$
(5,775)

$
4,636

$
(11,001)

$
50,218

Nine Months Ended September 30, 2020

Beginning

Beginning

balance,

balance,

prior to the

after

adoption of

Impact of

adoption of

Steuben

Ending
(000’s omitted)

ASC 326

ASC 326

ASC 326

Charge-offs

Recoveries

acquisition

Provision

balance
Business lending

$
19,426

$
288

$
19,714

$
(919)

$
289

$
2,483

$
5,507

$
27,074
Consumer mortgage

10,269

(1,051)

9,218

(668)

67

146

3,501

12,264
Consumer indirect

13,712

(997)

12,715

(4,791)

3,107

183

3,519

14,733
Consumer direct

3,255

(643)

2,612

(1,214)

578

87

1,730

3,793
Home equity

2,129

808

2,937

(178)

23

235

(470)

2,547
Unallocated

957

43

1,000

0

0

0

4

1,004
Purchased credit deteriorated

0

3,072

3,072

(91)

80

528

(42)

3,547
Purchased credit impaired

163

(163)

0

0

0

0

0

0
Allowance for credit losses – loans

49,911

1,357

51,268

(7,861)

4,144

3,662

13,749

64,962
Liabilities for off-balance-sheet credit exposures

0

1,185

1,185

0

0

67

363

1,615
Total allowance for credit losses

$
49,911

$
2,542

$
52,453

$
(7,861)

$
4,144

$
3,729

$
14,112

$
66,577

Allowance for Credit Losses

~~Improvements~~The following presents by segment the activity in ~~economic forecasts have resulted in an~~the allowance for credit losses ~~to total loans ratio of 0.68% at~~during the three months and nine months ended September 30, ~~2021, 19 basis points lower than the level at September 30, 2020~~2022 and ~~14 basis points lower than the level at December 31, 2020.~~2021:

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $18.2 million at September 30, 2021 and is excluded from the estimate of credit losses and amortized cost basis of loans.


	Three Months Ended September 30, 2022

	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	23,241	$	(495)	$	755	$	430	$	23,931
Consumer mortgage		12,631		(113)		4		1,296		13,818
Consumer indirect		14,378		(1,706)		1,386		2,960		17,018
Consumer direct		2,822		(342)		174		361		3,015
Home equity		1,470		(32)		11		132		1,581
Unallocated		1,000		0		0		0		1,000
Allowance for credit losses – loans		55,542		(2,688)		2,330		5,179		60,363
Liabilities for off-balance-sheet credit exposures		1,223		0		0		(118)		1,105
Total allowance for credit losses	$	56,765	$	(2,688)	$	2,330	$	5,061	$	61,468


	Three Months Ended September 30, 2021
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	25,302	$	(872)	$	204	$	(2,315)	$	22,319
Consumer mortgage		10,001		(127)		3		(132)		9,745
Consumer indirect		11,103		(1,365)		973		1,334		12,045
Consumer direct		2,548		(309)		163		268		2,670
Home equity		1,796		(30)		10		(56)		1,720
Unallocated		1,000		0		0		0		1,000
Allowance for credit losses – loans		51,750		(2,703)		1,353		(901)		49,499
Liabilities for off-balance-sheet credit exposures		762		0		0		(43)		719
Total allowance for credit losses	$	52,512	$	(2,703)	$	1,353	$	(944)	$	50,218


	Nine Months Ended September 30, 2022
							PCD
	Beginning		Charge-				Allowance at				Ending
(000’s omitted)	balance		offs		Recoveries		Acquisition		Provision		balance
Business lending	$	22,995	$	(650)	$	1,249	$	71	$	266	$	23,931
Consumer mortgage		10,017		(230)		21		0		4,010		13,818
Consumer indirect		11,737		(5,183)		3,732		0		6,732		17,018
Consumer direct		2,306		(859)		577		0		991		3,015
Home equity		1,814		(69)		132		0		(296)		1,581
Unallocated		1,000		0		0		0		0		1,000
Allowance for credit losses – loans		49,869		(6,991)		5,711		71		11,703		60,363
Liabilities for off-balance-sheet credit exposures		803		0		0		0		302		1,105
Total allowance for credit losses	$	50,672	$	(6,991)	$	5,711	$	71	$	12,005	$	61,468

2321

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	Nine Months Ended September 30, 2021
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	30,072	$	(925)	$	586	$	(7,414)	$	22,319
Consumer mortgage		10,672		(369)		22		(580)		9,745
Consumer indirect		13,696		(3,514)		3,402		(1,539)		12,045
Consumer direct		3,207		(822)		607		(322)		2,670
Home equity		2,222		(145)		19		(376)		1,720
Unallocated		1,000		0		0		0		1,000
Allowance for credit losses – loans		60,869		(5,775)		4,636		(10,231)		49,499
Liabilities for off-balance-sheet credit exposures		1,489		0		0		(770)		719
Total allowance for credit losses	$	62,358	$	(5,775)	$	4,636	$	(11,001)	$	50,218

A weaker economic forecast, offset, in part, by the continued improvement in non-economic qualitative adjustments resulting from low levels of delinquencies and charge-offs as well as improved risk ratings have resulted in an allowance for credit losses to total loans ratio of 0.71% at September 30, 2022, three basis points higher than the levels at both September 30, 2021 and December 31, 2021. Included in the provision for credit losses for the three and nine months ended September 30, 2022 is $3.9 million of acquisition-related provision for credit losses recognized in connection with the Elmira acquisition.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $19.8 million at September 30, 2022 and is excluded from the estimate of credit losses and amortized cost basis of loans.

Under ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), also referred to as ~~CECL,~~“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, 2020. 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 current expected credit losses. Management selected an ~~eight quarter~~eight-quarter reasonable and supportable forecast period using a ~~two quarter~~two-quarter lag adjustment for economic factors that are not dependent on collateral values, and no lag adjustment for factors that do utilize collateral values, with a ~~four quarter~~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 for expected losses and to reflect changes as a result of current conditions.

For qualitative macroeconomic adjustments, the Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that ~~were~~are weighted, ~~based on guidance from the third party provider,~~ with forecasts available as of September 30, ~~2021.~~2022. These forecasts were factored into the qualitative portion of the calculation of the estimated credit losses and ~~included~~include the continued influence of supply chain constraints and inflationary pressures as well as their commensurate impact ~~of COVID-19, including forecasted vaccine distribution progress~~on collateral values and ~~current and future Federal stimulus packages.~~economic growth. The scenarios utilized ~~outline a significant improvement in economic conditions with peak unemployment ranging from 2.9% to 9.1% in the third quarter of 2022, a general improvement in~~forecast stable unemployment levels, ~~over the subsequent three quarters, and an improvement~~offset by deterioration in GDP growth, auto values, residential real estate, and vehicle collateral values. 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, and the risk that Paycheck Protection Program (“PPP”) loans will not be forgiven.median household income.

Management developed expected loss estimates considering factors for segments as outlined below:

●

Business lending – non real estate: The Company ~~considered and~~ selected projected unemployment and GDP as ~~possible~~ indicators of forecasted losses related to business ~~lending.~~lending, and utilize both factors in an even weight for the calculation. The Company also considered delinquencies, the level of loan deferrals, risk rating changes, recent charge-off history and acquired loans as part of the ~~review~~estimation of ~~estimated~~credit losses.

●

Business lending – real estate: The Company ~~considered and~~ selected projected unemployment and commercial ~~and multi-family~~ real estate values as ~~possible~~ indicators of forecasted losses related to commercial real estate ~~loans.~~loans, and utilize both factors in an even weight for the calculation. The Company also considered the factors noted in business lending – non real estate.

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●

Consumer mortgages and home equity: The Company ~~considered and~~ selected projected unemployment and residential real estate values as ~~possible~~ indicators of forecasted losses related to mortgage ~~lending.~~lending, and utilize both factors in an even weight for the calculation. In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered.

●

Consumer indirect: The Company ~~considered and~~ selected projected unemployment and vehicle valuation indices as ~~possible~~ indicators of forecasted losses related to indirect ~~lending.~~lending, and utilize both factors in an even weight for the calculation. In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered.

●

Consumer direct: The Company ~~considered and~~ selected projected unemployment and ~~median~~inflation-adjusted household income as ~~possible indicator~~indicators of forecasted losses related to consumer direct ~~lending.~~lending, and utilize both factors in an even weight for the calculation. In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered.

The following table presents the carrying amounts of loans purchased and sold during the nine months ended September 30, ~~2021~~2022 by portfolio segment:


	Business		Consumer		Consumer		Consumer		Home				Business		Consumer		Consumer		Consumer		Home
(000’s omitted)	lending		mortgage		indirect		direct		equity		Total		lending		mortgage		indirect		direct		equity		Total
Purchases	$	0	$	0	$	0	$	0	$	0	$	0	$	125,288	$	271,408	$	9,383	$	12,511	$	18,429	$	437,019
Sales		848		16,955		0		0		0		17,803		0		4,541		0		0		0		4,541

All purchases of loans were from the acquisition of Elmira. All the sales of consumer mortgages during the nine months ended September 30, ~~2021~~2022 were sales of secondary market eligible residential mortgage loans. ~~The sales of business loans during the nine months ended September 30, 2021 includes two business lending loans under one relationship.~~

~~Table of Contents~~

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, 2021						December 31, 2020						September 30, 2022						December 31, 2021
	Gross				Net		Gross				Net		Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
(000’s omitted)	Amount		Amortization		Amount		Amount		Amortization		Amount		Amount		Amortization		Amount		Amount		Amortization		Amount
Amortizing intangible assets:
Core deposit intangibles	$	69,403	$	(59,238)	$	10,165	$	69,403	$	(55,572)	$	13,831	$	77,373	$	(63,823)	$	13,550	$	69,403	$	(60,316)	$	9,087
Other intangibles		116,799		(57,987)		58,812		90,462		(51,353)		39,109		119,263		(68,573)		50,690		116,799		(60,660)		56,139
Total amortizing intangibles	$	186,202	$	(117,225)	$	68,977	$	159,865	$	(106,925)	$	52,940	$	196,636	$	(132,396)	$	64,240	$	186,202	$	(120,976)	$	65,226

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


	(000’s omitted)
Oct - Dec 2021	$	3,751
2022		13,668
(000’s omitted)			(000’s omitted)
Oct - Dec 2022				$	3,771
2023		11,595			13,567
2024		9,782			11,482
2025		8,349			9,783
2026					8,685
Thereafter		21,832			16,952
Total	$	68,977		$	64,240

Shown below are the components of the Company’s goodwill at December 31, ~~2020~~2021 and September 30, ~~2021:~~2022:



(000’s omitted)	December 31, 2020		Activity		September 30, 2021		December 31, 2021		Activity		September 30, 2022
Goodwill, net	$	793,708	$	5,419	$	799,127
Goodwill							$	799,109	$	45,875	$	844,984

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NOTE G: MANDATORILY REDEEMABLE PREFERRED SECURITIES

As of September 30, ~~2021,~~2022, the Company does not sponsor any business trusts. The Company previously sponsored Community Capital Trust IV (“CCT IV”) until March 15, 2021 when the Company exercised its right to redeem all of the CCT IV debentures and associated preferred securities for a total of $77.3 million. The Company previously sponsored Steuben Statutory Trust II (“SST II”) until September 15, 2020 when the Company exercised its right to redeem all of the SST II debentures and associated preferred securities for a total of $2.1 million. The common stock of SST IItrust was ~~acquired in the Steuben 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.

NOTE 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 statements of income, while the other components of net periodic benefit income are included in other expenses. The Company made a ~~$2.9~~$0.1 million contribution to its defined benefit pension plan in the first quarter of ~~2021.~~2022. The Company made a ~~$3.9~~$2.8 million contribution to its defined benefit pension plan and a $0.09 million contribution to the Steuben Trust Company Pension Plan in the ~~third~~first quarter of ~~2020.~~2021.

~~Table of Contents~~

The net periodic benefit cost for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 is as follows:


	Pension Benefits								Post-retirement Benefits								Pension Benefits								Post-retirement Benefits
	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,				September 30,				September 30,				September 30,				September 30,
(000’s omitted)	2021		2020		2021			2020	2021			2020		2021	2020		2022		2021		2022		2021		2022		2021			2022	2021
Service cost	$	1,480	$	1,438	$	4,440	$	4,313	$	0	$	0	$	0	$	0	$	1,240	$	1,480	$	3,720	$	4,440	$	0	$	0	$	0	$	0
Interest cost		1,259		1,356		3,777		4,068		11		15		33		43		1,334		1,259		4,002		3,777		11		11		33		33
Expected return on plan assets		(4,696)		(3,932)		(14,087)		(11,796)		0		0		0		0		(4,756)		(4,696)		(14,268)		(14,087)		0		0		0		0
Amortization of unrecognized net loss		900		810		2,700		2,430		11		10		33		30		211		900		633		2,700		9		11		27		33
Amortization of prior service cost		95		60		284		180		(45)		(45)		(134)		(134)		154		95		462		284		(45)		(45)		(135)		(134)
Net periodic benefit	$	(962)	$	(268)	$	(2,886)	$	(805)	$	(23)	$	(20)	$	(68)	$	(61)	$	(1,817)	$	(962)	$	(5,451)	$	(2,886)	$	(25)	$	(23)	$	(75)	$	(68)

NOTE 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, ~~2021.~~2022.

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 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 0.4 million and 0.3 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30, 2022, respectively, compared to approximately 0.2 million and 0.1 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30, 2021, respectively, ~~compared to 0.5 million and 0.7 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30, 2020, respectively,~~ that were not included in the computation below.

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The following is a reconciliation of basic to diluted earnings per share for the three and nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
(000’s omitted, except per share data)	2021		2020		2021		2020		2022		2021		2022		2021
Net income	$	45,336	$	42,809	$	146,130	$	118,191	$	48,691	$	45,336	$	135,551	$	146,130
Income attributable to unvested stock-based compensation awards		(110)		(147)		(340)		(432)		(142)		(110)		(386)		(340)
Income available to common shareholders	$	45,226	$	42,662	$	145,790	$	117,759	$	48,549	$	45,226	$	135,165	$	145,790

Weighted-average common shares outstanding – basic		54,025		53,650		53,960		52,727		53,830		54,025		53,915		53,960
Basic earnings per share	$	0.84	$	0.80	$	2.70	$	2.23	$	0.90	$	0.84	$	2.51	$	2.70

Net income	$	45,336	$	42,809	$	146,130	$	118,191	$	48,691	$	45,336	$	135,551	$	146,130
Income attributable to unvested stock-based compensation awards		(110)		(147)		(340)		(432)		(142)		(110)		(386)		(340)
Income available to common shareholders	$	45,226	$	42,662	$	145,790	$	117,759	$	48,549	$	45,226	$	135,165	$	145,790

Weighted-average common shares outstanding – basic		54,025		53,650		53,960		52,727		53,830		54,025		53,915		53,960
Assumed exercise of stock options		385		324		431		356		302		385		328		431
Weighted-average common shares outstanding – diluted		54,410		53,974		54,391		53,083		54,132		54,410		54,243		54,391
Diluted earnings per share	$	0.83	$	0.79	$	2.68	$	2.22	$	0.90	$	0.83	$	2.49	$	2.68

~~Table of Contents~~

Stock Repurchase Program

At its December ~~2019~~2020 meeting, the Company’s Board of Directors (the “Board”) approved a stock repurchase program authorizing the repurchase of up to ~~2.60~~2.68 million shares of the Company’s common stock, in accordance with securities and banking laws and regulations, through December 31, ~~2020.~~2021. At its December ~~2020~~2021 meeting, the Board approved a ~~similar~~new stock repurchase program for ~~2021,~~2022, authorizing the repurchase of up to ~~2.68~~2.70 million shares of the Company’s common stock, in accordance with securities and banking laws and regulations, through December 31, ~~2021.~~2022. 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 repurchased 250,000 shares under the authorized plan during the first nine months of 2022 and did 0tnot repurchase any shares under the authorized plan during the first nine months of ~~2021 or 2020.~~2021. Refer to Part II, Item 2: Unregistered Sales of Equity Securities and Use of Proceeds for additional information regarding repurchases of the Company’s common stock.

NOTE 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.

The contract amounts of commitments and contingencies are as follows:


	September 30,		December 31,		September 30,		December 31,
(000’s omitted)	2021		2020		2022		2021
Commitments to extend credit	$	1,357,244	$	1,313,568	$	1,561,281	$	1,443,879
Standby letters of credit		33,373		39,213		51,635		42,684
Total	$	1,390,617	$	1,352,781	$	1,612,916	$	1,486,563

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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, ~~2021,~~2022, 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. This estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. Although the Company does not believe that the outcome of pending or threatened 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.

The Company recorded $3.0 million in litigation accrual in 2020 related to a settlement of a purported class action lawsuit regarding the Bank’s deposit account terms and overdraft disclosures. The Company executed a settlement agreement with respect to the lawsuit in the fourth quarter of 2020 providing for a release of all claims asserted by class members in the action, and the Company does not anticipate that additional amounts will be accrued for this matter in future periods. Notice of the settlement terms was provided to all class members and no objections to the settlement were received prior to expiration of the notice period. The hearing for final Court approval of the settlement took place on August 25, 2021 and the settlement was approved for $2.9 million which was paid in the third quarter of 2021, resulting in a $0.1 million adjustment to the Company’s litigation accrual.

~~Table of Contents~~

NOTE 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 transfersbetweenany of the levels for the periods presented.


	September 30, 2021								September 30, 2022
							Total Fair								Total Fair
(000’s omitted)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Available-for-sale investment securities:
U.S. Treasury and agency securities	$	3,293,134	$	100,126	$	0	$	3,393,260	$	4,206,653	$	68,787	$	0	$	4,275,440
Obligations of state and political subdivisions		0		421,965		0		421,965		0		489,910		0		489,910
Government agency mortgage-backed securities		0		510,676		0		510,676		0		384,891		0		384,891
Corporate debt securities		0		8,078		0		8,078		0		7,033		0		7,033
Government agency collateralized mortgage obligations		0		24,392		0		24,392		0		13,415		0		13,415
Total available-for-sale investment securities		3,293,134		1,065,237		0		4,358,371		4,206,653		964,036		0		5,170,689
Equity securities		459		0		0		459		439		0		0		439
Mortgage loans held for sale		0		117		0		117
Commitments to originate real estate loans for sale		0		0		45		45		0		0		(32)		(32)
Forward sales commitments		0		53		0		53		0		15		0		15
Interest rate swap agreements asset		0		335		0		335		0		2		0		2
Interest rate swap agreements liability		0		(5)		0		(5)		0		(2)		0		(2)
Total	$	3,293,593	$	1,065,737	$	45	$	4,359,375	$	4,207,092	$	964,051	$	(32)	$	5,171,111

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	December 31, 2020								December 31, 2021
							Total Fair								Total Fair
(000’s omitted)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Available-for-sale investment securities:
U.S. Treasury and agency securities	$	2,359,912	$	141,470	$	0	$	2,501,382	$	3,900,924	$	97,640	$	0	$	3,998,564
Obligations of state and political subdivisions		0		475,660		0		475,660		0		430,289		0		430,289
Government agency mortgage-backed securities		0		522,638		0		522,638		0		477,056		0		477,056
Corporate debt securities		0		4,635		0		4,635		0		7,962		0		7,962
Government agency collateralized mortgage obligations		0		43,577		0		43,577		0		20,339		0		20,339
Total available-for-sale investment securities		2,359,912		1,187,980		0		3,547,892		3,900,924		1,033,286		0		4,934,210
Equity securities		445		0		0		445		463		0		0		463
Mortgage loans held for sale		0		1,622		0		1,622
Commitments to originate real estate loans for sale		0		0		14		14		0		0		51		51
Forward sales commitments		0		2		0		2		0		32		0		32
Interest rate swap agreements asset		0		1,572		0		1,572		0		296		0		296
Interest rate swap agreements liability		0		(1,074)		0		(1,074)		0		(3)		0		(3)
Total	$	2,360,357	$	1,190,102	$	14	$	3,550,473	$	3,901,387	$	1,033,611	$	51	$	4,935,049

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 statements 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. The unpaid principal value of mortgage loans held for sale was approximately $0.1 million at September 30, 2021. The unpaid principal value of mortgage loans held for sale was approximately $1.6 million at December 31, 2020. The unrealized gain on mortgage loans held for sale was recognized in mortgage 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 statements 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 statements 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.

~~Table of Contents~~

●

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.

Table of Contents

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

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, 2021								December 31, 2020								September 30, 2022								December 31, 2021
							Total Fair								Total Fair								Total Fair								Total Fair
(000's omitted)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
(000’s omitted)																	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Individually assessed loans	$	0	$	0	$	18,794	$	18,794	$	0	$	0	$	25,063	$	25,063	$	0	$	0	$	0	$	0	$	0	$	0	$	1,820	$	1,820
Other real estate owned		0		0		891		891		0		0		883		883		0		0		527		527		0		0		718		718
Mortgage servicing rights		0		0		794		794		0		0		682		682		0		0		1,844		1,844		0		0		810		810
Contingent consideration		0		0		2,900		2,900		0		0		0		0		0		0		(3,500)		(3,500)		0		0		(3,100)		(3,100)
Total	$	0	$	0	$	23,379	$	23,379	$	0	$	0	$	26,628	$	26,628	$	0	$	0	$	(1,129)	$	(1,129)	$	0	$	0	$	248	$	248

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 ~~adjustments~~impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit 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%~~23.2% to ~~46.7%~~73.5% at September 30, ~~2021~~2022 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 ~~was 0 valuation allowance at September 30, 2021. There was~~is a valuation allowance of approximately ~~$0.2~~$0.1 million at September 30, 2022 and there was no valuation allowance at December 31, ~~2020.~~2021.

