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, ~~2022~~2023

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

For the transition period from to .

Commission File Number: 001-13695

(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 ☒.

Number of shares of common stock, par value $1.00 per share, outstanding as of the close of business on October 31, ~~2022: 53,734,397~~2023: 53,385,565 shares

Table of Contents

TABLE OF CONTENTS

Part I.	Financial Information	Page

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Condition September 30, ~~2022~~2023 and December 31, ~~2021~~2022	3

	Consolidated Statements of Income Three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022	4

	Consolidated Statements of Comprehensive Income (Loss) Three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022	5

	Consolidated Statements of Changes in Shareholders’ Equity Three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022	6

	Consolidated Statements of Cash Flows Nine months ended September 30, ~~2022~~2023 and ~~2021~~2022	8

	Notes to the Consolidated Financial Statements September 30, ~~2022~~2023	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3335

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5660

Item 4.	Controls and Procedures	5862

Part II.	Other Information

Item 1.	Legal Proceedings	5863

Item 1A.	Risk Factors	5863

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5863

Item 3.	Defaults Upon Senior Securities	5964

Item 4.	Mine Safety Disclosures	5964

Item 5.	Other Information	5964

Item 6.	Exhibits	6065

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,

2022

2021
Assets:




Cash and cash equivalents

$
247,391

$
1,875,064
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

(60,363)

(49,869)
Net loans

8,483,244

7,323,770

Goodwill

844,984

799,109
Core deposit intangibles, net

13,550

9,087
Other intangibles, net

50,690

56,139
Goodwill and intangible assets, net

909,224

864,335

Premises and equipment, net

161,966

160,651
Accrued interest and fees receivable

41,627

35,894
Other assets

523,803

313,854

Total assets

$
15,594,547

$
15,552,657

Liabilities:

Noninterest-bearing deposits

$
4,281,859

$
3,921,663
Interest-bearing deposits

9,204,462

8,989,505
Total deposits

13,486,321

12,911,168

Overnight borrowings

119,800

0
Securities sold under agreement to repurchase, short-term

352,772

324,720
Other Federal Home Loan Bank borrowings

19,472

1,888
Subordinated notes payable

3,256

3,277
Accrued interest and other liabilities

151,763

210,797
Total liabilities

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
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

1,048,444

1,041,304
Retained earnings

1,123,641

1,058,286
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

1,461,163

2,100,807

Total liabilities and shareholders’ equity

$
15,594,547

$
15,552,657


	September 30,		December 31,
	2023		2022
Assets:
Cash and cash equivalents	$	455,807	$	209,896
Available-for-sale investment securities includes pledged securities that can be sold or repledged of $542,828 and $466,902, respectively (cost of $3,314,815 and $4,675,474, respectively)		2,767,636		4,151,851
Held-to-maturity securities (fair value of $990,660 and $1,034,795, respectively)		1,125,540		1,079,695
Equity and other securities (cost of $66,006 and $82,424, respectively)		66,825		83,342

Loans		9,450,066		8,809,394
Allowance for credit losses		(64,945)		(61,059)
Loans, net of allowance for credit losses		9,385,121		8,748,335

Goodwill		845,396		841,841
Core deposit intangibles, net		9,087		12,304
Other intangibles, net		46,851		48,692
Goodwill and intangible assets, net		901,334		902,837

Premises and equipment, net		174,749		160,778
Accrued interest and fees receivable		46,933		52,613
Other assets		462,377		446,304

Total assets	$	15,386,322	$	15,835,651

Liabilities:
Noninterest-bearing deposits	$	3,780,519	$	4,140,617
Interest-bearing deposits		9,250,269		8,871,691
Total deposits		13,030,788		13,012,308

Overnight borrowings		0		768,400
Securities sold under agreement to repurchase, short-term		330,252		346,652
Other Federal Home Loan Bank borrowings		316,837		19,474
Subordinated notes payable		0		3,249
Accrued interest and other liabilities		153,506		133,863
Total liabilities		13,831,383		14,283,946

Commitments and contingencies (See Note J)

Shareholders’ equity:
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued		0		0
Common stock, $1.00 par value, 75,000,000 shares authorized; 54,363,812 and 54,190,201 shares issued, respectively		54,364		54,190
Additional paid-in capital		1,057,433		1,050,231
Retained earnings		1,179,196		1,152,452
Accumulated other comprehensive loss		(691,693)		(686,439)
Treasury stock, at cost (936,823 shares, including 119,308 shares held by deferred compensation arrangements at September 30, 2023, and 452,952 shares including 135,437 shares held by deferred compensation arrangements at December 31, 2022)		(51,198)		(26,485)
Deferred compensation arrangements (119,308 and 135,437 shares, respectively)		6,837		7,756
Total shareholders’ equity		1,554,939		1,551,705

Total liabilities and shareholders’ equity	$	15,386,322	$	15,835,651

See accompanying notes to consolidated financial 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				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Interest income:
Interest and fees on loans	$	88,434	$	75,825	$	238,907	$	231,446	$	115,138	$	88,434	$	322,775	$	238,907
Interest and dividends on taxable investments		23,737		17,361		71,228		49,325		18,969		23,737		61,718		71,228
Interest and dividends on nontaxable investments		3,704		2,480		9,611		7,920		3,449		3,704		10,569		9,611
Total interest income		115,875		95,666		319,746		288,691		137,556		115,875		395,062		319,746

Interest expense:
Interest on deposits		3,855		2,822		9,111		8,897		24,555		3,855		53,431		9,111
Interest on borrowings		1,588		195		2,113		716		5,215		1,588		13,498		2,113
Interest on subordinated notes payable		38		38		115		115		0		38		38		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		29,770		5,481		66,967		11,339

Net interest income		110,394		92,611		308,407		278,670		107,786		110,394		328,095		308,407
Provision for credit losses		5,061		(944)		12,005		(11,001)		2,878		5,061		7,130		12,005
Net interest income after provision for credit losses		105,333		93,555		296,402		289,671		104,908		105,333		320,965		296,402

Noninterest revenues:
Deposit service fees		17,452		15,442		49,745		43,758		16,007		17,452		46,839		49,745
Mortgage banking		171		460		595		1,479		113		171		399		595
Other banking services		912		996		2,521		2,830		1,471		912		4,535		2,521
Employee benefit services		27,884		29,923		86,385		83,933		29,997		27,884		87,946		86,385
Insurance services		11,332		9,176		31,521		25,538		12,113		11,332		35,495		31,521
Wealth management services		7,502		8,322		24,276		24,748		7,934		7,502		24,037		24,276
Unrealized (loss) gain on equity securities		(4)		(10)		(24)		14
Loss on sales of investment securities										0		0		(52,329)		0
Gain on debt extinguishment										0		0		242		0
Unrealized loss on equity securities										(49)		(4)		(99)		(24)
Total noninterest revenues		65,249		64,309		195,019		182,300		67,586		65,249		147,065		195,019

Noninterest expenses:
Salaries and employee benefits		66,190		62,883		193,236		178,407		70,687		66,190		210,208		193,236
Data processing and communications										15,480		14,184		42,900		40,454
Occupancy and equipment		10,364		9,867		31,740		31,437		10,358		10,364		31,835		31,740
Data processing and communications		14,184		12,966		40,