The Company has recorded contingent consideration liabilities that arise from acquisition activity. The contingent consideration is recorded at fair value at the date of acquisition. The valuation of contingent consideration is calculated using an income approach method, which provides an estimation of the fair value of ~~an asset or~~the liability based on future cash flows over a discrete projection period, discounted to present value using an appropriate rate of return. The assumptions used in the valuation calculation are based on significant unobservable inputs, therefore such valuations classify as Level 3.

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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:

Significant

Unobservable Input

Fair Value at

Range

Fair Value at

Range

(000's omitted, except per loan data)

September 30, 2021

Valuation Technique

Significant Unobservable Inputs

(Weighted Average)

Individually assessed loans

18,794

Fair value of collateral

Estimated cost of disposal/market adjustment

9.0% - 78.7% (53.5%)

(000’s omitted, except per loan data)

September 30, 2022

Valuation Technique

Significant Unobservable Inputs

(Weighted Average)

Other real estate owned

891

Fair value of collateral

Estimated cost of disposal/market adjustment

9.0% - 46.7% (33.7%)

527

Fair value of collateral

Estimated cost of disposal/market adjustment

23.2% - 73.5% (39.9%)

Commitments to originate real estate loans for sale

Discounted cash flow

Embedded servicing value

1.0

(32)

Discounted cash flow

Embedded servicing value

1.0

Mortgage servicing rights

794

Discounted cash flow

Weighted average constant prepayment rate

15.2% - 24.9% (16.6%)

1,844

Discounted cash flow

Weighted average constant prepayment rate

3.5% - 4.1% (3.6%)

Weighted average discount rate

2.3% - 2.8% (2.7%)

Weighted average discount rate

4.6% - 4.8% (4.8%)

Adequate compensation

7/loan

Adequate compensation

7/loan

Contingent consideration

2,900

Discounted cash flow

Discount rate

0.8% - 1.1% (1.0%)

(3,500)

Discounted cash flow

Discount rate

4.4% - 4.6% (4.5%)

Probability adjusted level of retained

$2.3 million - $5.8

Probability adjusted level of retained revenue

$3.3 million - $5.4 million

revenue

million

Significant

Unobservable Input

Fair Value at

Range

Fair Value at

Range

(000's omitted, except per loan data)

December 31, 2020

Valuation Technique

Significant Unobservable Inputs

(Weighted Average)

December 31, 2021

Valuation Technique

Significant Unobservable Inputs

(Weighted Average)

Individually assessed loans

25,063

Fair value of collateral

Estimated cost of disposal/market adjustment

9.0% - 78.4% (52.7%)

1,820

Fair value of collateral

Estimated cost of disposal/market adjustment

9.0% - 43.1% (43.1%)

Other real estate owned

883

Fair value of collateral

Estimated cost of disposal/market adjustment

11.3% - 52.9% (34.0%)

718

Fair value of collateral

Estimated cost of disposal/market adjustment

31.8% - 42.3% (33.3%)

Commitments to originate real estate loans for sale

Discounted cash flow

Embedded servicing value

1.0

Discounted cash flow

Embedded servicing value

1.0

Mortgage servicing rights

682

Discounted cash flow

Weighted average constant prepayment rate

9.8% - 18.8% (17.6%)

810

Discounted cash flow

Weighted average constant prepayment rate

6.4% - 15.2% (14.0%)

Weighted average discount rate

1.7% - 2.2% (2.1%)

Weighted average discount rate

2.3% - 2.7% (2.6%)

Adequate compensation

7/loan

Adequate compensation

7/loan

Contingent consideration

(3,100)

Discounted cash flow

Discount rate

1.4% - 1.7% (1.5%)

Probability adjusted level of retained revenue

$3.0 million - $5.8 million

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 individually assessed loans was calculated by dividing the total of the book value of the collateral of the individually assessed loans classified as Level 3 by the total of the fair value of the collateral of the individually assessed loans classified as Level 3. The weighted average of the estimated cost of disposal/market adjustment for OREO 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. The weighted average of the constant prepayment rate for mortgage servicing rights was calculated by adding the constant prepayment rates used in each loan pool weighted by the balance in each loan pool. The weighted average of the discount rate for mortgage servicing rights was calculated by adding the discount rates used in each loan pool weighted by the balance in each loan pool. The weighted average of the discount rate for the contingent consideration was calculated by adding the discount rates used for the calculation of the fair value of each payment of contingent consideration, weighted by the amount of the payment as part of the total fair value of contingent consideration.

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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, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows:


	September 30, 2021				December 31, 2020				September 30, 2022				December 31, 2021
	Carrying		Fair		Carrying		Fair		Carrying				Carrying
(000's omitted)	Value		Value		Value		Value
(000’s omitted)									Value		Fair Value		Value		Fair Value
Financial assets:
Net loans	$	7,233,083	$	7,608,456	$	7,355,083	$	7,655,044	$	8,483,244	$	8,192,522	$	7,323,770	$	7,523,024
Financial liabilities:
Deposits		12,723,821		12,730,674		11,224,974		11,239,628		13,486,321		13,450,034		12,911,168		12,911,197
Overnight borrowings										119,800		119,800		0		0
Securities sold under agreement to repurchase, short-term		316,763		316,763		284,008		284,008		352,772		352,772		324,720		324,720
Other Federal Home Loan Bank borrowings		2,912		2,956		6,658		6,758		19,472		19,201		1,888		1,907
Subordinated notes payable		3,283		3,283		3,303		3,303		3,256		3,256		3,277		3,277
Subordinated debt held by unconsolidated subsidiary trusts		0		0		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 ~~and 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 ~~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 borrowings ~~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.

~~NOTE~~ ~~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.

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, 2021 and December 31, 2020. The effect of the changes to these derivatives for the three and nine months then ended was also immaterial.

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The Company acquired interest rate swaps in 2017 with notional amounts with certain commercial customers which totaled $0.6 million at September 30, 2021 and $14.4 million at December 31, 2020. 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 $0.6 million at September 30, 2021 and $14.4 million at December 31, 2020. At September 30, 2021, the weighted average receive rate of these interest rate swaps was 2.33%, the weighted average pay rate was 3.54% and the weighted average maturity was 1.5 years. At December 31, 2020, the weighted average receive rate of these interest rate swaps was 2.10%, the weighted average pay rate was 4.44% and the weighted average maturity was 5.2 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 the Company’s results of operations.

The Company also acquired interest rate swaps in 2017 with notional amounts totaling $5.3 million at September 30, 2021, and $5.7 million at December 31, 2020, that were designated as fair value hedges of certain fixed rate loans with municipalities which are recorded in loans in the consolidated statements of condition. At September 30, 2021, the weighted average receive rate of these interest rate swaps was 1.38%, the weighted average pay rate was 3.11% and the weighted average maturity was 11.8 years. At December 31, 2020, the weighted average receive rate of these interest rate swaps was 1.42%, the weighted average pay rate was 3.11% and the weighted average maturity was 12.5 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 statements of income for the three and nine months ended September 30, 2021 are immaterial.

~~As of September 30, 2021 and December 31, 2020, the following amounts were recorded in the consolidated statement of condition related to cumulative basis adjustments for fair value hedges:~~

(000’s omitted)

Cumulative Amount of Fair Value

Carrying Amount of the Hedged

Hedging Adjustment Included in the
Line Item in the Consolidated

Assets

Carrying Amount of the Hedged Assets
Statement of Condition in Which

September 30,

December 31,

September 30,

December 31,
the Hedged Item Is Included

2021

2020

2021

2020
Loans

$
5,363

$
5,675

$
(330)

$
(498)

~~Fair values of derivative instruments as of September 30, 2021 and December 31, 2020 are as follows:~~

(000’s omitted)

September 30, 2021

Derivative Assets

Derivative Liabilities

Consolidated Statement

Fair

Consolidated Statement of

Fair


of Condition Location

Value

Condition Location

Value
Derivatives designated as hedging instruments under Subtopic 815-20








Interest rate swaps

Other assets

$
330





Derivatives not designated as hedging instruments under Subtopic 815-20






Interest rate swaps

Other assets

5

Accrued interest and other liabilities

$
5
Commitments to originate real estate loans for sale

Other assets

45



Forward sales commitments

Other assets

53



Total derivatives



$
433



$
5

~~Table of Contents~~

(000’s omitted)

December 31, 2020

Derivative Assets

Derivative Liabilities

Consolidated Statement

Fair

Consolidated Statement of

Fair


of Condition Location

Value

Condition Location

Value
Derivatives designated as hedging instruments under Subtopic 815-20








Interest rate swaps

Other assets

$
498





Derivatives not designated as hedging instruments under Subtopic 815-20




Interest rate swaps

Other assets

1,074

Accrued interest and other liabilities

$
1,074
Commitments to originate real estate loans for sale

Other assets

14

Forward sales commitments

Other assets

2

Total derivatives

$
1,588



$
1,074

The Company assessed its counterparty risk at September 30, 2021 and December 31, 2020 and determined any credit risk inherent in our derivative contracts was not material. Further information about the fair value of derivative financial instruments can be found in Note K to these consolidated financial statements.

NOTE M:L: 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, Fringe Benefits Design of Minnesota, Inc. (“FBD”), 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 Community Investment Services, Inc., The Carta Group, Inc. and OneGroup Wealth Partners, 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 NY, Inc. 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, ~~2020~~2021 filed with the SEC on March 1, ~~2021)~~2022).

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

Employee

Consolidated
(000’s omitted)

Banking

Benefit Services

All Other

Eliminations

Total
Three Months Ended September 30, 2022










Net interest income

$
110,311

$
75

$
8

$
0

$
110,394
Provision for credit losses

5,061

0

0

0

5,061
Noninterest revenues

19,427

28,451

19,210

(1,839)

65,249
Amortization of intangible assets

1,266

1,633

938

0

3,837
Acquisition expenses

409

0

0

0

409
Other operating expenses

73,554

17,711

14,513

(1,839)

103,939
Income before income taxes

$
49,448

$
9,182

$
3,767

$
0

$
62,397
Assets

$
15,373,021

$
250,784

$
102,883

$
(132,141)

$
15,594,547
Goodwill

$
735,680

$
85,381

$
23,923

$
0

$
844,984
Core deposit intangibles & Other intangibles

$
13,550

$
35,045

$
15,645

$
0

$
64,240

Three Months Ended September 30, 2021

Net interest income

$
92,539

$
65

$
7

$
0

$
92,611
Provision for credit losses

(944)

0

0

0

(944)
Noninterest revenues

17,696

30,473

17,885

(1,745)

64,309
Amortization of intangible assets

1,102

1,675

926

0

3,703
Acquisition expenses

102

0

0

0

102
Other operating expenses

67,980

17,212

13,184

(1,745)

96,631
Income before income taxes

$
41,995

$
11,651

$
3,782

$
0

$
57,428
Assets

$
15,102,077

$
246,033

$
99,721

$
(116,733)

$
15,331,098
Goodwill

$
689,868

$
85,336

$
23,923

$
0

$
799,127
Core deposit intangibles & Other intangibles

$
10,165

$
41,695

$
17,117

$
0

$
68,977

3431

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

Employee

Consolidated



Employee





Consolidated
(000's omitted)

Banking

Benefit Services

All Other

Eliminations

Total
Three Months Ended September 30, 2021










(000’s omitted)

Banking

Benefit Services

All Other

Eliminations

Total
Nine Months Ended September 30, 2022










Net interest income

$
308,177

$
210

$
20

$
0

$
308,407
Provision for credit losses

12,005

0

0

0

12,005
Noninterest revenues

55,634

88,093

57,065

(5,773)

195,019
Amortization of intangible assets

3,506

4,974

2,940

0

11,420
Acquisition expenses

4,665

3

0

0

4,668
Acquisition-related contingent consideration adjustment

0

(100)

500

0

400
Other operating expenses

212,616

53,026

42,059

(5,773)

301,928
Income before income taxes

$
131,019

$
30,400

$
11,586

$
0

$
173,005

Nine Months Ended September 30, 2021



Net interest income

$
92,539

$
65

$
7

$
0

$
92,611

$
278,411

$
224

$
35

$
0

$
278,670
Provision for credit losses

(944)

0

0

0

(944)

(11,001)

0

0

0

(11,001)
Noninterest revenues

17,696

30,473

17,885

(1,745)

64,309

50,507

85,616

51,518

(5,341)

182,300
Amortization of intangible assets

1,102

1,675

926

0

3,703

3,666

4,356

2,278

0

10,300
Acquisition expenses

102

0

0

0

102

133

0

0

0

133
Other operating expenses

67,980

17,212

13,184

(1,745)

96,631

198,145

47,063

36,925

(5,341)

276,792
Income before income taxes

$
41,995

$
11,651

$
3,782

$
0

$
57,428

$
137,975

$
34,421

$
12,350

$
0

$
184,746
Assets

$
15,102,077

$
246,033

$
99,721

$
(116,733)

$
15,331,098
Goodwill

$
689,868

$
85,336

$
23,923

$
0

$
799,127
Core deposit intangibles & Other intangibles

$
10,165

$
41,695

$
17,117

$
0

$
68,977

Three Months Ended September 30, 2020

Net interest income

$
92,642

$
256

$
67

$
0

$
92,965
Provision for credit losses

1,945

0

0

0

1,945
Noninterest revenues

19,756

25,651

15,706

(1,454)

59,659
Amortization of intangible assets

1,379

1,409

793

0

3,581
Acquisition expenses

796

0

0

0

796
Other operating expenses

67,193

15,078

11,772

(1,454)

92,589
Income before income taxes

$
41,085

$
9,420

$
3,208

$
0

$
53,713
Assets

$
13,674,995

$
210,679

$
80,528

$
(120,877)

$
13,845,325
Goodwill

$
690,162

$
83,275

$
20,312

$
0

$
793,749
Core deposit intangibles & Other intangibles

$
15,186

$
33,461

$
7,818

$
0

$
56,465




Employee





Consolidated
(000's omitted)

Banking

Benefit Services

All Other

Eliminations

Total
Nine Months Ended September 30, 2021










Net interest income

$
278,411

$
224

$
35

$
0

$
278,670
Provision for credit losses

(11,001)

0

0

0

(11,001)
Noninterest revenues

50,507

85,616

51,518

(5,341)

182,300
Amortization of intangible assets

3,666

4,356

2,278

0

10,300
Acquisition expenses

133

0

0

0

133
Other operating expenses

198,145

47,063

36,925

(5,341)

276,792
Income before income taxes

$
137,975

$
34,421

$
12,350

$
0

$
184,746

Nine Months Ended September 30, 2020

Net interest income

$
274,051

$
742

$
177

$
0

$
274,970
Provision for credit losses

17,313

0

0

0

17,313
Noninterest revenues

53,428

76,080

46,058

(4,347)

171,219
Amortization of intangible assets

4,160

4,314

2,298

0

10,772
Acquisition expenses

4,537

0

0

0

4,537
Other operating expenses

190,523

45,157

34,890

(4,347)

266,223
Income before income taxes

$
110,946

$
27,351

$
9,047

$
0

$
147,344

3532

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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, ~~2021~~2022 and ~~2020,~~2021, although in some circumstances the second and first quarters of ~~2021~~2022 are 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 ~~35.~~32. All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole. Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year ~~2021,~~2022, “last year” and equivalent terms refer to calendar year ~~2020,~~2021, “third quarter” refers to the three months ended September 30, ~~2021,~~2022, “YTD” refers to the nine months ended September 30, ~~2021,~~2022, 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 ~~57.~~53.
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 credit losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation, the carrying value of goodwill and other intangible assets, and acquired loan valuations. A summary of the accounting policies used by management is disclosed in Note A, “Summary of Significant Accounting Policies” on pages ~~79-92~~76-88 of the most recent Form 10-K (fiscal year ended December 31, ~~2020)~~2021) filed with the Securities and Exchange Commission (“SEC”) on March 1, ~~2021.~~2022. A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on pages ~~13-14~~12-13 of this Form 10-Q.
Supplemental Reporting of Non-GAAP Results of Operations
The Company also provides supplemental reporting of its results on an “operating,” “adjusted” and “tangible” basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), accretion on ~~non-impaired purchased~~acquired non-purchased credit deteriorated (“PCD”) loans, acquisition expenses, ~~associated with acquisitions,~~acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions. In addition, the Company provides supplemental reporting for “adjusted pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities from income before income taxes. Although adjusted pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the adoption of ~~CECL~~the Current Expected Credit Losses (“CECL”) model and the economic uncertainty caused by the COVID-19 pandemic. Earnings per share were ~~$0.83~~$0.90 in the third quarter of ~~2021,~~2022, up ~~$0.04,~~$0.07, or ~~5.1%~~8.4%, from the third quarter of ~~2020.~~2021. Diluted adjusted net earnings per share, a non-GAAP measure, were $0.94 in the third quarter of 2022, compared to $0.87 in the third quarter of 2021, ~~compared to $0.88 in the third quarter of 2020,~~ a ~~$0.01~~$0.07 per share, or ~~1.1%~~8.0%, ~~decrease.~~increase. Adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, was ~~$1.04~~$1.25 per weighted average diluted share in the third quarter of ~~2021, down $0.06,~~2022, up $0.21, or ~~5.5%~~20.2%, from the third quarter of ~~2020.~~2021. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table ~~11.~~10.

3633

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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’s Benefit Plans Administrative Services, Inc. (“BPAS”) subsidiary is a leading provider of employee benefits administration, trust services, collective investment fund administration and actuarial consulting services to customers on a national scale. In addition, the Company offers comprehensive financial planning, insurance and wealth management services through its Community Bank Wealth Management Group and OneGroup NY, Inc. (“OneGroup”) operating units.

The Company’s core operating objectives are: (i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies and divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and 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~~banking, employee benefit, insurance and wealth management services business units, and the acquisition of additional financial services and banking businesses, and (v) utilize technology to deliver customer-responsive products and services and improve efficiencies.

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

On August 2, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of Thomas Gregory Associates Insurance Brokers, Inc. (“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area for $13.1 million, including $11.6 million in cash and contingent consideration valued at $1.5 million. The Company recorded a $10.9 million customer list intangible asset and $2.2 million of goodwill in conjunction with the acquisition.

On July 1, 2021, the Company, through its subsidiary Benefit Plans Administrative Services, Inc., completed its acquisition of Fringe Benefits Design of Minnesota, Inc. (“FBD”), a provider of retirement plan administration and benefit consulting services with offices in Minnesota and South Dakota, for $16.7 million, including $15.3 million in cash and contingent consideration valued at $1.4 million. The Company recorded a $14.0 million customer list intangible asset and $2.1 million of goodwill in conjunction with the acquisition.

On June 1, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of NuVantage Insurance Corp. (“NuVantage”), an insurance agency headquartered in Melbourne, Florida. The Company paid $2.9 million in cash and recorded a $1.4 million customer list intangible asset and $1.5 million of goodwill in conjunction with the acquisition.

~~On June 12, 2020,~~May 13, 2022, the Company completed its merger with ~~Steuben Trust Corporation~~Elmira Savings Bank (“~~Steuben”~~Elmira”), ~~parent company of Steuben Trust Company,~~ a New York State chartered savings bank headquartered in ~~Hornell,~~Elmira, New York, for ~~$98.6~~$82.2 million in ~~Company stock and cash, comprised of $21.6 million in cash and the issuance of 1.36 million shares of common stock.~~cash. The merger ~~extended the Company’s footprint into two new counties in Western New York State, and~~ enhanced the Company’s presence in ~~four Western New York State~~five counties in ~~which it had already operated.~~New York’s Southern Tier and Finger Lakes regions. In connection with the merger, the Company added 11eight full-service offices to its branch service network and acquired ~~$607.8~~approximately $579.0 million of identifiable assets, including ~~$339.7~~$437.0 million of loans, ~~and $180.5~~$11.3 million of investment securities and $8.0 million of core deposit intangibles, as well as ~~$516.3~~$522.3 million of deposits. ~~Goodwill~~Preliminary goodwill of ~~$20.0~~$45.8 million ~~a $2.9 million core deposit intangible asset and a $1.2 million customer list intangible asset were~~was recognized as a result of the merger.

Third quarter ~~and YTD~~ net income increased compared to last year’s third quarter by $3.4 million, or 7.4%, while YTD net income decreased compared to the equivalent ~~2020 timeframes~~2021 timeframe by ~~$2.5~~$10.6 million, or ~~5.9%, and $27.9 million, or 23.6%, respectively.~~7.2%. Earnings per share of ~~$0.83~~$0.90 for the third quarter of ~~2021~~2022 was ~~$0.04~~$0.07 more than the third quarter of ~~2020, and~~ 2021, whereas 2022 YTD earnings per share of ~~$2.68~~$2.49 was ~~$0.46 higher~~$0.19 lower than ~~2020~~2021 YTD earnings per share. The increases in net income and earnings per share between the quarters were ~~driven~~due to increases in net interest income and noninterest revenues and a decrease in fully-diluted average shares outstanding, offset, in part, by ~~a significant decrease~~higher noninterest expenses and increases in the provision for credit losses ~~reflective of a more favorable economic outlook, improvements~~and income taxes. The decreases in ~~asset quality metrics~~net income and ~~a significant increase~~earnings per share between the YTD periods were due to increases in noninterest ~~revenues.~~expenses and the provision for credit losses, including the impacts from the Elmira acquisition, partially offset by increases in net interest income and noninterest revenues and decreases in income taxes and fully-diluted shares outstanding.

~~Table of Contents~~

Third quarter and YTD net income adjusted to exclude acquisition expenses, ~~associated with acquisitions,~~acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, litigation accrual expenses and the unrealized gain (loss) on equity securities (“operating net income”), a non-GAAP measure, ~~decreased $0.5~~increased $3.7 million, or ~~1.0%~~8.1%, as compared to the third quarter of ~~2020~~2021 and ~~increased $19.4~~decreased $3.5 million, or ~~15.3%~~2.4%, compared to September YTD ~~2020.~~2021. Earnings per share adjusted to exclude acquisition expenses, ~~associated with acquisitions,~~acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, litigation accrual expenses and the unrealized gain (loss) on equity securities (“operating earnings per share”), a non-GAAP measure, of ~~$0.83~~$0.90 for the third quarter ~~decreased $0.02~~of 2022 increased $0.07 compared to the third quarter of ~~2020.~~2021. Operating earnings per share of ~~$2.68~~$2.62 for the first nine months of ~~2021 increased $0.30~~2022 decreased $0.06 compared to the prior year period. 2021 results were enhanced by a net benefit recorded in the provision for credit losses and higher Paycheck Protection Program (“PPP”)-related revenues than the comparable periods of 2022, which, net of tax, were responsible for a $0.14 decrease in fully-diluted operating earnings per share between the comparable quarters and a $0.45 decrease between the comparable YTD periods. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table ~~11.~~10.

Table of Contents

Net income adjusted to exclude income taxes, provision for credit losses, acquisition expenses, ~~associated with acquisitions,~~acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue”), a non-GAAP measure, of ~~$56.5~~$67.9 million for the third quarter ~~decreased $2.9~~increased $11.4 million, or ~~4.9%~~20.1%, as compared to the third quarter of ~~2020.~~2021. Adjusted pre-tax, pre-provision net revenue of ~~$173.8~~$190.1 million for the first nine months of ~~2021~~2022 increased ~~$1.6~~$16.3 million, or ~~0.9%~~9.4%, as compared to the first nine months of ~~2020.~~2021. Earnings per share adjusted to exclude income taxes, provision for credit losses, acquisition expenses, ~~associated with acquisitions,~~acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue per share”), a non-GAAP measure, of ~~$1.04~~$1.25 for the third quarter of ~~2021~~2022 was ~~$0.06 lower~~$0.21 higher than the third quarter of ~~2020,~~2021, and ~~2021~~2022 YTD adjusted pre-tax, pre-provision net revenue per share of ~~$3.19~~$3.49 was ~~$0.04 lower~~$0.30 higher than the prior YTD ~~period. The decrease~~period as the increases in ~~adjusted pre-tax, pre-provision net revenue per share compared to~~revenues outpaced the ~~third quarter of 2020 was driven by an~~ increase in operating expenses ~~an increase in diluted weighted average common shares and a decrease in net interest income, partially offset by an increase in noninterest revenues.~~between the periods. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table ~~11.~~10.

Loans ~~decreased~~and deposits increased on both an ending and average basis as compared to the prior year third quarter, ~~primarily due to decreases in U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)~~reflective of large net inflows of funds from government stimulus programs and PPP lending, along with the Company’s continued enhanced focus on organic loan ~~balances driven by forgiveness granted by~~generation and the ~~SBA, while deposits~~second quarter 2022 acquisition of Elmira. The yield on average interest-earning assets increased ~~on an ending and average~~35 basis aspoints compared to the prior year third quarter ~~primarily due to large inflows of funds from government stimulus and PPP lending programs. Interest rates~~as the yields on ~~loans,~~average investments and deposits have decreased over the past year primarily due to low short-term market interest rates as well as medium and longer-term market interest rates being below the average levels that existed over the past several years. In connection with these lower rates, coupled with a higher proportion of earnings assets held inincluding cash equivalents and average loans both increased, while on a YTD basis the ~~Company’s~~yield on average interest-earning ~~asset~~assets increased four basis points as the yield on average investments including cash equivalents increased while the yield on average loans decreased. The yield on average investments, including cash equivalents, increased 50 basis points compared to the prior year’s third quarter and increased 33 basis points compared to the prior YTD, as the Company meaningfully shifted the composition of earning assets away from cash equivalents that were earning a low yield in the prior year to higher yielding investment securities between the periods. The yield on average loans for the ~~first nine months~~third quarter increased by seven basis points compared to the third quarter of 2021 and decreased 6214 basis points ~~from~~on a YTD basis. The yield on average loans included a decline in PPP-related interest income between the ~~year-earlier period.~~periods, which declined $3.9 million on a quarterly basis and $11.9 million on a YTD basis. The Company’s total cost of funds for the first nine months of ~~2021 decreased 11 basis points from~~2022 remained consistent with the year earlier period, as the decrease in the Company’s deposit funding cost ~~and~~was offset by an increase in the rate on borrowings ~~both decreased~~ from the prior year period. The majority of borrowings are customer repurchase agreements, rather than wholesale borrowings obtained through capital markets and correspondent banks. Customer repurchase agreements have deposit-like features and typically ~~bear~~have lower rates of interest than other types of wholesale borrowings.

The ~~net benefit recognized in the~~ provision for credit losses of ~~$0.9~~$5.1 million for the third quarter and ~~$11.0~~$12.0 million for YTD ~~2021 resulted in a $2.9~~2022 were up $6.0 million and ~~$28.3~~$23.0 million ~~lower provision for credit losses than~~from the comparable prior year periods, respectively. ~~These decreases are~~The third quarter and YTD 2022 provision for credit losses was reflective of a weaker economic forecast and an ~~improving economic outlook given~~increase in loans outstanding, partially offset by continued low levels of net charge-offs, delinquent loans and nonperforming loans. The second quarter provision for credit losses included $3.9 million of acquisition-related provision for credit losses due to the ~~state~~Elmira acquisition. Comparatively, at the end of the third quarter of 2021, economic forecasts reflected a post-vaccine economic recovery and included the continuation of elevated real estate and vehicle collateral values, resulting in a ~~decrease in individually assessed~~release of reserves for the quarter and solid asset quality metrics, including continued low levels of net charge-offs and declining delinquent loan balances. Additionally, $3.2 million of provision for credit losses was recorded in the second quarter of 2020 related to acquired non-purchased credit deteriorated loans associated with the Steuben acquisition.on a YTD basis. Net charge-offs were $0.4 million for the third quarter and $1.3 million for the first nine months of 2022, compared to net charge-offs of $1.4 million for the prior year third quarter and $1.1 million for the first nine months of ~~2021, compared to net charge-offs of $1.3 million for the prior year third quarter and $3.7 million for the first nine months of 2020.~~2021. Third quarter ~~2021~~2022 nonperforming and delinquent loan ratios ~~increased~~improved in comparison to the third quarter of ~~2020~~2021 largely attributable to the ~~Company’s decision~~upgrade of several large business loans, primarily customers operating in the hospitality industry whose operations were negatively impacted during the height of the pandemic, from nonaccrual status to ~~reclassify certain loans under extended pandemic-related forbearance to nonperforming~~accruing status induring the fourth quarter of ~~2020. Third quarter~~ 2021 ~~nonperforming loan ratios generally improved in comparison to their levels at the end of the fourth~~and first quarter of ~~2020.~~2022.

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Net Income and Profitability

As shown in Table 1, net income for the third quarter and September YTD of ~~$45.3~~$48.7 million and ~~$146.1~~$135.6 million, respectively, increased ~~$2.5~~$3.4 million, or ~~5.9%~~7.4%, as compared to the third quarter of ~~2020~~2021 and ~~increased $27.9~~decreased $10.6 million, or ~~23.6%~~7.2%, compared to September YTD ~~2020.~~2021. Earnings per share of ~~$0.83~~$0.90 for the third quarter was ~~$0.04~~$0.07 higher than the third quarter of ~~2020,~~2021, while earnings per share for the first nine months of ~~2021~~2022 of ~~$2.68~~$2.49 was ~~$0.46 higher~~$0.19 lower than the first nine months of ~~2020.~~2021. The ~~increase~~increases in net income and earnings per share ~~for~~between the ~~quarter was primarily the result of~~quarters were due to increases in net interest income and noninterest revenues and a decrease in fully-diluted average shares outstanding, partially offset by higher noninterest ~~revenues, lower litigation accrual~~ expenses ~~a lower~~and increases in the provision for credit losses and ~~lower acquisition expenses, partially offset by higher core noninterest expenses, a higher effective tax rate, lower net interest~~ income ~~and an increase in diluted shares outstanding.~~taxes. The ~~increase~~decreases in net income and earnings per share ~~for~~between the YTD ~~period was primarily~~periods were due to increases in noninterest expenses and the ~~result of a lower~~ provision for credit losses, ~~higher noninterest revenues, lower~~including the impacts from the Elmira acquisition, ~~expenses, higher~~partially offset by increases in net interest income and ~~lower litigation accrual expenses, partially offset by higher~~ noninterest ~~expenses, a higher effective tax rate~~revenues and ~~an increase~~decreases in ~~diluted~~income taxes and fully-diluted shares outstanding. Operating net income, a non-GAAP measure, of ~~$45.3~~$49.0 million and ~~$146.1~~$142.6 million for the third quarter and September YTD, respectively, ~~decreased $0.5~~increased $3.7 million, or ~~1.0%~~8.1%, as compared to the third quarter of ~~2020~~2021 and ~~increased $19.4~~decreased $3.5 million, or ~~15.3%~~2.4%, compared to September YTD ~~2020.~~2021. Operating earnings per share, a non-GAAP measure, of ~~$0.83~~$0.90 for the third quarter was ~~down $0.02~~up $0.07 compared to the third quarter of ~~2020,~~2021, while operating earnings per share of ~~$2.68~~$2.62 for the first nine months of ~~2021~~2022 was ~~up $0.30~~down $0.06 compared to the first nine months of ~~2020. The decreases in operating~~2021. 2021 results were enhanced by a net ~~income and earnings per share for the quarter are primarily due to an increase in operating expenses, partially offset by higher noninterest revenues and a lower provision for credit losses~~benefit recorded in the ~~current quarter. The increases in operating net income and earnings per share for the YTD period are primarily due to the lower~~ provision for credit losses and higher ~~noninterest~~PPP-related revenues ~~recorded~~than the comparable periods of 2022, which, net of tax, were responsible for a $0.14 decrease in fully-diluted operating earnings per share between the ~~current~~comparable quarters and a $0.45 decrease between the comparable YTD ~~period.~~periods. See Table 1110 for Reconciliation of GAAP to Non-GAAP Measures.

As reflected in Table 1, third quarter net interest income of ~~$92.6~~$110.4 million was ~~down $0.4~~up $17.8 million, or ~~0.4%~~19.2%, from the comparable prior year period. Net interest income for the first nine months of ~~2021~~2022 increased ~~$3.7~~$29.7 million, or ~~1.3%~~10.7%, versus the first nine months of ~~2020.~~2021. The quarterly ~~decrease~~and year-over-year improvements resulted from ~~a decrease~~an increase in the yield on interest-earning assets and an increase in ~~interest-bearing liabilities that was only~~interest-earning asset balances, partially offset by an increase ~~in interest-earning asset balances and a decrease~~ in the average rate paid on interest-bearing ~~liabilities. The YTD year-over-year improvement resulted from an increase in interest-earning asset balances and a decrease in the average rate paid on interest-bearing~~ liabilities ~~partially offset by a decrease in the yield on interest-earning assets~~ and an increase in interest-bearing liability balances.

The provision for credit losses for the third quarter and September YTD ~~decreased $2.9~~increased $6.0 million and ~~$28.3~~$23.0 million as compared to the third quarter and first nine months of ~~2020,~~2021, respectively. ~~These decreases are~~The third quarter and YTD 2022 provision for credit losses was reflective of a weaker economic forecast and an ~~improving economic outlook given the state of the post-vaccine economic recovery, elevated real estate and vehicle collateral values, a decrease~~increase in ~~individually assessed reserves and solid asset quality metrics, including~~loans outstanding, partially offset by continued low levels of net charge-offs, delinquent loans and ~~stable delinquent loan balances. Additionally, there was $3.2 million of~~nonperforming loans. The second quarter provision for credit losses ~~recorded in~~included $3.9 million of acquisition-related provision for credit losses due to the ~~second quarter of 2020 related to acquired non-purchased credit deteriorated loans associated with the Steuben~~Elmira acquisition.

Third quarter and year-to-date noninterest revenues were ~~$64.3~~$65.2 million and ~~$182.3~~$195.0 million, respectively, up ~~$4.6~~$0.9 million, or ~~7.8%~~1.5%, from the third quarter of ~~2020~~2021 and up ~~$11.1~~$12.7 million, or ~~6.5%~~7.0%, from the first nine months of ~~2020.~~2021. The increase compared to the prior year’s third quarter was ~~primarily~~ a result of increases in ~~employee benefit services revenue, wealth management~~insurance services revenue, deposit service charges and fees, ~~insurance services revenue,~~ debit interchange and ATM fees other banking revenue and unrealized gains and losses on equity securities, partially offset by a decrease in mortgage banking revenue. The YTD increase was due to increases in employee benefit services revenue, wealth management services revenue, debit interchange and ATM fees, insurance services revenue, other banking revenue and unrealized gains and losses on equity securities, partially offset by decreases in employee benefit services revenue, wealth management services revenue, mortgage banking revenue and other banking revenue. The YTD increase was due to increases in insurance services revenue, deposit service charges and ~~fees.~~fees, employee benefit services revenue and debit interchange and ATM fees, partially offset by decreases in mortgage banking revenue, wealth management services revenue, other banking revenue and unrealized gains and losses on equity securities.

Noninterest expenses of ~~$100.4~~$108.2 million and ~~$287.2~~$318.4 million for the third quarter and September YTD periods, respectively, reflected an increase of ~~$3.5~~$7.8 million, or ~~3.6%~~7.7%, from the third quarter of ~~2020~~2021 and an increase of ~~$5.7~~$31.2 million, or ~~2.0%~~10.9%, from the first nine months of ~~2020.~~2021. The increase in noninterest expenses for the quarter was due to increases in salaries and benefits, ~~legal~~business development and ~~professional fees,~~marketing expenses, data processing and communications expenses, other expenses, occupancy and equipment expenses, acquisition expenses, amortization of intangible assets and the absence of a litigation accrual expense adjustment, partially offset by ~~decreases~~a decrease in ~~litigation accrual expenses, business development~~legal and ~~marketing expenses, acquisition-related expenses and occupancy and equipment expenses.~~professional fees. The YTD increase in noninterest expenses was due to increases in salaries and benefits, acquisition expenses, other expenses, business development and marketing expenses, data processing and communications expenses, legal and professional fees, amortization of intangible assets, acquisition-related contingent consideration adjustments, occupancy and equipment expenses and ~~legal and professional fees, partially offset by decreases in acquisition-related expenses,~~the absence of a negative litigation accrual expense adjustment. Excluding acquisition expenses, ~~amortization of intangible assets, other expenses and business development and marketing expenses. Excluding~~ acquisition-related ~~expenses~~contingent consideration adjustments and litigation accrual expenses, ~~2021~~2022 operating expenses were ~~$7.2~~$7.3 million, or ~~7.7%~~7.3%, higher for the third quarter and ~~$13.1~~$26.2 million, or ~~4.8%~~9.1%, higher for the year-to-date ~~timeframe.~~timeframe, in part due to the acquisition of Elmira Savings Bank in the second quarter of 2022 and financial services acquisitions.

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The effective income tax rates were ~~21.1%~~22.0% and ~~20.9%~~21.6% for the third quarter and YTD ~~2021,~~2022, respectively, as compared to ~~20.3%~~21.1% and ~~19.8%~~20.9% for the comparable prior year periods. The effective tax rate in the third quarter of 2021 was driven down by a decrease in the Company’s full year effective tax rate projection. The increase in the YTD effective tax rate was fully attributable to lower levels of tax benefits related to stock-based compensation activity. The effective tax rates ~~compared~~adjusted to ~~the prior year~~exclude stock-based compensation tax benefits for both YTD periods ~~was primarily attributable to an increase in certain state income tax rates that~~ were ~~enacted in the second quarter of 2021.~~22.0%.

A condensed income statement is as follows:

Table 1: Condensed Income Statements


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
(000’s omitted, except per share data)	2021		2020		2021		2020		2022		2021		2022		2021
Net interest income	$	92,611	$	92,965	$	278,670	$	274,970	$	110,394	$	92,611	$	308,407	$	278,670
Provision for credit losses		(944)		1,945		(11,001)		17,313		5,061		(944)		12,005		(11,001)
Noninterest revenues		64,309		59,659		182,300		171,219		65,249		64,309		195,019		182,300
Noninterest expenses		100,436		96,966		287,225		281,532		108,185		100,436		318,416		287,225
Income before income taxes		57,428		53,713		184,746		147,344		62,397		57,428		173,005		184,746
Income taxes		12,092		10,904		38,616		29,153		13,706		12,092		37,454		38,616
Net income	$	45,336	$	42,809	$	146,130	$	118,191	$	48,691	$	45,336	$	135,551	$	146,130

Diluted weighted average common shares outstanding		54,541		54,159		54,516		53,276		54,290		54,541		54,396		54,516
Diluted earnings per share	$	0.83	$	0.79	$	2.68	$	2.22	$	0.90	$	0.83	$	2.49	$	2.68

Net Interest Income

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

As shown in Table 2a, net interest income (with nontaxable income converted to a fully tax-equivalent basis) for the third quarter was ~~$93.4~~$111.5 million, ~~$0.5~~an increase of $18.1 million, or ~~0.5%~~19.4%, ~~less than~~compared to the same period last year. This was driven by a 4535 basis point ~~decrease~~increase in the average yield on ~~interest-earning~~interest-earnings assets and a ~~$987.1 million increase in average interest-bearing liabilities, partially offset by a $1.57~~$1.08 billion increase in average interest-earning assets, ~~and~~partially offset by a nine basis point ~~decrease~~increase in the average rate paid on interest-bearing liabilities and a $724.5 million increase in average interest-bearing liabilities in comparison to the third quarter of ~~2020.~~2021. As reflected in Table 3, net interest income was ~~unfavorably~~favorably impacted by ~~$14.1~~$12.5 million due to the ~~decrease~~increase in the average yield on interest-earning assets and ~~$0.5 million due to the volume increase in interest-bearing liabilities, partially offset by favorable impacts on net interest income of $12.1~~$8.1 million due to the volume increase in interest-earning assets, ~~and $2.0~~partially offset by the unfavorable impacts on net interest income of $2.2 million due to ~~a decrease~~an increase in the average rate paid on interest-bearing liabilities and $0.3 million due to the volume increase in interest-bearing liabilities. September YTD net interest income (with nontaxable income converted to a fully tax-equivalent basis), as reflected in Table 2b, of ~~$281.2~~$311.4 million, increased ~~$3.3~~$30.1 million, or ~~1.2%~~10.7%, from the year-earlier period. The September YTD increase resulted from a ~~$2.17~~$1.24 billion increase in average interest-earning assets and a 15four basis point ~~decrease in the average rate paid on interest-bearing liabilities, partially offset by a 62 basis point decrease~~increase in the average yield on interest-earning assets, ~~and a $1.28 billion~~partially offset by an $825.3 million increase in average interest-bearing liabilities and a one basis point increase in the average rate paid on interest-bearing liabilities. As reflected in Table 3, for September YTD, the volume increase in interest-earning assets and the ~~decrease~~increase in the average yield on interest-earning assets had favorable impacts on net interest income of $27.6 million and $3.8 million, respectively, partially offset by the volume increase in interest-bearing liabilities and the increase in the average rate paid on interest-bearing liabilities ~~had favorable~~having unfavorable impacts on net interest income of ~~$52.5~~$0.9 million and ~~$9.2~~$0.4 million, respectively, partially offset by the decrease in the average yield on interest-earning assets having an unfavorable impact on net interest income of $55.9 million and the volume increase in interest-bearing liabilities having a negative impact of $2.5 million.respectively.

The net interest margin of ~~2.74%~~3.03% for the third quarter of ~~2021~~2022 was 3829 basis points ~~lower than~~higher as compared to the third quarter of ~~2020.~~2021. The ~~decrease~~increase was the result of a 4535 basis point ~~decrease~~increase in the interest-earning asset yield, partially offset by a nine basis point ~~decrease~~increase in the ~~average~~ rate on interest-bearing liabilities. The net interest margin of ~~2.85%~~2.88% for the first nine months of ~~2021~~2022 was 51three basis points ~~lower~~higher than the comparable period of ~~2020.~~2021. The yield on interest-earning assets ~~decreased 62~~increased four basis points, while the rate on interest-bearing liabilities ~~decreased~~increased by 15one basis ~~points~~point for the first nine months of ~~2021~~2022 as compared to the prior year period.

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The 4535 basis point ~~decrease~~increase in the average yield on interest-earning assets for the quarter was the result of ~~a decrease~~increases in the average yield on ~~loans~~investments and ~~investments.~~cash equivalents and the average yield on loans. For the third quarter, the average yield on ~~loans decreased by eight~~investments, including cash equivalents, increased 50 basis points and the average yield on ~~investments, including cash equivalents, decreased 37~~loans increased by seven basis points compared to the prior year. The 62four basis point ~~decrease~~increase in the yield on interest-earning assets for the first nine months of ~~2021~~2022 was the result of ~~an 18~~a 33 basis point increase in the average yield on investments, including cash equivalents, partially offset by a 14 basis point decrease in the average yield on loans ~~and a 64 basis point decrease in the average yield on investments, including cash equivalents,~~as compared to the prior year. The ~~decrease~~changes in the loan ~~and~~yields included declines in PPP-related interest income between the periods. During the third quarter of 2022, the Company recorded $0.5 million of PPP-related interest income, a decrease of $3.9 million from the prior year’s third quarter, while during the first nine months of 2022, the Company recorded $3.2 million of PPP-related interest income, a decrease of $11.9 million from the first nine months of 2021. The increase in investment yields were primarily driven by the ~~comparatively low market rates over~~Company meaningfully shifting the ~~past 12 months, a significant increase in the proportion~~composition of ~~lower yielding~~earning assets away from cash equivalents ~~and included~~that were earning a low yield at the ~~impact of a $9.2 million YTD increase in loan income recognized on PPP loans.~~time to higher yielding investment securities between the periods.

The average rate on interest-bearing liabilities ~~decreased~~increased by nine basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits ~~decreased six~~increased four basis points and the average rate paid on external borrowings ~~decreased 80~~increased 95 basis points from the comparable prior year ~~quarter.~~period. For the first nine months of ~~2021,~~2022, the average rate on interest-bearing liabilities ~~decreased~~increased by 15one basis ~~points~~point from the comparable prior year period as the average rate on interest-bearing deposits decreased 11one basis ~~points and~~point, while the average rate on external borrowings ~~decreased 89~~increased 27 basis points. The ~~decrease~~changes in the average ~~rate~~rates paid on interest-bearing deposits ~~was~~were driven by ~~a decrease~~increases in the interest rates paid on interest checking and money market ~~rates for deposits.~~deposits, while the interest rate paid on time deposits decreased. The ~~decrease~~increases in the average cost of borrowings ~~was~~were primarily the result of ~~a decrease in the variable rates paid on external borrowings due to decreases in~~higher market interest rates and the ~~redemption of~~Company entering into an overnight borrowing position during in the ~~Community Capital Trust IV (“CCT IV”) debentures and associated preferred securities during the first~~second quarter of ~~2021.~~2022.

The third quarter and YTD average balance of investments, including cash equivalents, increased ~~$1.81 billion~~$16.0 million and ~~$2.05 billion,~~$742.7 million, respectively, as compared to the corresponding prior year periods. Investment ~~securities~~security maturities, calls and principal payments outpaced purchases during the third quarter while investment security purchases outpaced maturities, calls and principal payments during ~~third quarter and YTD.~~the YTD period. The cash equivalents component of average earning assets ~~increased $777.1 million~~decreased $2.05 billion and ~~$1.19~~$1.47 billion for the third quarter and YTD periods, respectively, compared to the prior year periods. The ~~increase~~decrease in cash equivalents was primarily due to ~~large inflows related~~the Company meaningfully shifting the composition of earning assets away from cash equivalents that at the time were earning a low yield to ~~government stimulus-related deposit funding~~higher yielding investment securities and ~~PPP lending.~~loans. Average loan balances ~~decreased $240.2 million~~increased $1.06 billion for the quarter ~~primarily driven by decreases in the average balances of PPP loans~~ and ~~increased $119.8~~$496.7 million YTD as compared to the prior year, ~~primarily~~ driven by organic and acquired growth during both periods, including the ~~Steuben~~Elmira acquisition in ~~June 2020~~May 2022, despite declines in average PPP loan balances. The change in average loan balances for the quarter and ~~an increase~~YTD periods included a $215.4 million and $300.1 million decrease in ~~the~~ average ~~balance of~~ PPP ~~loans.~~loans, respectively.

Average interest-bearing deposits increased ~~$1.04 billion~~$479.9 million compared to the prior year quarter and ~~$1.31 billion~~$733.7 million compared to the prior YTD period. The quarterly increase in average interest-bearing deposits ~~for the quarterly period~~ was due to increases in ~~interest checking, savings and money market deposits due primarily to large inflows of government stimulus-related~~all deposit funding, partially offset by a decrease in time deposits. The increase in average interest-bearing deposits for the YTD period was due to increases in interest checking, savings, money market, and time depositscategories, due primarily to large inflows of government stimulus-related deposit funding and the ~~Steuben~~Elmira acquisition in ~~June 2020.~~May 2022. The YTD increase in average interest-bearing deposits was due to increases in savings, interest checking and money market deposits, while time deposits declined. The average borrowing balance, including borrowings at the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), overnight borrowings at the Federal Reserve Bank of New York (“Federal Reserve”) and FHLB, subordinated notes payable, subordinated debt held by unconsolidated subsidiary trusts and securities sold under agreement to repurchase (customer repurchase agreements), ~~decreased $54.1~~increased $244.5 million and ~~$32.9~~$91.5 million for the quarter and YTD periods, respectively. The ~~decreases~~increases in average borrowings from the prior year quarter and YTD periods ~~was~~were primarily due to ~~the redemption of $77.3 million of trust preferred subordinated debt held by CCT IV, an unconsolidated subsidiary trust, during the first quarter of 2021 and a decrease~~increases in average ~~FHLB~~overnight borrowings ~~partially offset by an increase in average~~and customer repurchase agreements.

Tables 2a and 2b below ~~sets~~set forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent basis (“FTE”) using a marginal income tax ~~rates~~rate of 24.1% and 24.2% in 2022 and ~~24.0% in~~ 2021, ~~and 2020,~~ 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 ~~origination,~~ 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: Quarterly Average Balance Sheet


	Three Months Ended						Three Months Ended						Three Months Ended						Three Months Ended
	September 30, 2021						September 30, 2020						September 30, 2022						September 30, 2021
					Avg.						Avg.						Avg.						Avg.
	Average				Yield/Rate		Average				Yield/Rate		Average				Yield/Rate		Average				Yield/Rate
(000's omitted except yields and rates)	Balance		Interest		Paid		Balance		Interest		Paid
(000’s omitted except yields and rates)													Balance		Interest		Paid		Balance		Interest		Paid
Interest-earning assets:
Cash equivalents	$	2,077,996	$	794	0.15	%	$	1,300,981	$	332	0.10	%	$	25,730	$	114	1.76	%	$	2,077,996	$	794	0.15	%
Taxable investment securities ⁽¹⁾		3,800,978		16,567	1.73	%		2,686,120		14,549	2.15	%		5,701,691		23,623	1.64	%		3,800,978		16,567	1.73	%
Nontaxable investment securities ⁽¹⁾		384,053		3,137	3.24	%		461,963		3,747	3.23	%		551,610		4,681	3.37	%		384,053		3,137	3.24	%
Loans (net of unearned discount) ⁽²⁾		7,268,659		75,973	4.15	%		7,508,895		79,825	4.23	%		8,333,148		88,575	4.22	%		7,268,659		75,973	4.15	%
Total interest-earning assets		13,531,686		96,471	2.83	%		11,957,959		98,453	3.28	%		14,612,179		116,993	3.18	%		13,531,686		96,471	2.83	%
Noninterest-earning assets		1,495,792						1,585,501						941,117						1,495,792
Total assets	$	15,027,478					$	13,543,460					$	15,553,296					$	15,027,478

Interest-bearing liabilities:
Interest checking, savings, and money market deposits	$	7,701,717		792	0.04	%	$	6,658,778		966	0.06	%	$	8,179,556		2,206	0.11	%	$	7,701,717		792	0.04	%
Time deposits		960,670		2,030	0.84	%		962,428		2,689	1.11	%		962,777		1,649	0.68	%		960,670		2,030	0.84	%
Customer repurchase agreements		230,906		177	0.30	%		190,781		250	0.52	%		269,958		216	0.32	%		230,906		177	0.30	%
Overnight borrowings														188,975		1,226	2.57	%		0		0	0.00	%
FHLB borrowings		2,920		18	2.45	%		7,689		42	2.14	%		19,463		146	2.97	%		2,920		18	2.45	%
Subordinated notes payable		3,288		38	4.63	%		13,748		184	5.33	%		3,261		38	4.63	%		3,288		38	4.63	%
Subordinated debt held by unconsolidated subsidiary trusts		0		0	0.00	%		79,023		394	1.98	%
Total interest-bearing liabilities		8,899,501		3,055	0.14	%		7,912,447		4,525	0.23	%		9,623,990		5,481	0.23	%		8,899,501		3,055	0.14	%
Noninterest-bearing liabilities:
Noninterest checking deposits		3,841,646						3,312,841						4,192,615						3,841,646
Other liabilities		182,167						222,961						56,166						182,167
Shareholders' equity		2,104,164						2,095,211
Total liabilities and shareholders' equity	$	15,027,478					$	13,543,460
Shareholders’ equity														1,680,525						2,104,164
Total liabilities and shareholders’ equity													$	15,553,296					$	15,027,478

Net interest earnings			$	93,416					$	93,928					$	111,512					$	93,416

Net interest spread					2.69	%					3.05	%					2.95	%					2.69	%
Net interest margin on interest-earning assets					2.74	%					3.12	%					3.03	%					2.74	%

Fully tax-equivalent adjustment ⁽³⁾			$	805					$	963					$	1,118					$	805

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

(2)	Includes nonaccrual loans. The impact of interest and fees not recognized on nonaccrual loans was immaterial.

(3)	The fully-tax equivalent adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable. The adjustment attempts to enhance the comparability of the performance of assets that have different tax liabilities.

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


	Nine Months Ended						Nine Months Ended						Nine Months Ended						Nine Months Ended
	September 30, 2021						September 30, 2020						September 30, 2022						September 30, 2021
					Avg.						Avg.						Avg.						Avg.
	Average				Yield/Rate		Average				Yield/Rate		Average				Yield/Rate		Average				Yield/Rate
(000's omitted except yields and rates)	Balance		Interest		Paid		Balance		Interest		Paid
(000’s omitted except yields and rates)													Balance		Interest		Paid		Balance			Interest	Paid
Interest-earning assets:
Cash equivalents	$	1,941,329	$	1,772	0.12	%	$	748,236	$	794	0.14	%	$	473,112	$	1,306	0.37	%	$	1,941,329	$	1,772	0.12	%
Taxable investment securities ⁽¹⁾		3,531,272		47,553	1.80	%		2,627,302		44,839	2.28	%		5,655,745		69,921	1.65	%		3,531,272		47,553	1.80	%
Nontaxable investment securities⁽¹⁾		406,835		10,018	3.29	%		458,617		11,520	3.36	%		493,302		12,153	3.29	%		406,835		10,018	3.29	%
Loans (net of unearned discount) ⁽²⁾		7,322,581		231,920	4.23	%		7,202,830		237,534	4.41	%		7,819,306		239,322	4.09	%		7,322,581		231,920	4.23	%
Total interest-earning assets		13,202,017		291,263	2.95	%		11,036,985		294,687	3.57	%		14,441,465		322,702	2.99	%		13,202,017		291,263	2.95	%
Noninterest-earning assets		1,436,252						1,527,615						1,092,450						1,436,252
Total assets	$	14,638,269					$	12,564,600					$	15,533,915					$	14,638,269

Interest-bearing liabilities:
Interest checking, savings, and money market deposits	$	7,474,811		2,309	0.04	%	$	6,187,919		4,672	0.10	%	$	8,230,007		4,037	0.07	%	$	7,474,811		2,309	0.04	%
Time deposits		962,559		6,588	0.92	%		935,783		8,701	1.24	%		941,094		5,074	0.72	%		962,559		6,588	0.92	%
Customer repurchase agreements		250,638		641	0.34	%		208,317		1,108	0.71	%		292,411		642	0.29	%		250,638		641	0.34	%
Overnight borrowings														64,204		1,233	2.57	%		0		0	0.00	%
FHLB borrowings		4,634		75	2.15	%		11,988		172	1.92	%		10,890		238	2.93	%		4,634		75	2.15	%
Subordinated notes payable		3,294		115	4.69	%		13,767		553	5.37	%		3,268		115	4.69	%		3,294		115	4.69	%
Subordinated debt held by unconsolidated subsidiary trusts		20,675		293	1.89	%		78,027		1,501	2.57	%		0		0	0.00	%		20,675		293	1.89	%
Total interest-bearing liabilities		8,716,611		10,021	0.15	%		7,435,801		16,707	0.30	%		9,541,874		11,339	0.16	%		8,716,611		10,021	0.15	%
Noninterest-bearing liabilities:
Noninterest checking deposits		3,685,556						2,913,492						4,075,005						3,685,556
Other liabilities		178,402						212,510						96,763						178,402
Shareholders' equity		2,057,700						2,002,797
Total liabilities and shareholders' equity	$	14,638,269					$	12,564,600
Shareholders’ equity														1,820,273						2,057,700
Total liabilities and shareholders’ equity													$	15,533,915					$	14,638,269

Net interest earnings			$	281,242					$	277,980					$	311,363					$	281,242

Net interest spread					2.80	%					3.27	%					2.83	%					2.80	%
Net interest margin on interest-earning assets					2.85	%					3.36	%					2.88	%					2.85	%

Fully tax-equivalent adjustment ⁽³⁾			$	2,572					$	3,010					$	2,956					$	2,572

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

(2)	Includes nonaccrual loans. The impact of interest and fees not recognized on nonaccrual loans was immaterial.

(3)	The fully-tax equivalent adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable. The adjustment attempts to enhance the comparability of the performance of assets that have different tax liabilities.

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

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Table 3: Rate/Volume


	Three months ended September 30, 2021							Nine months ended September 30, 2021					Three months ended September 30, 2022							Nine months ended September 30, 2022
	versus September 30, 2020							versus September 30, 2020					versus September 30, 2021							versus September 30, 2021
	Increase (Decrease) Due to Change in ⁽¹⁾							Increase (Decrease) Due to Change in ⁽¹⁾					Increase (Decrease) Due to Change in ⁽¹⁾							Increase (Decrease) Due to Change in ⁽¹⁾
					Net						Net
(000's omitted)	Volume		Rate		Change		Volume		Rate		Change
(000’s omitted)													Volume		Rate		Net Change		Volume		Rate		Net Change
Interest earned on:
Cash equivalents	$	251	$	211	$	462	$	1,102	$	(124)	$	978	$	(1,493)	$	813	$	(680)	$	(2,078)	$	1,612	$	(466)
Taxable investment securities		5,237		(3,219)		2,018		13,410		(10,696)		2,714		7,912		(856)		7,056		26,545		(4,177)		22,368
Nontaxable investment securities		(636)		26		(610)		(1,279)		(223)		(1,502)		1,417		127		1,544		2,130		5		2,135
Loans		(2,526)		(1,326)		(3,852)		3,903		(9,517)		(5,614)		11,295		1,307		12,602		15,378		(7,976)		7,402
Total interest-earning assets ⁽²⁾		12,096		(14,078)		(1,982)		52,481		(55,905)		(3,424)		8,076		12,446		20,522		27,652		3,787		31,439

Interest paid on:
Interest checking, savings and money market deposits		136		(310)		(174)		822		(3,185)		(2,363)		52		1,362		1,414		253		1,475		1,728
Time deposits		(5)		(654)		(659)		243		(2,356)		(2,113)		4		(385)		(381)		(144)		(1,370)		(1,514)
Customer repurchase agreements		46		(119)		(73)		192		(659)		(467)		31		8		39		98		(97)		1
Overnight borrowings														1,226		0		1,226		1,233		0		1,233
FHLB borrowings		(29)		5		(24)		(116)		19		(97)		123		5		128		129		34		163
Subordinated notes payable		(125)		(21)		(146)		(375)		(63)		(438)
Subordinated debt held by unconsolidated subsidiary trusts		(394)		0		(394)		(888)		(320)		(1,208)		0		0		0		(293)		0		(293)
Total interest-bearing liabilities ⁽²⁾		514		(1,984)		(1,470)		2,523		(9,209)		(6,686)		255		2,171		2,426		922		396		1,318

Net interest earnings ⁽²⁾	$	11,581	$	(12,093)	$	(512)	$	49,822	$	(46,560)	$	3,262	$	7,798	$	10,298	$	18,096	$	26,686	$	3,435	$	30,121

(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 fourth quarter 2021 net interest margin to remain below results in the comparable prior year quarter due to the significant and precipitous drop in the overnight Federal Funds and Prime interest rates in early 2020 that have remained into 2021. In the near term, 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 1.00%, the Company’s recognition of the interest income on origination fees, net of deferred origination costs, on PPP loans will likely cause earning asset yield volatility as loans are forgiven by the SBA. While the Company expects to recognize the majority of its remaining first draw net deferred PPP fees totaling $0.1 million through interest income during the fourth quarter of 2021 and the majority of its second draw net deferred PPP fees totaling $6.2 million over the next few quarters, the eligibility of the borrowers’ forgiveness requests and the SBA’s ability to provide loan forgiveness in a timely manner remains uncertain at this time.

Noninterest Revenues

The Company’s sources of noninterest revenues are of four primary types: 1) general banking services related to loans, including mortgage banking, deposits and other core customer activities typically provided through the branch network and digital banking channels (performed by CBNA); 2) employee benefit trust, collective investment fund, transfer agency, actuarial and benefit plan administration services (performed by BPAS and its subsidiaries); 3) wealth management services, comprised of trust services (performed by the trust unit within CBNA), broker-dealer and investment advisory products and services (performed by Community Investment Services Inc. (“CISI”), OneGroup Wealth Partners, Inc. and The Carta Group, Inc.) and asset management services (performed by Nottingham Advisors, Inc.); and 4) insurance and risk management products and services (performed by OneGroup). Additionally, the Company ~~periodically generates~~has other transactions that impact noninterest revenues, ~~from investment and borrowing activities,~~ including unrealized gains or losses on equity securities.

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Table 4: Noninterest Revenues


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
(000's omitted)	2021			2020			2021			2020
(000’s omitted)													2022			2021			2022			2021
Employee benefit services	$	29,923		$	25,159		$	83,933		$	74,593		$	27,884		$	29,923		$	86,385		$	83,933
Deposit service charges and fees		8,816			7,899			24,305			25,318
Mortgage banking		460			3,908			1,479			6,199
Debit interchange and ATM fees		6,626			6,361			19,453			17,404
Insurance services		9,176			8,531			25,538			24,772			11,332			9,176			31,521			25,538
Wealth management services		8,322			6,889			24,748			20,389			7,502			8,322			24,276			24,748
Deposit service charges and fees														10,755			8,816			29,715			24,305
Debit interchange and ATM fees														6,697			6,626			20,030			19,453
Mortgage banking														171			460			595			1,479
Other banking revenues		996			924			2,830			2,574			912			996			2,521			2,830
Subtotal		64,319			59,671			182,286			171,249			65,253			64,319			195,043			182,286
Unrealized (loss) gain on equity securities		(10)			(12)			14			(30)			(4)			(10)			(24)			14
Total noninterest revenues	$	64,309		$	59,659		$	182,300		$	171,219		$	65,249		$	64,309		$	195,019		$	182,300

Noninterest revenues/operating revenues (FTE basis) ⁽¹⁾		41.0	%		39.2	%		39.6	%		38.5	%		37.2	%		41.0	%		38.8	%		39.6	%

(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~~FTE basis excluding acquired ~~non-impaired~~non-PCD loan accretion plus noninterest revenues excluding unrealized gains and losses on equity securities. See Table 1110 for Reconciliation of GAAP to Non-GAAP Measures.

As displayed in Table 4, noninterest revenues, excluding unrealized gain (loss) ~~gain~~ on equity securities, were ~~$64.3~~$65.3 million for the third quarter of ~~2021~~2022 and ~~$182.3~~$195.0 million for the first nine months of ~~2021.~~2022. This represents an increase of ~~$4.6~~$0.9 million, or ~~7.8%~~1.5%, for the quarter and an increase of ~~$11.0~~$12.8 million, or ~~6.4%~~7.0%, for the YTD period in comparison to the equivalent ~~2020~~2021 periods. The increase for the quarterly ~~and YTD periods were~~period was driven by increases in insurance services revenue and banking noninterest revenue, partially offset by declines in employee benefit services revenue and wealth management services revenue. The increase for the YTD period was due to increases in insurance services revenue, banking noninterest revenue and ~~insurance~~employee benefit services revenue, partially offset by a ~~decrease~~decline in ~~banking noninterest~~wealth management services revenue.

Banking noninterest revenue of ~~$16.9~~$18.5 million for the third quarter and ~~$48.1~~$52.9 million for the first nine months of ~~2021 decreased $2.2~~2022 increased $1.6 million, or ~~11.5%~~9.7%, and ~~decreased $3.4~~increased $4.8 million, or ~~6.7%~~10.0%, respectively, as compared to the corresponding prior year periods. The quarterly ~~decrease was primarily~~and YTD increases were driven ~~by a decrease in mortgage banking revenues as the Company is currently holding almost all of its new consumer mortgage production in portfolio due to a change in its strategy, partially offset~~ by increases in deposit service charges and fees and debit interchange and ATM fees, ~~and other banking revenues, reflective of increased transaction activity. The YTD decline was primarily driven~~partially offset by decreases in mortgage banking revenues ~~due to the aforementioned change~~and other banking revenues. The increases in ~~strategy and~~ deposit service charges and fees including decreases in overdraft fees in part due to the higher average deposit balances resulting from government stimulus program inflows, partially offset by increases in debit interchange and ATM fees,were reflective of increased post-pandemic transaction activity, including ~~the impact from~~ the addition of new deposit relationships from the ~~Steuben~~Elmira acquisition in May 2022. The Company expects to make modifications to its deposit service charges and ~~higher other~~fees over the next several quarters in order to better align with industry trends and to ensure the Company continues to provide customers with affordable and competitive banking ~~revenues.~~options.

Employee benefit services revenue ~~increased $4.8~~decreased $2.0 million, or ~~18.9%~~6.8%, ~~and $9.3~~but increased $2.5 million, or ~~12.5%~~2.9%, for the three and nine months ended September 30, ~~2021,~~2022, respectively, as compared to the equivalent prior year periods. ~~This growth primarily related to increases~~The decline in quarterly revenues was driven by decreases in employee benefit trust and custodial fees, ~~as well as~~reflecting the adverse impact from market-related headwinds, while the growth on a YTD basis was primarily driven by incremental revenues from the acquisition of ~~FBD~~Fringe Benefits Design of Minnesota, Inc. (“FBD”) during the third ~~quarter.~~quarter of 2021. Insurance services revenue was up ~~$0.6~~$2.2 million, or ~~7.6%~~23.5%, and ~~up $0.8~~$6.0 million, or ~~3.1%~~23.4%, for the third quarter and YTD periods, ~~respectively. These increases were primarily~~respectively, driven by ~~incremental revenues from~~organic expansion, as well as the ~~acquisitions~~second quarter 2021 acquisition of ~~TGA during~~a Florida-based personal lines insurance agency, the third quarter 2021 acquisition of a Boston-based specialty-lines insurance broker and ~~NuVantage during~~ the ~~second quarter.~~first quarter 2022 acquisitions of three other insurance agencies. Wealth management services revenue was ~~up $1.4~~down $0.8 million, or ~~20.8%~~9.9%, for the third quarter of ~~2021~~2022 and ~~was up $4.4~~$0.5 million, or ~~21.4%~~1.9%, for September ~~2021~~2022 YTD as compared to the same time periods of ~~2020,~~2021, primarily driven by ~~increases in~~more challenging investment ~~management and trust services revenues due to the addition~~market conditions.

Table of ~~new relationships and higher equity market valuations.~~Contents

The ratio of noninterest revenues to operating revenues (FTE basis), as defined in footnote 1 of Table 4 above, was ~~41.0%~~37.2% for the quarter and ~~39.6%~~38.8% for the nine months ended September 30, ~~2021,~~2022, respectively, versus ~~39.2%~~41.0% and ~~38.5%~~39.6% for the comparable periods of ~~2020.~~2021. The ~~increase~~decrease for the year-to-date period is a function of a ~~6.4%~~7.0% increase in adjusted noninterest revenues while adjusted net interest income (FTE basis) increased at10.7%. The decrease for the quarterly periods is reflective of a ~~slower 1.2% pace.~~

~~Table of Contents~~

~~The Company expects its full-year mortgage banking~~1.5% increase in adjusted noninterest revenues ~~in 2021 to continue to be below 2020 as the Company reduced the amount of sales of secondary market eligible residential mortgage loans beginning in the fourth quarter of 2020.~~while adjusted net interest income (FTE basis) increased 19.2%.

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						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
(000's omitted)	2021			2020			2021			2020
(000’s omitted)													2022			2021			2022			2021
Salaries and employee benefits	$	62,883		$	57,280		$	178,407		$	170,252		$	66,190		$	62,883		$	193,236		$	178,407
Occupancy and equipment		9,867			10,134			31,437			30,627			10,364			9,867			31,740			31,437
Data processing and communications		12,966			12,096			38,123			33,342			14,184			12,966			40,454			38,123
Amortization of intangible assets		3,703			3,581			10,300			10,772			3,837			3,703			11,420			10,300
Legal and professional fees		3,352			2,365			8,885			8,577			3,194			3,352			10,196			8,885
Business development and marketing		2,383			3,145			7,071			7,162			3,616			2,383			9,975			7,071
Litigation accrual		(100)			2,950			(100)			2,950			0			(100)			0			(100)
Acquisition expenses		102			796			133			4,537			409			102			4,668			133
Acquisition-related contingent consideration adjustment														0			0			400			0
Other		5,280			4,619			12,969			13,313			6,391			5,280			16,327			12,969
Total noninterest expenses	$	100,436		$	96,966		$	287,225		$	281,532		$	108,185		$	100,436		$	318,416		$	287,225

Operating expenses⁽¹⁾/average assets		2.55	%		2.63	%		2.53	%		2.80	%		2.65	%		2.55	%		2.60	%		2.53	%
Efficiency ratio⁽²⁾		61.7	%		58.9	%		60.1	%		59.2	%		59.3	%		61.7	%		60.0	%		60.1	%

(1)

Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual ~~expenses,acquisition~~ expenses and amortization of intangibles. See Table 1110 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~~FTE basis excluding acquired ~~non-impaired~~non-PCD loan accretion plus noninterest revenues excluding unrealized gains and losses on equity securities. See Table 1110 for Reconciliation of GAAP to Non-GAAP Measures.

Table of Contents

As shown in Table 5, the Company recorded noninterest expenses of ~~$100.4~~$108.2 million and ~~$287.2~~$318.4 million for the third quarter and YTD periods of ~~2021,~~2022, respectively, representing ~~an increase~~increases of ~~$3.5~~$7.8 million, or ~~3.6%~~7.7%, and ~~an increase of $5.7~~$31.2 million, or ~~2.0%~~10.9%, from the ~~respective~~ prior year ~~periods. Combined acquisition-related~~periods, respectively. Acquisition expenses and ~~litigation accrual expenses~~acquisition-related contingent consideration adjustments of ~~$3.7~~$0.4 million and ~~$7.5~~$5.1 million are included in third quarter ~~2020~~ and YTD ~~2020~~2022 noninterest expenses, respectively. Salaries and employee benefits increased ~~$5.6~~$3.3 million, or ~~9.8%~~5.3%, and ~~$8.2~~$14.8 million, or ~~4.8%~~8.3%, for the third quarter and YTD periods of ~~2021,~~2022, respectively, as compared to the corresponding periods of ~~2020.~~2021. The increase in salaries and benefits expense was driven by increases in ~~merit and incentive-related~~merit-related employee wages, acquisition-related additions to staffing, higher payroll taxes ~~including increases in state-related unemployment taxes,~~and higher employee benefit-related ~~expenses and staffing increases due to recent acquisitions.~~expenses. The remaining change to noninterest expenses ~~can be~~are attributed to occupancy and equipment ~~(down $0.3~~(up $0.5 million for the quarter ~~driven by branch consolidation activities between the periods~~ and up ~~$0.8~~$0.3 million ~~YTD driven by the Steuben acquisition)~~YTD), data processing and communications (up ~~$0.9~~$1.2 million for the quarter and ~~$4.8~~$2.3 million ~~YTD driven by the Steuben acquisition and the Company’s implementation of new customer-facing digital technologies and back office systems)~~YTD), amortization of intangible assets (up $0.1 million for the quarter ~~due to recent acquisitions~~ and ~~down $0.5~~$1.1 million YTD), legal and professional fees ~~(up $1.0~~(down $0.2 million for the quarter and ~~$0.3~~up $1.3 million ~~YTD due to the general increase in the level of business activities)~~YTD), business development and marketing ~~(down $0.8~~(up $1.2 million for the quarter and ~~$0.1~~$2.9 million YTD) and other expenses (up ~~$0.7~~$1.1 million for the quarter and $3.4 million YTD). Noninterest expenses were generally up due to the ~~general~~ increase in the level of business activities and ~~down $0.3 million YTD). Included~~incremental expenses due to the end of most pandemic-related restrictions as well as the costs associated with operating an expanded franchise subsequent to the Elmira and financial services acquisitions, including increases in ~~other~~business development and marketing expenses, insurance and travel-related expenses. The increase in data processing and communications expenses was andue to the Company’s continued investment in customer-facing and back office digital technologies between the comparable periods. The slight increase in ~~non-service related components of~~occupancy and equipment expense was driven by inflationary pressures, partially offset by branch office consolidations between the ~~net periodic pension benefit credit (up $0.6 million for the quarter and $2.0 million YTD).~~periods.

~~Table of Contents~~

The Company’s efficiency ratio (as defined in ~~Table 5~~the table above) was ~~61.7%~~59.3% for the third quarter, ~~2.8% unfavorable~~2.4 percentage points favorable to the comparable quarter of ~~2020.~~2021. This resulted from operating expenses (as described ~~in footnote 1 of Table 5~~ above) increasing ~~7.9%~~7.5%, while operating revenues (as described ~~in footnote 2 of Table 5~~ above) increased ~~a lesser 3.0%~~11.8%. The efficiency ratio of ~~60.1%~~60.0% for the first nine months of ~~2021~~2022 was ~~0.9% unfavorable~~0.1 percentage point favorable compared to the first nine months of ~~2020~~2021 due to ~~5.2%~~9.0% higher operating expenses (as described ~~in footnote 1 of Table 5~~ above), while operating revenues (as described ~~footnote 2 of Table 5~~ above) increased by ~~3.4%~~9.3%. Current year operating expenses, excluding amortization of intangible ~~amortization,~~assets, acquisition expenses, acquisition-related contingent consideration adjustments and litigation accrual ~~expenses and acquisition~~ expenses, as a percentage of average assets ~~decreased eight basis~~increased 0.10 percentage points versus the prior year quarter and ~~was 27 basis~~increased 0.07 percentage points ~~lower than~~versus the prior year-to-date period as operating expenses (as defined above) increased at a ~~slower pace~~faster rate than average assets. Operating expenses (as defined above) increased ~~7.9%~~7.5% for the quarter and increased ~~5.2%~~9.0% for the year-to-date period, while average assets increased ~~11.0%~~3.5% for the quarter and increased ~~16.5%~~6.1% for the year-to-date ~~period.~~period as the strong growth of the book value of earning assets was partially offset by a significant decline in the pre-tax market value adjustment on the investment portfolio.

Income Taxes

The third quarter and YTD ~~2021~~2022 effective income tax rates were ~~21.1%~~22.0% and ~~20.9%~~21.6%, respectively, as compared to ~~the 20.3%~~21.1% and ~~19.8%~~20.9% for the comparable periods of ~~2020.~~2021. The effective tax rate in the third quarter of 2021 was driven down by a decrease in the Company’s full year effective tax rate projection. The increase in the ~~third quarter and~~ YTD ~~2021~~ effective ~~income~~ tax ~~rates is primarily~~rate was fully attributable to ~~an increase in certain state income~~lower levels of tax ~~rates that were enacted in the second quarter of 2021. Partially offsetting this was a higher level of benefit derived from stock based~~benefits related to stock-based compensation ~~activity for YTD 2021.~~activity. The Company recorded a ~~$2.0~~$0.6 million and ~~$1.3~~$2.0 million reduction in income tax expense associated with stock-based compensation tax benefits for YTD ~~2021~~2022 and YTD ~~2020,~~2021, respectively. The effective tax rates adjusted to exclude stock-based compensation tax benefits for the third quarter and YTD ~~2021~~2022 were both 22.0%, as compared to 21.1% and 22.0%, ~~respectively, as compared to 20.4% and 20.7%~~ for the comparable periods of ~~2020.~~2021, respectively.

Investment Securities

The carrying value of investment securities (including unrealized gains and losses) was ~~$4.40~~$5.23 billion at the end of the third quarter, an increase of ~~$808.1~~$248.2 million from December 31, ~~2020~~2021 and ~~$1.13 billion~~$823.9 million higher than September 30, ~~2020.~~2021. The ~~balance~~carrying value of cash equivalents was ~~$2.10 billion~~$30.0 million at the end of the third quarter, ~~an increase~~a decrease of ~~$629.4 million~~$1.69 billion from December 31, ~~2020~~2021 and ~~$461.7 million higher than~~$2.07 billion from September 30, ~~2020.~~2021. The book value of investment securities (excluding unrealized gains and losses) of ~~$4.45~~$6.19 billion at the end of the third quarter increased ~~$976.7 million~~$1.17 billion from December 31, ~~2020~~2021 and increased ~~$1.34~~$1.74 billion from September 30, ~~2020.~~2021. During the first nine months of ~~2021,~~2022, the Company purchased ~~$1.16~~$1.14 billion of U.S. Treasury and agency securities with an average yield of ~~1.28%~~1.62%, ~~$102.4~~$34.6 million of government agency mortgage-backed securities with an average yield of ~~1.77%~~2.75%, ~~$13.8~~and $182.0 million of obligations of state and political subdivisions with an average yield of ~~2.44% and $5.0~~3.96%. Additionally, the Company acquired $11.3 million of ~~corporate debt securities with an average yield~~investments from Elmira during the second quarter of ~~3.25%.~~2022. These additions were partially offset by ~~$313.9~~$212.4 million of investment maturities, calls and principal payments during the first nine months of ~~2021.~~2022. Additionally, there was ~~$8.5~~$14.8 million of net accretion on investment securities during the first nine months of ~~2021.~~2022. The effective duration of the investment securities portfolio was 6.5 years at the end of the third quarter of 2022, as compared to 7.5 years at the end of 2021 and 7.6 years at the end of the third quarter of ~~2021, as compared to 7.7 years at the end~~2021.

Table of ~~2020 and 3.2 years at the end of the third quarter of 2020.~~Contents

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At September 30, ~~2021,~~2022, the portfolio had a $964.9 million net unrealized loss, as compared to a $44.9 million net unrealized loss at December 31, 2021 and a $47.5 million net unrealized loss ~~a decrease of $168.6 million from the net unrealized gain at December 31, 2020 and a $202.8 million decrease from the net unrealized gain~~ at September 30, ~~2020.~~2021. These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases and maturities that have occurred over the past 12 months.

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

Table 6: Investment Securities


	September 30, 2021				December 31, 2020				September 30, 2020				September 30,		December 31,			September 30,
	Amortized		Fair		Amortized		Fair		Amortized		Fair
(000's omitted)	Cost		Value		Cost		Value		Cost		Value

(000’s omitted)													2022		2021			2021
Available-for-Sale Portfolio:
U.S. Treasury and agency securities	$	3,467,053	$	3,393,260	$	2,423,236	$	2,501,382	$	2,034,512	$	2,149,170	$	4,275,440	$	3,998,564	$	3,393,260
Obligations of state and political subdivisions		404,531		421,965		451,028		475,660		470,518		493,496		489,910		430,289		421,965
Government agency mortgage-backed securities		503,548		510,676		506,540		522,638		508,738		523,974		384,891		477,056		510,676
Corporate debt securities		8,000		8,078		4,499		4,635		4,504		4,602		7,033		7,962		8,078
Government agency collateralized mortgage obligations		23,746		24,392		42,476		43,577		50,134		51,480		13,415		20,339		24,392
Total available-for-sale portfolio		4,406,878		4,358,371		3,427,779		3,547,892		3,068,406		3,222,722		5,170,689		4,934,210		4,358,371

Equity and other Securities:
Equity and Other Securities:
Equity securities, at fair value		251		459		251		445		251		423		439		463		459
Federal Home Loan Bank common stock		7,251		7,251		7,468		7,468		7,545		7,545		18,438		7,188		7,251
Federal Reserve Bank common stock		33,916		33,916		33,916		33,916		33,916		33,916		33,568		33,916		33,916
Other equity securities, at adjusted cost		2,651		3,401		4,876		5,626		4,707		5,457		4,158		3,312		3,401
Total equity and other securities		44,069		45,027		46,511		47,455		46,419		47,341		56,603		44,879		45,027

Total investments	$	4,450,947	$	4,403,398	$	3,474,290	$	3,595,347	$	3,114,825	$	3,270,063	$	5,227,292	$	4,979,089	$	4,403,398

Loans

~~As shown in Table 7, loans~~Loans ended the third quarter at ~~$7.28~~$8.54 billion, ~~down $176.1 million,~~an increase of $1.26 billion, or ~~2.4%~~17.3%, from one year earlier and ~~down $133.4 million,~~an increase of $1.17 billion, or ~~1.8%~~15.9%, from the end of ~~2020.~~2021. The ~~decline~~increase during the last twelve months ~~occurred primarily~~was driven by increases in ~~the~~all loan categories, including consumer mortgage, business lending, ~~portfolio, reflective of a net decrease in PPP loans, along with lesser declines in the~~consumer indirect, home equity and consumer direct ~~portfolios, partially offset by increases in~~loans, due to the ~~consumer indirect~~Elmira acquisition and ~~consumer mortgage portfolios. The decline from the end of 2020 was also primarily in the business lending portfolio, reflective of~~net organic growth, despite a ~~net~~$156.2 million decrease in PPP loans ~~along with a lesser decline in the home equity portfolio, partially offset by increases in the consumer indirect, consumer mortgage and consumer direct portfolios.~~due to loan forgiveness activities.

~~Table 7: Loans~~

(000's omitted)

September 30, 2021

December 31, 2020

September 30, 2020

Business lending

$
3,092,177

42.5
%
$
3,440,077

46.4
%
$
3,433,565

46.0
%
Consumer mortgage

2,470,974

33.9
%

2,401,499

32.4
%

2,410,249

32.3
%
Consumer indirect

1,168,378

16.1
%

1,021,885

13.8
%

1,039,925

13.9
%
Consumer direct

155,602

2.1
%

152,657

2.0
%

161,639

2.2
%
Home equity

395,451

5.4
%

399,834

5.4
%

413,265

5.6
%
Total loans

$
7,282,582

100.0
%
$
7,415,952

100.0
%
$
7,458,643

100.0
%

The business lending portfolio consists of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and ~~vehicle~~ dealer floor plan financing. The business lending portfolio ~~decreased $341.4~~increased $402.2 million, or ~~9.9%~~13.0%, from September 30, ~~2020, primarily~~2021 and increased $418.5 million, or 13.6%, from December 31, 2021, including $125.3 million of loans acquired from Elmira in the second quarter of 2022. The increase in the business lending portfolio was driven by ~~a $336.8 million net decrease~~the Elmira acquisition and organic growth despite decreases in PPP loans ~~as a result~~ of ~~forgiveness granted by the SBA. The portfolio decreased $347.9~~$156.2 million from September 30, 2021 and $82.0 million from December 31, ~~2020, primarily attributable to a $302.6 million net decrease in PPP loans. Highly competitive~~2021. Competitive conditions for business lending continue to prevail in both the digital marketplace and geographic regions in which the Company operates. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category.

~~Table of Contents~~

The Company participated in both rounds of the PPP, a specialized low-interest loan program funded by the U.S. Treasury Department and administered by the SBA, including lending pursuant to the 2020 Coronavirus Aid, Relief, and Security Act’s (“CARES Act”), now known as first draw loans. In addition, the Company participated in the 2021 Consolidated Appropriations Act’s (“CAA”) PPP loan program, now known as second draw loans. As of September 30, 2021, the Company’s business lending portfolio included 45 first draw PPP loans with a total balance of $14.4 million and 1,341 second draw PPP loans with a total balance of $151.0 million. This compares to 3,417 first draw PPP loans with a total balance of $470.7 million at December 31, 2020 and 3,473 first draw PPP loans with a total balance of $507.2 million at September 30, 2020.

Consumer mortgages increased ~~$60.7~~$504.5 million, or ~~2.5%~~20.4%, from one year ago and increased ~~$69.5~~$419.4 million, or ~~2.9%~~16.4%, from December 31, ~~2020~~2021, including $271.4 million of loans acquired from Elmira in the second quarter of 2022. In addition to the Elmira acquisition, the increase in consumer mortgages was driven by refinance activities late last year and early this year, the Company’s competitive product offerings and business development efforts, in addition to strong housing ~~demand.~~demand throughout the past twelve months. Interest rate levels, secondary market premiums, expected duration and ALCO strategies continue to be the most significant factors in determining whether the Company chooses to retain, versus sell and service, portions of its new mortgage production. During the fourth quarter of 2020, the Company sold $42.3 million of its secondary market eligible consumer mortgages, which offset a portion of the increase in outstanding balances between the comparable annual periods. The Company ~~changed its strategy to hold the majority of its secondary market eligible consumer mortgages during the fourth quarter of 2020 and~~ is currently holding almost all of its new consumer mortgage production in ~~portfolio, with only $17.0 million of consumer mortgages sold in the first nine months of 2021.~~portfolio. Home equity loans ~~decreased $17.8~~increased $37.6 million, or ~~4.3%~~9.5%, from one year ago, and ~~decreased $4.4~~increased $35.0 million, or ~~1.1%~~8.8%, from December 31, ~~2020. The Company continues to experience paydowns~~2021, including $18.4 million of loans acquired from Elmira in its home equity portfolio due in part to some consumers using stimulus funds to reduce debt levels and balances being rolled into re-financed first lien consumer mortgages that offer attractive attributes to customers.the second quarter of 2022.

Table of Contents

Consumer installment loans, both those originated directly in the branches (referred to as “consumer direct”) and indirectly in automobile, marine and other recreational vehicle dealerships (referred to as “consumer indirect”), increased ~~$122.4~~$316.7 million, or ~~10.2%~~23.9%, from one year ago and increased ~~$149.4~~$297.1 million, or ~~12.7%~~22.1%, from December 31, ~~2020 due~~2021, including $21.9 million of loans acquired from Elmira in ~~large part to high demand driven by low~~the second quarter of 2022. Despite national vehicle supply shortages, the Company’s market ~~interest rates~~area and ~~added personal liquidity to fund larger down payments. Strained supplies~~dealer network have experienced robust sales activity, which, combined with higher sales prices, have resulted in ~~all categories, while not impactful enough thus far to substantially stunt~~significant growth ~~opportunities, will continue to prop up pricing~~ in ~~all~~the Company’s consumer indirect ~~collateral categories.~~portfolio. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer direct loans provide attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.

The ultimate impact the COVID-19 pandemic will have on loan demand and the Company’s loan balances for the rest of 2021 remains uncertain at this time. The Company’s business lending balances will be unfavorably impacted as first draw and second draw PPP loans continue to be forgiven by the SBA. The Company anticipates assisting the remainder of the Company’s first draw PPP borrowers with forgiveness requests during the fourth quarter of 2021 and the majority of the Company’s second draw PPP borrowers with forgiveness requests over the next few quarters. The longer-term implications that COVID-19 and the repayment of PPP loans will have on business lending loan demand are presently difficult to predict.

Asset Quality

The following table sets forth the allocation of the allowance for credit losses by loan category as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes when the risk factors of each component part change. The allocation is not indicative of either the specific amounts of the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table ~~8 below exhibits~~7, the ~~major components~~total allowance for credit losses at the end of ~~nonperforming~~the third quarter was $60.4 million, an increase of $10.9 million, or 21.9%, from one year earlier and an increase of $10.5 million, or 21.0%, from the end of 2021, driven primarily by significant loan growth during the intervening period.

Table 7: Allowance for Credit Losses by Loan Type

September 30, 2022

December 31, 2021

September 30, 2021

(000’s omitted except for ratios)

Allowance

Loan Mix

Allowance

Loan Mix

Allowance

Loan Mix

Business lending

$
23,931

40.9
%
$
22,995

41.7
%
$
22,319

42.5
%
Consumer mortgage

13,818

34.8
%

10,017

34.7
%

9,745

33.9
%
Consumer indirect

17,018

17.1
%

11,737

16.1
%

12,045

16.1
%
Consumer direct

3,015

2.1
%

2,306

2.1
%

2,670

2.1
%
Home equity

1,581

5.1
%

1,814

5.4
%

1,720

5.4
%
Unallocated

1,000

0.0
%

1,000

0.0
%

1,000

0.0
%
Total loans

$
60,363

100.0
%
$
49,869

100.0
%
$
49,499

100.0
%

As demonstrated in Table 7 and discussed previously, business lending and consumer installment carry higher credit risk than residential real estate, and as a result, these loans ~~and assets and key asset quality metrics~~carry allowance for credit losses that cover a higher percentage of their total portfolio balances. The unallocated allowance is maintained for potential inherent losses in the ~~periods ending~~specific portfolios that are not captured due to model imprecision. The unallocated allowance of $1.0 million at September 30, 2022 was consistent with December 31, 2021 and ~~2020~~September 30, 2021. The changes in allowance allocations reflect management’s continued refinement of its loss estimation techniques. However, given the inherent imprecision in the many estimates used in the determination of the allocated portion of the allowance, management remained conservative in the approaches used to establish the overall allowance for credit losses. Management considers the allocated and ~~December 31, 2020.~~unallocated portions of the allowance for credit losses to be prudent and reasonable. Furthermore, the Company’s allowance for credit losses is general in nature and is available to absorb losses from any loan category.

4946

Table of Contents

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

Table 8: ~~Nonperforming Assets~~Loan Ratios


	September 30,			December 31,			September 30,			September 30,			December 31,			September 30,
(000’s omitted)	2021			2020			2020
Nonaccrual loans
										2022			2021			2021
Allowance for credit losses/total loans											0.71	%		0.68	%		0.68	%
Allowance for credit losses/nonperforming loans											186	%		110	%		73	%
Nonaccrual loans/total loans											0.33	%		0.57	%		0.91	%
Allowance for credit losses/nonaccrual loans											215	%		120	%		75	%
Net charge-offs (annualized) to average loans outstanding (quarterly):
Business lending	$	47,820		$	55,709		$	11,750			(0.03)	%		0.10	%		0.08	%
Consumer mortgage		15,605			14,970			14,821			0.01	%		0.00	%		0.02	%
Consumer indirect		0			1			1			0.09	%		0.24	%		0.14	%
Consumer direct		1			3			3			0.32	%		0.53	%		0.34	%
Home equity		2,541			2,246			2,181			0.02	%		0.01	%		0.02	%
Total nonaccrual loans		65,967			72,929			28,756
Accruing loans 90+ days delinquent
Business lending		148			59			39
Consumer mortgage		1,288			3,051			3,182
Consumer indirect		131			219			12
Consumer direct		19			28			34
Home equity		288			565			220
Total accruing loans 90+ days delinquent		1,874			3,922			3,487
Nonperforming loans
Business lending		47,968			55,768			11,789
Consumer mortgage		16,893			18,021			18,003
Consumer indirect		131			220			13
Consumer direct		20			31			37
Home equity		2,829			2,811			2,401
Total nonperforming loans		67,841			76,851			32,243
Other real estate owned (OREO)		891			883			1,209
Total nonperforming assets	$	68,732		$	77,734		$	33,452

Nonperforming loans / total loans		0.93	%		1.04	%		0.43	%
Nonperforming assets / total loans and other real estate		0.94	%		1.05	%		0.45	%
Delinquent loans (30 days old to nonaccruing) to total loans		1.28	%		1.50	%		0.79	%
Net charge-offs to average loans outstanding (quarterly)		0.07	%		0.07	%		0.07	%
Provision for credit losses to net charge-offs (quarterly)		(70)	%		(246)	%		155	%
Total loans											0.02	%		0.09	%		0.07	%

~~As displayed in Table 8, nonperforming assets at September 30, 2021~~Net charge-offs during the third quarter of 2022 were ~~$68.7~~$0.4 million, a ~~$9.0~~decrease of $1.0 million ~~decrease versus~~compared to the ~~level at~~third quarter of 2021. The business lending, consumer indirect and consumer mortgage portfolios experienced lower net charge-offs during the ~~end~~third quarter of ~~2020 and a $35.3 million increase~~2022 as compared to one year earlier. Nonperforming loans decreased $9.0 million from year-end 2020 and increased $35.6 million from September 30, 2020. Nonperforming loans were 0.93% of total loans outstanding at the end of the third quarter 11of 2021, while the consumer direct portfolio experienced higher net charge-offs as compared to the prior year third quarter, and the net charge-offs in the home equity portfolio were consistent with the equivalent prior year period. The total net charge-off ratio (net charge-offs annualized as a percentage of average loans outstanding for the quarter) for the third quarter was 0.02%, seven and five basis points lower than the ~~level at December 31, 2020~~ratios for the fourth and ~~50 basis points higher than~~third quarters of 2021, respectively. Net charge-off ratios for the ~~level at September 30, 2020.~~

~~With respect to~~third quarter of 2022 for the business lending, consumer indirect and consumer mortgage portfolios were below the Company’s ~~lending activities,~~average for the Company continues to consider customer forbearance requests to assist borrowers that may be experiencing financial hardship due to COVID-19 related challenges, but such requests diminished significantly intrailing eight quarters, while the ~~first nine months of 2021. As of September 30, 2021,~~net charge-off ratios for the Company had 4 borrowers in forbearance due to COVID-19 related financial hardship, representing $3.9 million in outstanding loan balances, or 0.01% of total loans outstanding. This compares to 74 borrowersconsumer direct and $66.5 million in loans outstanding in forbearance at December 31, 2020 and 216 borrowers and $192.7 million in loans outstanding in forbearance at September 30, 2020. Consistent with industry regulatory guidance, borrowers thathome equity portfolios were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period. 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 nonperforming loan status.

~~Table of Contents~~

~~The increase in nonperforming assets and loans over the prior year was primarily driven by~~above the Company’s ~~decision to reclassify loans under extended pandemic-related forbearance to nonperforming status. More specifically, during~~average for the fourth quarter of 2020, several commercial borrowers, which primarily operate in the hospitality, travel and entertainment industries, requested extended loan repayment forbearance due to the continued pandemic-related financial hardship they were experiencing. Although the Company’s management granted these forbearance requests, it also reclassified the majority of these loan relationships from accruing to nonaccrual status, unless the borrower clearly demonstrated current repayment capacity or sufficient cash reserves to service their pre-forbearance payment obligations.trailing eight quarters.

Other real estate owned (“OREO”) at September 30, 2022 was $0.5 million. This compares to $0.7 million at December 31, 2021 ofand $0.9 million ~~was consistent with December 31, 2020 and decreased $0.3 million from~~at September 30, ~~2020.~~2021. At September 30, ~~2021,~~2022, OREO consisted of ~~five~~eight residential properties with a total value of ~~$0.3~~$0.5 million. This compares to two residential properties with a total value of $0.1 million and one commercial property with a value of $0.6 ~~million. This compares to~~million at December 31, 2021, and five residential properties with a total value of $0.3 million and one commercial property with a value of $0.6 million at ~~December 31, 2020, and nine residential properties with a total value of $0.6 million and one commercial property with a value of $0.6 million at~~ September 30, ~~2020.~~2021.

Approximately ~~71%~~15% of the nonperforming loans at September 30, ~~2021~~2022 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type. The level of nonperforming business loans ~~increased~~decreased significantly from the prior year as the economic environment improved and businesses resumed normal operations. The Company upgraded several large business loans for customers in the hospitality industry that had previously requested extended loan repayment forbearance due to pandemic-related hardship from nonaccrual to accruing status during the ~~continued pandemic-related financial hardship experienced by certain~~first quarter of 2022 and fourth quarter of 2021. These borrowers ~~as described previously.~~ had successfully restored all past due payment to current status, resumed their pre-forbearance payment obligations for a period of at least nine months, and demonstrated sufficient repayment capacity and cash reserves to be reclassified to accruing status.

Approximately ~~25%~~77% of nonperforming loans at September 30, ~~2021~~2022 were comprised of consumer mortgages. Collateral values of residential properties within the Company’s ~~market area~~geographic footprint have generally remained stable or have increased over the past several years. Additionally, strong economic conditions prior to COVID-19 and the generally positive economic recovery following, including ~~lower~~low unemployment levels, have positively impacted consumers and ~~had~~ resulted in generally more favorable nonperforming consumer mortgage ratios. Economic conditions impacted by COVID-19, including increased unemployment rates, travel restrictions and state government shutdowns of certain business activities, as well as COVID-19 related delays in foreclosure processes have improved overratios throughout the past few quarters, contributing to a modest decrease in nonperforming loans in the consumer mortgage portfolio as compared to one year earlier. The Company will continue to closely monitor the impact that economic conditions associated with the COVID-19 pandemic could have on its level of delinquent loans, nonperforming assets and ultimately credit-related losses and proactively engage with our customers to strive to limit the potential losses.years. The remaining 4%8% of nonperforming loans relate to consumer installment and home equity loans, with home equity nonperforming loan levels being driven by the same factors that were identified for consumer mortgages. The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was ~~73%~~186% at the end of the third quarter, as compared to ~~79%~~110% at year-end ~~2020~~2021 and ~~201%~~73% at September 30, ~~2020.~~2021. The ~~decrease~~increase in this ratio between the annual quarterly periods was primarily driven by the ~~increase~~decrease in nonperforming business loans ~~as mentioned previously.~~noted above combined with a $10.9 million increase in the allowance for credit losses.

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

The 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,~~this analysis, a relationship may be assigned a special assets officer or other senior lending officer to review the loan, meet with the borrowers, assess the collateral and recommend an action plan. This plan could include foreclosure, restructuring loans, issuing demand letters or other actions. The Company’s larger criticized credits are also reviewed on a quarterly basis by senior credit administration management, special assets officers and ~~commercial~~business lending management to monitor their status and discuss relationship management plans. ~~Commercial~~Business lending management reviews the criticized business loan portfolio on a monthly basis.

Delinquent loans (30 days past due through nonaccruing) as a percent of total loans was ~~1.28%~~0.71% at the end of the third quarter, 2229 basis points below the ~~1.50%~~1.00% at year-end ~~2020~~2021 and 4957 basis points ~~above~~below the ~~0.79%~~1.28% at September 30, ~~2020.~~2021. The business lending delinquency ratio at the end of the third quarter of 0.17% was ~~four~~80 basis points below the level of 0.97% at December 31, ~~2020~~2021 and ~~128~~155 basis points ~~above~~below the level of 1.72% at September 30, ~~2020,~~2021, largely attributable to the ~~aforementioned pandemic-related hardship experienced by~~reclassification of certain ~~loan customers.~~business loans’ status from nonaccrual to accruing during the fourth quarter of 2021 and first quarter of 2022. The delinquency ~~rates for the consumer mortgage, consumer indirect and consumer direct portfolios all decreased as compared to the levels at December 31, 2020 and September 30, 2020, while the delinquency rate~~ratio for the home equity portfolio decreased as compared to the ~~level~~levels at both December 31, ~~2020~~2021 and ~~increased as compared to the level at~~ September 30, ~~2020. The Company believes the decreases in~~2021, while consumer ~~delinquent loan levels was supported by the extraordinary Federal~~installment and ~~State Government financial assistance that has been provided~~consumer mortgage increased slightly relative to ~~consumers throughout the pandemic.~~those same periods.

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Prediction of future delinquency and credit loss performance is ~~extremely~~ difficult, ~~given the uncertainties centering around the evolution~~because although, until recently, economic growth had been above average for most of ~~the virus, the efficacy of vaccination programs, the related pace of the full resumption of business activities,~~2021 and the ~~trajectory of~~unemployment rate remains low, there continues to be uncertainty regarding the economic ~~recovery~~fallout created by supply chain constraints and inflationary pressures, as ~~government assistance programs are phased out.~~well as a rising interest rate environment. Due to the Company’s continued focus on maintaining strict underwriting standards and the effective utilization of its collection capabilities, the Company expects that its credit performance will eventually return to levels consistent with its average long-term historical results once public health, government intervention, and economic conditions return to a more normalized state.

~~Table 9: Allowance~~The Company recorded a $5.1 million provision for ~~Credit Losses Activity~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

(000’s omitted)

2021

2020

2021

2020

Allowance for credit losses at beginning of period

$
51,750

$
64,437

$
60,869

$
49,911

Impact of adopting ASC 326

0

0

0

1,357

Charge-offs:

Business lending

872

827

925

1,010

Consumer mortgage

127

248

369

668

Consumer indirect

1,365

1,281

3,514

4,791

Consumer direct

309

340

822

1,214

Home equity

30

24

145

178

Total charge-offs

2,703

2,720

5,775

7,861

Recoveries:

Business lending

204

99

586

369

Consumer mortgage

3

23

22

67

Consumer indirect

973

1,111

3,402

3,107

Consumer direct

163

225

607

578

Home equity

10

5

19

23

Total recoveries

1,353

1,463

4,636

4,144

Net charge-offs

1,350

1,257

1,139

3,717

Allowance for credit losses on acquired PCD loans

0

0

0

528

Provision for credit losses related to loans

(901)

1,782

(10,231)

13,749

Provision for credit losses related to acquisition

0

0

0

3,134

Allowance for credit losses at end of period

$
49,499

$
64,962

$
49,499

$
64,962

Liabilities for off-balance-sheet credit exposures at beginning of period

$
762

$
1,452

$
1,489

$
0

Impact of adopting ASC 326

0

0

0

1,185

Provision for credit losses related to off-balance-sheet credit exposures from acquisition

0

0

0

67

Provision for credit losses related to off-balance-sheet credit
exposures

(43)

163

(770)

363

Liabilities for off-balance-sheet credit exposures at end of period

$
719

$
1,615

$
719

$
1,615

Allowance for credit losses / total loans

0.68
%

0.87
%

0.68
%

0.87
%
Allowance for credit losses / nonperforming loans

73
%

201
%

73
%

201
%
Net charge-offs (annualized) to average loans outstanding:

Business lending

0.08
%

0.08
%

0.01
%

0.03
%
Consumer mortgage

0.02
%

0.04
%

0.02
%

0.03
%
Consumer indirect

0.14
%

0.07
%

0.01
%

0.21
%
Consumer direct

0.34
%

0.26
%

0.17
%

0.47
%
Home equity

0.02
%

0.02
%

0.04
%

0.05
%
Total loans

0.07
%

0.07
%

0.02
%

0.07
%

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~~As displayed~~credit losses in ~~Table 9, net charge-offs during~~ the third quarter of ~~2021 were $1.4 million,~~2022, including a $0.1 million ~~higher than~~net benefit related to off-balance sheet credit exposures. The third quarter ~~of 2020 net charge-offs of $1.3 million. Net charge-offs~~provision for ~~the nine months ended September 30, 2021 were $1.1~~credit losses was $6.0 million $2.6 million below the $3.7 million of net charge-offs during the first nine months of 2020. All portfolios experienced lower levels of net charge-offs for the YTD periods of 2021 as compared to the corresponding period of 2020. The consumer indirect, consumer direct and home equity portfolio experienced slightly higher levels of net charge-offs during the third quarter as compared to the corresponding period of 2020, while the consumer mortgage and business lending portfolios experienced slightly lower levels of net charge-offs as compared to the same period. The annualized net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the third quarter of 2021 was 0.07%, consistent with the third quarter of 2020. Net charge-off ratios for the third quarter of 2021 for the consumer direct, consumer indirect, home equity and consumer mortgage portfolios were below the Company’s average for the trailing eight quarters, while the net charge-off ratio for the business lending portfolio was above the Company’s average for the trailing eight quarters. The September YTD annualized net charge-off ratio of 0.02% for total loans was five basis points lower than ~~it was for~~ the equivalent prior year ~~period.~~

~~The Company recorded a $0.9 million~~period’s net benefit in the provision for credit losses ~~in the third quarter and~~of $0.9 million, which was reflective of an $11.0 million net benefit in the provision for credit losses for the YTD period. The third quarter provision for credit losses was $2.9 million less than the $2.0 million provision for credit losses recorded in the prior year’s third quarter. Exclusive of the $3.2 million of acquisition-related provision dueeconomic recovery related to the ~~Steuben transaction recorded in~~cessation of most pandemic-related restrictions and included the ~~second quarter~~continuation of 2020, the YTD provision for credit losses was $25.1 million lower than the equivalent prior year period. The allowance for credit losses of $49.5 million as of September 30, 2021 decreased $15.5 million from the level one year ago. At the end of the third quarter of 2020, unemployment was high and economic forecasts reflected continued weakness due to the state of the COVID-19 pandemic. Conversely, during the third quarter of 2021, economic forecasts remained comparatively favorable given the state of the post-vaccine economic recovery, which, in combination with elevated real estate and vehicle collateral values, ~~drove down expected life of loan losses,~~ resulting in ana release of reserves in that quarter. The allowance for credit losses of $60.4 million as of September 30, 2022 increased $10.5 million compared to December 31, 2021 and increased $10.9 million compared to September 30, 2021, due in part to increases in non-PPP loans outstanding, including $437.0 million of loans acquired from Elmira in the second quarter of 2022, combined with weaker economic forecasts during the third quarter of 2022. The allowance for credit losses to total loans ratio ~~of 0.68%~~was 0.71% at September 30, ~~2021, 19~~2022, an increase of three basis points ~~lower than~~from the ~~level~~levels at both December 31, 2021 and September 30, ~~2020 and 14 basis points lower than the level at December 31, 2020.~~

2021. Refer to Note E: Loans of the Consolidated Financial Statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

As of September 30, ~~2021,~~2022, the net purchase discount related to the ~~$1.10~~$1.28 billion of remaining non-PCD acquired loan balances ~~acquired from prior period acquisitions~~ was approximately ~~$8.8~~$25.6 million, or ~~0.80%~~1.99% of that portfolio.

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Deposits

As shown in Table ~~10,~~9, average deposits of ~~$12.50~~$13.33 billion in the third quarter were ~~$1.57 billion,~~$830.9 million, or ~~14.4%~~6.6%, higher than the third quarter of ~~2020,~~2021, primarily due to ~~the~~ larger than anticipated net inflows ~~and retention~~ of funds related to government stimulus and PPP ~~programs.~~programs in 2021 and the addition of acquired Elmira deposit liabilities during the second quarter of 2022. The Company acquired $522.3 million of deposits in the Elmira acquisition, including $356.5 million of non-time deposits and $165.8 million of time deposits. Total average deposit balances increased ~~$1.29 billion,~~$502.8 million, or ~~11.5%~~3.9%, from the fourth quarter of last year, primarily due to ~~continued net inflows~~the addition of ~~deposits, including those associated with additional stimulus payments and a second round of PPP lending.~~acquired Elmira deposit liabilities between the periods. Average noninterest checking deposits as a percentage of average total deposits was ~~30.7%~~31.4% in the third quarter compared to ~~30.3%~~30.7% in the third quarter of ~~2020~~2021 and ~~29.9% in~~ the fourth quarter of last year. Non-maturity deposits (noninterest checking, interest checking, savings and money markets) represent ~~92.3%~~92.8% of the Company’s average deposit funding base ~~(up from 91.2% one year earlier),~~during the third quarter of 2022, while time deposits represent ~~7.7%~~7.2% of total average ~~third quarter deposits (down from 8.8% one year earlier).~~deposits. The quarterly average cost of deposits was ~~0.09%~~0.11% for the third quarter of ~~2021,~~2022, compared to ~~0.12%~~0.08% for the fourth quarter of ~~2020~~2021 and ~~0.13%~~0.09% in the third quarter of ~~2020,~~2021, reflective of ~~market-driven decreases~~increases in ~~deposit~~the interest rates ~~between~~paid on interest checking and money market deposits, while the ~~periods and an increase in the proportion of average noninterest checking deposits.~~interest rate paid on time deposits decreased. The Company continues to focus on expanding its core deposit relationship base through its proactive marketing efforts, competitive product offerings and high quality customer service.

Average nonpublic fund deposits for the third quarter of ~~2021~~2022 increased ~~$1.14 billion,~~$839.6 million, or ~~11.6%~~7.5%, versus the fourth quarter of ~~2020~~2021 and increased ~~$1.24 billion,~~$983.5 million, or ~~12.7%~~8.9%, versus the year-earlier period. Average public fund deposits for the third quarter ~~increased $151.1~~decreased $336.8 million, or ~~11.4%~~20.2%, from the fourth quarter of ~~2020~~2021 and ~~increased $328.8~~decreased $152.6 million, or ~~28.5%~~10.3%, from the third quarter of ~~2020.~~2021. Average public fund deposits as a percentage of total average deposits ~~increased~~decreased from ~~10.5% in the third quarter of 2020 to~~ 11.9% in the third quarter of 2021 ~~impacted by federal and state stimulus program-related support~~ to ~~municipalities to cover COVID-19 expenditures and investments that cover multi-year timeframes.~~

~~Table~~10.0% in the third quarter of ~~Contents~~2022.

Table ~~10:~~9: Quarterly Average Deposits


	September 30,		December 31,		September 30,		September 30,		December 31,		September 30,
(000's omitted)	2021		2020		2020
(000’s omitted)							2022		2021		2021
Noninterest checking deposits	$	3,841,646	$	3,356,156	$	3,312,841	$	4,192,615	$	3,935,586	$	3,841,646
Interest checking deposits		3,147,360		2,791,708		2,676,279		3,299,612		3,215,815		3,147,360
Savings deposits		2,197,592		1,916,715		1,859,544		2,460,915		2,227,776		2,197,592
Money market deposits		2,356,765		2,209,455		2,122,955		2,419,029		2,510,766		2,356,765
Time deposits		960,670		935,886		962,428		962,777		942,205		960,670
Total deposits	$	12,504,033	$	11,209,920	$	10,934,047	$	13,334,948	$	12,832,148	$	12,504,033

Nonpublic fund deposits	$	11,022,010	$	9,878,990	$	9,780,843	$	12,005,491	$	11,165,894	$	11,022,010
Public fund deposits		1,482,023		1,330,930		1,153,204		1,329,457		1,666,254		1,482,023
Total deposits	$	12,504,033	$	11,209,920	$	10,934,047	$	13,334,948	$	12,832,148	$	12,504,033

Borrowings

Borrowings, excluding securities sold under agreement to repurchase, at the end of the third quarter of ~~2021~~2022 totaled ~~$6.2~~$142.5 million. This was ~~$81.1~~$137.4 million ~~or 92.9%, lower~~higher than borrowings at December 31, ~~2020~~2021 and ~~$92.5~~$136.3 million ~~or 93.7%, below~~above the level at the end of the third quarter of ~~2020.~~2021. The ~~decrease from the prior year third quarter was~~increases were primarily due to an increase in overnight borrowings of $119.8 million to support the ~~redemption~~funding of ~~$77.3~~strong loan growth and $17.6 million of trust preferred subordinated debt held by Community Capital Trust IV (“CCT IV”), an unconsolidated subsidiary trust, during the first quarter of 2021, the redemption of $10.4 million of subordinated notes payableFHLB borrowings acquired from the ~~Kinderhook Bank Corp.~~Elmira acquisition during the ~~fourth~~second quarter of 2020 and a decrease in other FHLB borrowings. The decrease from the fourth quarter of 2020 was primarily related to the aforementioned redemption of the trust preferred subordinated debt held by CCT IV and a decrease in other FHLB borrowings.2022.

Securities sold under agreement to repurchase, also referred to as customer repurchase agreements, represent collateralized municipal and commercial customer accounts that price and operate similar to a deposit instrument. Customer repurchase agreements were ~~$316.8~~$352.8 million at the end of the third quarter of ~~2021,~~2022, an increase of ~~$32.8~~$28.1 million and $36.0 million from their levels at December 31, ~~2020 due primarily to the seasonal characteristics of this portfolio,~~2021 and ~~were $36.0 million above their level at~~ September 30, ~~2020, impacted by federal and state stimulus program-related support to municipalities to cover COVID-19 expenditures and investments that cover multi-year timeframes.~~2021, respectively.

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Shareholders’ Equity and Regulatory Capital

Total shareholders’ equity was ~~$2.07~~$1.46 billion at the end of the third quarter, down ~~$34.2~~$639.6 million from the balance at December 31, ~~2020.~~2021. The decrease was driven by ~~$125.9~~$695.7 million of other comprehensive loss, net of tax, ~~and~~ dividends declared of ~~$68.4~~$70.2 million and common stock repurchased of $16.4 million, partially offset by net income of ~~$146.1~~$135.6 million, net activity under the Company’s employee stock plan of ~~$9.2~~$1.6 million, and ~~$4.8~~$5.5 million recognized from employee stock options earned. The other comprehensive loss, net of tax, was comprised of a ~~$128.1~~$696.5 million decrease in the after-tax market value adjustment on the available-for-sale investment portfolio asdue to a significant amount of securities being purchased and a meaningful upward movement in market interest rates ~~increased~~ between the periods, partially offset by a positive ~~$2.2~~$0.8 million adjustment to the funded status of the Company’s retirement plans. Over the past 12 months, total shareholders’ equity decreased ~~$28.7~~$608.8 million, as a decrease in the market value adjustment on investments, ~~and~~ dividends declared and common stock repurchase activity more than offset net income, the issuance of common stock in association with the employee stock plan and the Company’s benefit plans, and the change in the funded status of the Company’s defined benefit pension and other postretirement plans.

The dividend payout ratio (dividends declared divided by net income) for the first nine months of 2022 was 51.8%, compared to 46.8% for the nine months ended September 30, 2021. Dividends declared for the first nine months of 2022 increased 2.7% compared to the first nine months of 2021, as the Company’s quarterly dividend per share was raised from $0.43 to $0.44 in the third quarter of 2022, while net income decreased 7.2% versus the equivalent year-to-date period due to increases in the provision for credit losses, acquisition-related provision for credit losses and noninterest expenses, including a $4.9 million increase in acquisition-related noninterest expenses, partially offset by increases in net interest income and noninterest revenues. The 2022 dividend increase marked the Company’s 30^th consecutive year of increased dividend payouts to common shareholders. Additionally, the number of common shares outstanding decreased 0.4% over the last twelve months, as common stock repurchases outweighed issuance activity in the Company’s employee stock plans.

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Company and the Bank are required to maintain a “capital conservation buffer,” composed entirely of common equity Tier 1 capital, in addition to minimum risk-based capital ratios. The required capital conservation buffer is 2.5% as of September 30, 2022 and December 31, 2021. Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer as of September 30, 2022 and December 31, 2021, the Company and the Bank must maintain:

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

(ii) Tier 1 capital to total risk-weighted assets (“Tier 1 risk-based capital ratio”) of at least 8.5%, and

(iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets (“Total risk-based capital ratio”) of at least 10.5%.

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

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

September 30, 2022

December 31, 2021

Community Bank

Community

Community Bank

Community


System, Inc.

Bank, N.A.

System, Inc.

Bank, N.A.

Tier 1 leverage ratio

8.78
%
7.03
%
9.09
%
7.26
%
Tier 1 risk-based capital ratio

15.50
%
12.44
%
18.60
%
14.92
%
Total risk-based capital ratio

16.19
%
13.14
%
19.28
%
15.62
%
Common equity Tier 1 capital ratio

15.50
%
12.44
%
18.60
%
14.92
%

5450

Table of Contents

The Company’s Tier 1 leverage ratio ~~a primary measure of regulatory capital for which 5% is the requirement to be “well-capitalized”,~~ was ~~9.22%~~8.78% at the end of the third quarter, down 9431 basis points from year-end ~~2020~~2021 and 9944 basis points below its level one year earlier. The decrease in the Tier 1 leverage ratio in comparison to December 31, ~~2020~~2021 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income, ~~items, decreasing 0.4%~~increasing 1.2%, ~~primarily~~as the impact of net earnings retention outweighed the intangible assets added from the ~~redemption of $75.0 million of junior subordinated debt partially offset by net earnings retention,~~Elmira acquisition and share repurchases, while average assets, excluding intangibles and the market value adjustment on investments, increased ~~9.7%~~4.8%, primarily due to ~~continued inflows of customer deposits as a result of government stimulus programs.~~strong organic loan growth and the Elmira acquisition. The Tier 1 leverage ratio decreased compared to the prior year’s third quarter as shareholders’ equity, excluding intangibles and other comprehensive income, increased ~~2.0% primarily due to~~2.9%, as the impact of earnings retention ~~partially offset by the redemption of $75.0 million of junior subordinated debt,~~outweighed Elmira acquisition-related intangible assets and share repurchases, while average assets excluding intangibles and the market value adjustment on investments, increased ~~12.9%~~8.1% primarily due to ~~government stimulus program~~continued inflows of customer deposits, organic loan growth and ~~PPP lending-related funding inflows.~~the acquisition of Elmira. The net tangible equity-to-assets ratio (a non-GAAP measure) of ~~8.59%~~4.08% decreased ~~133 basis~~4.61 percentage points from ~~both~~ December 31, ~~2020~~2021 and decreased 4.51 percentage points versus September 30, ~~2020~~2021 (See Table 1110 for Reconciliation of Quarterly GAAP to Non-GAAP Measures). The decrease in the net tangible equity to net tangible assets ratio ~~over the past 12 months~~(non-GAAP) from one year prior was primarily driven by a ~~$1.47 billion,~~$644.8 million, or ~~11.2%~~51.8%, decrease in tangible equity due to the decline in the after-tax market value adjustment on available-for-sale investment securities and a $41.1 million net increase in intangible assets due primarily to the Elmira acquisition and a $227.5 million, or 1.6%, increase in tangible assets due to the ~~aforementioned government stimulus-related funding~~Elmira acquisition and net inflows ~~as well as~~of deposits. The decrease in the net tangible equity to net tangible assets ratio (non-GAAP) from the fourth quarter of 2021 was driven by a ~~$154.1~~$679.8 million ~~decline~~decrease in tangible equity due to the impact of the Elmira acquisition, the purchase of securities in late 2021 and early 2022 and higher market interest rates on the after-tax market value adjustment on ~~the Company’s~~ available-for-sale investment securities, ~~portfolio due to higher market interest rates and changes in the composition of the portfolio.~~

The dividend payout ratio (dividends declared divided by net income) for the first nine months of 2021 was 46.8%, compared to 55.8% for the nine months ended September 30, 2020. Dividends declared for the first nine months of 2021while tangible assets increased 3.7% compared to the first nine months of 2020, as the Company’s quarterly dividend per share was raised from $0.41 to $0.42 in the third quarter of 2020 and from $0.42 to $0.43 in the third quarter of 2021, while net income increased 23.6% versus the equivalent year-to-date period due in most part to a significantly lower provision for credit losses. The 2021 dividend increase marked the Company’s 29^th consecutive year of increased dividend payouts to common shareholders. Additionally, the number of common shares outstanding increased 0.7% over the last twelve months, primarily related to activity in the Company’s employee stock plans.$1.7 million.

Liquidity

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

Given the uncertain nature of the Company’s ~~customers'~~customers’ demands, as well as the ~~Company's~~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.~~when needed. Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity must be supplemented with additional sources such as credit lines from correspondent banks and borrowings from the FHLB and the Federal ~~Reserve Bank of New York (“Federal Reserve”).~~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 isare FHLB or Federal Reserve overnight advances, of which there were no$119.8 million of outstanding borrowings at September 30, ~~2021.~~2022.

The Company’s primary sources of liquidity are its liquid assets, as well as unencumbered loans and securities that can be used to collateralize additional funding. At September 30, ~~2021,~~2022, the Bank had ~~$2.32 billion~~$247.4 million of cash and cash equivalents of which ~~$2.10 billion~~$30.0 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks. The Company also had ~~$1.66~~$1.76 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and ~~maintained $248.9~~had $487.7 million of funding availability at the Federal ~~Reserve Bank’s~~Reserve’s discount window. Additionally, the Company has ~~$2.03~~$2.57 billion of unencumbered securities that could be pledged at the FHLB or Federal Reserve to obtain additional funding. There iswas $25.0 million available in unsecured lines of credit with other correspondent banks at ~~quarter-end.~~quarter end.

~~Table of Contents~~

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, ~~2021,~~2022, this ratio was ~~24.9%~~15.1% for 30-days and ~~25.1%~~15.3% for 90-days, excluding the ~~Company's~~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%.

Table of Contents

A sources and uses statement is used by the Company to measure intermediate liquidity risk over the next twelve months. As of September 30, ~~2021,~~2022, 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, ~~2021~~2022 indicate the Company has sufficient sources of funds for the next year in all simulated stressed scenarios.

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

Though remote, the possibility of a funding crisis exists at all financial institutions. 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.~~events and detailed action plans that would be initiated if those trigger points are reached.

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Forward-Looking Statements
This report contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Forward-looking statements often use words such as “anticipate,” “could,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “forecast,” “believe,” or other words of similar meaning. These statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. Moreover, the Company’s plans, objectives and intentions are subject to change based on various factors (some of which are beyond the Company’s control). Factors that could cause actual results to differ from those discussed in the forward-looking statements include: (1) the macroeconomic and other challenges and uncertainties related to the COVID-19 pandemic, variants of COVID-19, ~~and~~ related vaccine ~~rollout~~ and ~~efficacy,~~booster rollouts and efficacies, and government measures taken in response thereto, including the negative impacts and disruptions on public health, the Company’s corporate and consumer customers, the communities the Company serves, and the domestic and global economy, which may have an adverse effect on the Company’s business; (2) current and future economic and market conditions, including the effects of ~~a decline~~changes in housing or vehicle prices, ~~higher~~ unemployment rates, labor shortages, supply chain disruption, inability to obtain raw materials and supplies, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth; (3) changes to the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (the “PPP”), including to the rules under which the PPP is administered, with respect to the origination, servicing, or forgiveness of PPP loans, whether now existing or originated in the future, or the terms and conditions of any guaranteed payments due to the Company from the SBA with respect to PPP loans; (4) the effect of, and changes in, monetary and fiscal policies and laws, including future changes in Federal ~~or State~~and state statutory income tax rates and interest rate and other policy actions of the Board of Governors of the Federal Reserve System; ~~(5)~~(4) the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin; ~~(6)~~(5) future provisions for credit losses on loans and debt securities; ~~(7)~~(6) changes in nonperforming assets; ~~(8)~~(7) the effect of a fall in stock market or bond prices on the Company’s fee income businesses, including its employee benefit services, wealth management, and insurance businesses; ~~(9)~~(8) risks related to credit quality; ~~(10)~~(9) inflation, interest rate, liquidity, market and monetary fluctuations; ~~(11)~~(10) the strength of the U.S. economy in general and the strength of the local economies where the Company conducts its business; ~~(12)~~(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; ~~(13)~~(12) changes in consumer spending, borrowing and savings habits; ~~(14)~~(13) technological changes and implementation and financial risks associated with transitioning to new technology-based systems involving large multi-year contracts; ~~(15)~~(14) the ability of the Company to maintain the security of its financial, accounting, technology, data processing and other operating systems and facilities; ~~(16)~~(15) effectiveness of the Company’s risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, the Company’s ability to manage its credit or interest rate risk, the sufficiency of its allowance for credit losses and the accuracy of the assumptions or estimates used in preparing the Company’s financial statements and disclosures; ~~(17)~~(16) failure of third parties to provide various services that are important to the Company’s operations; ~~(18)~~(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; ~~(19)~~(18) the ability to maintain and increase market share and control expenses; ~~(20)~~(19) the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of the Company and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, service fees, risk management, securities and other aspects of the financial services ~~industry, specifically the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 or those emanating from COVID-19; (21)~~industry; (20) changes in the Company’s organization, compensation and benefit plans and in the availability of, and compensation levels for, employees in its geographic markets; ~~(22)~~(21) the outcome of pending or future litigation, government proceedings and ~~government proceedings;~~local, state and Federal tax audits; (22) the effects of climate change and natural disasters on the Company’s operations or the operations of its customers; (23) other risk factors outlined in the Company’s filings with the SEC from time to time; and (24) the success of the Company at managing the risks of the foregoing.
The foregoing list of important factors is not all-inclusive. For more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to ~~“Item 1A Risk~~the discussion under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K filed with Securities and Exchange Commission (“SEC”) for the year ended December 31, ~~2020.~~2021 and the Quarterly Report on Form 10-Q filed with the SEC on May 10, 2022 for the quarter ended March 31, 2022. 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:~~10: GAAP to Non-GAAP Reconciliations


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
(000's omitted)	2021		2020		2021		2020
(000’s omitted)									2022		2021		2022		2021
Income statement data
Pre-tax, pre-provision net revenue
Net income (GAAP)	$	45,336	$	42,809	$	146,130	$	118,191	$	48,691	$	45,336	$	135,551	$	146,130
Income taxes		12,092		10,904		38,616		29,153		13,706		12,092		37,454		38,616
Income before income taxes		57,428		53,713		184,746		147,344		62,397		57,428		173,005		184,746
Provision for credit losses		(944)		1,945		(11,001)		17,313		5,061		(944)		12,005		(11,001)
Pre-tax, pre-provision net revenue (non-GAAP)		56,484		55,658		173,745		164,657		67,458		56,484		185,010		173,745
Acquisition expenses		102		796		133		4,537		409		102		4,668		133
Acquisition-related contingent consideration adjustment										0		0		400		0
Unrealized loss (gain) on equity securities		10		12		(14)		30		4		10		24		(14)
Litigation accrual		(100)		2,950		(100)		2,950		0		(100)		0		(100)
Adjusted pre-tax, pre-provision net revenue (non-GAAP)	$	56,496	$	59,416	$	173,764	$	172,174	$	67,871	$	56,496	$	190,102	$	173,764

Pre-tax, pre-provision net revenue per share
Diluted earnings per share (GAAP)	$	0.83	$	0.79	$	2.68	$	2.22	$	0.90	$	0.83	$	2.49	$	2.68
Income taxes		0.22		0.20		0.71		0.55		0.25		0.22		0.69		0.71
Income before income taxes		1.05		0.99		3.39		2.77		1.15		1.05		3.18		3.39
Provision for credit losses		(0.01)		0.04		(0.20)		0.32		0.10		(0.01)		0.22		(0.20)
Pre-tax, pre-provision net revenue per share (non-GAAP)		1.04		1.03		3.19		3.09		1.25		1.04		3.40		3.19
Acquisition expenses		0.00		0.02		0.00		0.09		0.00		0.00		0.08		0.00
Acquisition-related contingent consideration adjustment										0.00		0.00		0.01		0.00
Unrealized loss (gain) on equity securities		0.00		0.00		0.00		0.00		0.00		0.00		0.00		0.00
Litigation accrual		0.00		0.05		0.00		0.05		0.00		0.00		0.00		0.00
Adjusted pre-tax, pre-provision net revenue per share (non-GAAP)	$	1.04	$	1.10	$	3.19	$	3.23	$	1.25	$	1.04	$	3.49	$	3.19

Net income
Net income (GAAP)	$	45,336	$	42,809	$	146,130	$	118,191	$	48,691	$	45,336	$	135,551	$	146,130
Acquisition expenses		102		796		133		4,537		409		102		4,668		133
Tax effect of acquisition expenses		(21)		(162)		(27)		(915)		(90)		(21)		(1,009)		(27)
Subtotal (non-GAAP)										49,010		45,417		139,210		146,236
Acquisition-related contingent consideration adjustment										0		0		400		0
Tax effect of acquisition-related contingent consideration adjustment										0		0		(86)		0
Subtotal (non-GAAP)		45,417		43,443		146,236		121,813		49,010		45,417		139,524		146,236
Acquisition-related provision for credit losses		0		0		0		3,201		0		0		3,927		0
Tax effect of acquisition-related provision for credit losses		0		0		0		(649)		0		0		(848)		0
Subtotal (non-GAAP)		45,417		43,443		146,236		124,365		49,010		45,417		142,603		146,236
Unrealized loss (gain) on equity securities		10		12		(14)		30		4		10		24		(14)
Tax effect of unrealized loss (gain) on equity securities		(2)		(2)		2		(6)		(1)		(2)		(5)		2
Subtotal (non-GAAP)		45,425		43,453		146,224		124,389		49,013		45,425		142,622		146,224
Litigation accrual		(100)		2,950		(100)		2,950		0		(100)		0		(100)
Tax effect of litigation accrual		21		(599)		21		(599)		0		21		0		21
Operating net income (non-GAAP)		45,346		45,804		146,145		126,740		49,013		45,346		142,622		146,145
Amortization of intangibles		3,703		3,581		10,300		10,772		3,837		3,703		11,420		10,300
Tax effect of amortization of intangibles		(780)		(727)		(2,155)		(2,130)		(843)		(780)		(2,472)		(2,155)
Subtotal (non-GAAP)		48,269		48,658		154,290		135,382		52,007		48,269		151,570		154,290
Acquired non-impaired loan accretion		(906)		(1,326)		(3,177)		(4,156)
Tax effect of acquired non-impaired loan accretion		191		269		666		821
Acquired non-PCD loan accretion										(1,397)		(906)		(3,154)		(3,177)
Tax effect of acquired non-PCD loan accretion										307		191		685		666
Adjusted net income (non-GAAP)	$	47,554	$	47,601	$	151,779	$	132,047	$	50,917	$	47,554	$	149,101	$	151,779

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	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
(000's omitted)	2021			2020			2021			2020			2022			2021			2022			2021
Return on average assets
Adjusted net income (non-GAAP)	$	47,554		$	47,601		$	151,779		$	132,047		$	50,917		$	47,554		$	149,101		$	151,779
Average total assets		15,027,478			13,543,460			14,638,269			12,564,600			15,553,296			15,027,478			15,533,915			14,638,269
Adjusted return on average assets (non-GAAP)		1.26	%		1.40	%		1.39	%		1.40	%		1.30	%		1.26	%		1.28	%		1.39	%

Return on average equity
Adjusted net income (non-GAAP)	$	47,554		$	47,601		$	151,779		$	132,047		$	50,917		$	47,554		$	149,101		$	151,779
Average total equity		2,104,164			2,095,211			2,057,700			2,002,797			1,680,525			2,104,164			1,820,273			2,057,700
Adjusted return on average equity (non-GAAP)		8.97	%		9.04	%		9.86	%		8.81	%		12.02	%		8.97	%		10.95	%		9.86	%

Earnings per common share
Diluted earnings per share (GAAP)	$	0.83		$	0.79		$	2.68		$	2.22		$	0.90		$	0.83		$	2.49		$	2.68
Acquisition expenses		0.00			0.02			0.00			0.09			0.00			0.00			0.08			0.00
Tax effect of acquisition expenses		0.00			0.00			0.00			(0.02)			0.00			0.00			(0.02)			0.00
Subtotal (non-GAAP)		0.83			0.81			2.68			2.29			0.90			0.83			2.55			2.68
Acquisition-related contingent consideration adjustment														0.00			0.00			0.01			0.00
Tax effect of acquisition-related contingent consideration adjustment														0.00			0.00			0.00			0.00
Subtotal (non-GAAP)														0.90			0.83			2.56			2.68
Acquisition-related provision for credit losses		0.00			0.00			0.00			0.06			0.00			0.00			0.07			0.00
Tax effect of acquisition-related provision for credit losses		0.00			0.00			0.00			(0.01)			0.00			0.00			(0.01)			0.00
Subtotal (non-GAAP)		0.83			0.81			2.68			2.34			0.90			0.83			2.62			2.68
Unrealized loss (gain) on equity securities		0.00			0.00			0.00			0.00			0.00			0.00			0.00			0.00
Tax effect of unrealized loss (gain) on equity securities		0.00			0.00			0.00			0.00			0.00			0.00			0.00			0.00
Subtotal (non-GAAP)		0.83			0.81			2.68			2.34			0.90			0.83			2.62			2.68
Litigation accrual		0.00			0.05			0.00			0.05			0.00			0.00			0.00			0.00
Tax effect of litigation accrual		0.00			(0.01)			0.00			(0.01)			0.00			0.00			0.00			0.00
Operating earnings per share (non-GAAP)		0.83			0.85			2.68			2.38			0.90			0.83			2.62			2.68
Amortization of intangibles		0.07			0.07			0.19			0.21			0.07			0.07			0.21			0.19
Tax effect of amortization of intangibles		(0.01)			(0.01)			(0.04)			(0.03)			(0.02)			(0.01)			(0.05)			(0.04)
Subtotal (non-GAAP)		0.89			0.91			2.83			2.56			0.95			0.89			2.78			2.83
Acquired non-impaired loan accretion		(0.02)			(0.03)			(0.06)			(0.09)
Tax effect of acquired non-impaired loan accretion		0.00			0.00			0.01			0.01
Acquired non-PCD loan accretion														(0.02)			(0.02)			(0.06)			(0.06)
Tax effect of acquired non-PCD loan accretion														0.01			0.00			0.02			0.01
Diluted adjusted net earnings per share (non-GAAP)	$	0.87		$	0.88		$	2.78		$	2.48		$	0.94		$	0.87		$	2.74		$	2.78

Noninterest operating expenses
Noninterest expenses (GAAP)	$	100,436		$	96,966		$	287,225		$	281,532		$	108,185		$	100,436		$	318,416		$	287,225
Amortization of intangibles		(3,703)			(3,581)			(10,300)			(10,772)			(3,837)			(3,703)			(11,420)			(10,300)
Acquisition expenses		(102)			(796)			(133)			(4,537)			(409)			(102)			(4,668)			(133)
Acquisition-related contingent consideration adjustment														0			0			(400)			0
Litigation accrual		100			(2,950)			100			(2,950)			0			100			0			100
Total adjusted noninterest expenses (non-GAAP)	$	96,731		$	89,639		$	276,892		$	263,273		$	103,939		$	96,731		$	301,928		$	276,892

Efficiency ratio
Adjusted noninterest expenses (non-GAAP) - numerator	$	96,731		$	89,639		$	276,892		$	263,273		$	103,939		$	96,731		$	301,928		$	276,892
Fully tax-equivalent net interest income		93,416			93,928			281,242			277,980			111,512			93,416			311,363			281,242
Noninterest revenues		64,309			59,659			182,300			171,219			65,249			64,309			195,019			182,300
Acquired non-impaired loan accretion		(906)			(1,326)			(3,177)			(4,156)
Acquired non-PCD loan accretion														(1,397)			(906)			(3,154)			(3,177)
Unrealized loss (gain) on equity securities		10			12			(14)			30			4			10			24			(14)
Operating revenues (non-GAAP) - denominator	$	156,829		$	152,273		$	460,351		$	445,073		$	175,368		$	156,829		$	503,252		$	460,351
Efficiency ratio (non-GAAP)		61.7	%		58.9	%		60.1	%		59.2	%		59.3	%		61.7	%		60.0	%		60.1	%

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	September 30,			December 31,			September 30,			September 30,			December 31,			September 30,
(000's omitted)	2021			2020			2020
Balance sheet data – at end of quarter
(000’s omitted)										2022			2021			2021
Balance sheet data - at end of quarter
Total assets
Total assets (GAAP)	$	15,331,098		$	13,931,094		$	13,845,325		$	15,594,547		$	15,552,657		$	15,331,098
Intangible assets		(868,104)			(846,648)			(850,214)			(909,224)			(864,335)			(868,104)
Deferred taxes on intangible assets		43,768			44,370			44,733			48,893			44,160			43,768
Total tangible assets (non-GAAP)	$	14,506,762		$	13,128,816		$	13,039,844		$	14,734,216		$	14,732,482		$	14,506,762

Total common equity
Shareholders' Equity (GAAP)	$	2,069,934		$	2,104,107		$	2,098,660
Shareholders’ Equity (GAAP)										$	1,461,163		$	2,100,807		$	2,069,934
Intangible assets		(868,104)			(846,648)			(850,214)			(909,224)			(864,335)			(868,104)
Deferred taxes on intangible assets		43,768			44,370			44,733			48,893			44,160			43,768
Total tangible common equity (non-GAAP)	$	1,245,598		$	1,301,829		$	1,293,179		$	600,832		$	1,280,632		$	1,245,598

Net tangible equity-to-assets ratio at quarter end
Total tangible common equity (non-GAAP) - numerator	$	1,245,598		$	1,301,829		$	1,293,179		$	600,832		$	1,280,632		$	1,245,598
Total tangible assets (non-GAAP) - denominator	$	14,506,762		$	13,128,816		$	13,039,844		$	14,734,216		$	14,732,482		$	14,506,762
Net tangible equity-to-assets ratio at quarter end (non-GAAP)		8.59	%		9.92	%		9.92	%		4.08	%		8.69	%		8.59	%

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~~collateralized mortgage obligation securities issued by government agencies comprise ~~90.6%~~90.8% of the total portfolio and are currently rated AAA by Moody’s Investor Services and AA+ by Standard & Poor’s. ~~Municipals~~Obligations of state and political subdivisions account for ~~9.2%~~9.1% of the total portfolio, of which, ~~94.2%~~96.4% carry a minimum rating of A-. The remaining ~~0.2%~~0.1% 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 inover the short and long term time horizons is an important component of the ~~Company's~~Company’s asset/liability management process, which is governed by ~~limits~~guidelines 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~~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. This begins with the development of a base case scenario, which projects net interest income (“NII”) over the next twelve month period. The base case scenario NII may increase or decrease significantly from quarter to quarter reflective of changes during the most recent quarter in the Company’s: (i) earning assets and liabilities balances, (ii) composition of earning assets and liabilities, (iii) earning asset yields, (iv) cost of funds and (v) model projections, as well as current market interest rates, including the slope of the yield curve and projected changes in the slope of the yield curve over the twelve month period. Due to increases in market interest rates on new loans and a significant increase in the Company’s loan balances during the third quarter of 2022, the base case NII projection increased significantly between the second quarter income simulation and the third quarter income simulation.
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~~Company’s estimated ~~net interest income (“NII”)~~NII sensitivity as compared to the base case scenario over the subsequent twelve months based on:
● ~~Asset and liability~~Balance sheet levels using September 30, ~~2021~~2022 as a starting point.
● ~~Pending acquisitions are excluded from this model.~~
● The model assumes the Company’s average deposit balances will increase approximately ~~2.6%~~2.4% over the next twelve months.

Table of Contents

●	The model assumes the Company’s average earning asset balances will increase approximately ~~3.3%~~1.4% over the next twelve months.

~~Table of Contents~~

●

Cash flows on earning assets are based on contractual maturity, optionality, and amortization schedules along with applicable prepayments derived from internal historical data and external sources. The model assumes that all of the remaining PPP loans originated during 2020 will be forgiven and repayment of the vast majority of the balances would occur over the next 12 months. The majority of the PPP loans originated in 2021 under the “Second Draw” are generally projected to be repaid over the next 9 months. All ~~other~~ loan balances are generally projected to increase modestly throughout the forecast period.

●

~~As of September 30, 2021, cash equivalents were just under $2.1 billion.~~ The model assumes ~~approximately 44% of the excess cash and cash flows from~~no additional investment ~~contractual maturities and prepayments, estimated at $1.1 billion, are to be invested in long-term securities~~security purchases over the next twelve months. Investment cash flows will be used to pay down overnight borrowings and fund loan growth.

●

In the rising rates scenarios, the prime rate and federal funds rates are assumed to move up by the amounts listed below 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 -100 basis point model, the prime and federal funds ~~rate~~rates are ~~held at current levels~~dropped one hundred basis points each, and the treasury ~~yield~~ curve assumes the same slope as the rising rate scenarios, with all points normalizing off of the three month treasury rate, which is ~~assumed to move to levels experienced during~~lowered by one hundred basis points from the 3^rd ~~quarter of 2020 as a result of COVID-19.~~flat rate scenario. The same method is applied for the -200 and -300 basis point scenarios, with the rate moves being down 200 and 300 basis points for prime, federal funds, and the three month treasury rate.

Net Interest Income Sensitivity Model


	Calculated annualized increase (decrease)		Calculated annualized increase	Calculated annualized increase
	in projected net interest		(decrease) in projected net interest	(decrease) in projected net interest
	income at September 30, 2021		income at September 30, 2022	income at September 30, 2022
Interest rate scenario	(000’s omitted)		(000’s omitted)	(%)
+300 basis points			($8,243)	(1.8%)
+200 basis points	$	15,592	($5,702)	(1.2%)
+100 basis points	$	7,174	($3,217)	(0.7%)
-100 basis points	$	(4,809)	($763)	(0.2%)
-200 basis points			($2,455)	(0.5%)
-300 basis points			($9,804)	(2.1%)

Projected NII over the 12-month forecast period ~~increases~~decreases in the rising rate environments largely due to deposits and overnight borrowings repricing higher ~~rates earned on significant levels of cash equivalents, investment purchases, and assumed higher rates on new loans, including variable and adjustable rate loans. These increases~~in year 1, which are only partially offset by ~~anticipated increases in deposit and borrowing costs.~~loans repricing higher. Over the longer time period, the growth in NII ~~continues~~begins to improve in ~~both~~all rising rate environments as the impact from lower yielding assets ~~mature~~maturing and ~~are~~being replaced at higher ~~rates.~~rates is significantly more material than the increase in funding costs.

In the ~~-100 basis points scenario,~~falling rate scenarios, the Company shows interest rate risk exposure to lower ~~short term rates.~~rates on all terms. During the first twelve months, net interest income declines largely due to lower assumed rates on ~~investment purchases~~loan originations, and ~~new loans, including~~certain adjustable and variable rate ~~assets.~~loans. Modestly lower funding costs associated with deposits and borrowings only partially offset the decrease in interest income.

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 a reasonable outlook for national and local economic and ~~local~~ market conditions, the Company cannot make any assurances as to the predictive efficacy 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.~~rates and other developments.

6157

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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, ~~2021.~~2022.
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, ~~2021~~2022 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, ~~2021,~~2022, 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. This estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. Information on current legal proceedings is set forth in Note J to the consolidated financial statements included under Part I, Item 1. 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 any material change in the risk factors disclosure from that contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020~~2021, as filed with the SEC on March 1, ~~2021.~~2022, and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, as filed with the SEC on May 10, 2022.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
a) Not applicable.
b) Not applicable.
c) At its December ~~2020~~2021 meeting, the Board approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to ~~2,680,000~~2,697,000 shares of the Company’s common stock, in accordance with securities laws and regulations, during a twelve-month period beginning January 1, ~~2021.~~2022. 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.

6258

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The following table presents stock purchases made during the third quarter of ~~2021:~~2022:

Issuer Purchases of Equity Securities


	Total			Total Number of Shares	Maximum Number of	Total			Total Number of Shares	Maximum Number of
	Number of	Average		Purchased as Part of	Shares That May Yet Be	Number of	Average		Purchased as Part of	Shares That May Yet Be
	Shares	Price Paid		Publicly Announced	Purchased Under the Plans	Shares	Price Paid		Publicly Announced	Purchased Under the Plans
Period	Purchased	Per Share		Plans or Programs	or Programs	Purchased	Per Share		Plans or Programs	or Programs
July 1-31, 2021	830	$	73.44	0	2,680,000
August 1-31, 2021	0		0.00	0	2,680,000
September 1-30, 2021	0		0.00	0	2,680,000
July 1-31, 2022						903	$	63.64	0	2,447,000
August 1-31, 2022						0		0.00	0	2,447,000
September 1-30, 2022						0		0.00	0	2,447,000
Total ⁽¹⁾	830	$	73.44			903	$	63.64

(1)	Included in the common shares repurchased were ~~830~~903 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.

6359

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Item 6.Exhibits

Exhibit No.

Description

10.1

Amendment to Employment Agreement, effective August 24, 2022, by and among Community Bank System, Inc., Community Bank, N.A., and Dimitar Karaivanov. Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on August 26, 2022 (Registration No. 001-13695). ⁽¹⁾
10.2

Retirement Agreement, dated August 24, 2022, 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 August 26, 2022 (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. ⁽¹⁾⁽²⁾
101.SCH

Inline XBRL Taxonomy Extension Schema Document ⁽¹⁾⁽²⁾
101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document ⁽¹⁾⁽²⁾
101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document ⁽¹⁾⁽²⁾
101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document ⁽¹⁾⁽²⁾
101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document ⁽¹⁾⁽²⁾
104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) ⁽¹⁾⁽²⁾
(1) Denotes management contract or compensatory plan or arrangement.
(2) Filed herewith.
~~(2)~~(3) Furnished herewith.

6460

Table of Contents

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 9, ~~2021~~2022
/s/ Mark E. Tryniski

Mark E. Tryniski, President and Chief Executive Officer

~~Officer~~

Date: November 9, ~~2021~~2022
/s/ Joseph E. Sutaris

Joseph E. Sutaris, Treasurer and Chief

Financial Officer

6561


(000s omitted)	Non-PCD Loans
Contractually required principal and interest at acquisition	$	400,738
Contractual cash flows not expected to be collected		(2,994)
Expected cash flows at acquisition		397,744
Interest component of expected cash flows		(94,068)
Fair value of non-PCD loans at acquisition	$	303,676


	Three Months Ended September 30, 2020
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	24,204	$	(736)	$	67	$	3,539	$	27,074
Consumer mortgage		13,088		(248)		23		(599)		12,264
Consumer indirect		15,866		(1,281)		1,111		(963)		14,733
Consumer direct		4,028		(340)		225		(120)		3,793
Home equity		2,690		(24)		5		(124)		2,547
Unallocated		1,000		0		0		4		1,004
Purchased credit deteriorated		3,561		(91)		32		45		3,547
Allowance for credit losses – loans		64,437		(2,720)		1,463		1,782		64,962
Liabilities for off-balance-sheet credit exposures		1,452		0		0		163		1,615
Total allowance for credit losses	$	65,889	$	(2,720)	$	1,463	$	1,945	$	66,577


	Nine Months Ended September 30, 2020
	Beginning				Beginning
	balance,				balance,
	prior to the				after
	adoption of		Impact of		adoption of						Steuben				Ending
(000’s omitted)	ASC 326		ASC 326		ASC 326		Charge-offs		Recoveries		acquisition		Provision		balance
Business lending	$	19,426	$	288	$	19,714	$	(919)	$	289	$	2,483	$	5,507	$	27,074
Consumer mortgage		10,269		(1,051)		9,218		(668)		67		146		3,501		12,264
Consumer indirect		13,712		(997)		12,715		(4,791)		3,107		183		3,519		14,733
Consumer direct		3,255		(643)		2,612		(1,214)		578		87		1,730		3,793
Home equity		2,129		808		2,937		(178)		23		235		(470)		2,547
Unallocated		957		43		1,000		0		0		0		4		1,004
Purchased credit deteriorated		0		3,072		3,072		(91)		80		528		(42)		3,547
Purchased credit impaired		163		(163)		0		0		0		0		0		0
Allowance for credit losses – loans		49,911		1,357		51,268		(7,861)		4,144		3,662		13,749		64,962
Liabilities for off-balance-sheet credit exposures		0		1,185		1,185		0		0		67		363		1,615
Total allowance for credit losses	$	49,911	$	2,542	$	52,453	$	(7,861)	$	4,144	$	3,729	$	14,112	$	66,577


(000’s omitted)					Cumulative Amount of Fair Value
	Carrying Amount of the Hedged				Hedging Adjustment Included in the
Line Item in the Consolidated	Assets				Carrying Amount of the Hedged Assets
Statement of Condition in Which	September 30,		December 31,		September 30,		December 31,
the Hedged Item Is Included	2021		2020		2021		2020
Loans	$	5,363	$	5,675	$	(330)	$	(498)


(000’s omitted)	September 30, 2021
	Derivative Assets			Derivative Liabilities
	Consolidated Statement	Fair		Consolidated Statement of	Fair
	of Condition Location	Value		Condition Location	Value
Derivatives designated as hedging instruments under Subtopic 815-20
Interest rate swaps	Other assets	$	330

Derivatives not designated as hedging instruments under Subtopic 815-20
Interest rate swaps	Other assets		5	Accrued interest and other liabilities	$	5
Commitments to originate real estate loans for sale	Other assets		45
Forward sales commitments	Other assets		53
Total derivatives		$	433		$	5


			Employee						Consolidated
(000’s omitted)	Banking		Benefit Services		All Other		Eliminations		Total
Three Months Ended September 30, 2022
Net interest income	$	110,311	$	75	$	8	$	0	$	110,394
Provision for credit losses		5,061		0		0		0		5,061
Noninterest revenues		19,427		28,451		19,210		(1,839)		65,249
Amortization of intangible assets		1,266		1,633		938		0		3,837
Acquisition expenses		409		0		0		0		409
Other operating expenses		73,554		17,711		14,513		(1,839)		103,939
Income before income taxes	$	49,448	$	9,182	$	3,767	$	0	$	62,397
Assets	$	15,373,021	$	250,784	$	102,883	$	(132,141)	$	15,594,547
Goodwill	$	735,680	$	85,381	$	23,923	$	0	$	844,984
Core deposit intangibles & Other intangibles	$	13,550	$	35,045	$	15,645	$	0	$	64,240


Three Months Ended September 30, 2021
Net interest income	$	92,539	$	65	$	7	$	0	$	92,611
Provision for credit losses		(944)		0		0		0		(944)
Noninterest revenues		17,696		30,473		17,885		(1,745)		64,309
Amortization of intangible assets		1,102		1,675		926		0		3,703
Acquisition expenses		102		0		0		0		102
Other operating expenses		67,980		17,212		13,184		(1,745)		96,631
Income before income taxes	$	41,995	$	11,651	$	3,782	$	0	$	57,428
Assets	$	15,102,077	$	246,033	$	99,721	$	(116,733)	$	15,331,098
Goodwill	$	689,868	$	85,336	$	23,923	$	0	$	799,127
Core deposit intangibles & Other intangibles	$	10,165	$	41,695	$	17,117	$	0	$	68,977


	September 30, 2022				December 31, 2021
	Community Bank		Community		Community Bank		Community
	System, Inc.		Bank, N.A.		System, Inc.		Bank, N.A.
Tier 1 leverage ratio	8.78	%	7.03	%	9.09	%	7.26	%
Tier 1 risk-based capital ratio	15.50	%	12.44	%	18.60	%	14.92	%
Total risk-based capital ratio	16.19	%	13.14	%	19.28	%	15.62	%
Common equity Tier 1 capital ratio	15.50	%	12.44	%	18.60	%	14.92	%


Exhibit No.		Description

10.1		Amendment to Employment Agreement, effective August 24, 2022, by and among Community Bank System, Inc., Community Bank, N.A., and Dimitar Karaivanov. Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on August 26, 2022 (Registration No. 001-13695). ⁽¹⁾
10.2		Retirement Agreement, dated August 24, 2022, 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 August 26, 2022 (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. ⁽¹⁾⁽²⁾
101.SCH		Inline XBRL Taxonomy Extension Schema Document ⁽¹⁾⁽²⁾
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document ⁽¹⁾⁽²⁾
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document ⁽¹⁾⁽²⁾
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document ⁽¹⁾⁽²⁾
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document ⁽¹⁾⁽²⁾
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) ⁽¹⁾⁽²⁾


Date: November 9, ~~2021~~2022	/s/ Mark E. Tryniski
	Mark E. Tryniski, President and Chief Executive Officer
	~~Officer~~


Date: November 9, ~~2021~~2022	/s/ Joseph E. Sutaris
	Joseph E. Sutaris, Treasurer and Chief
	Financial Officer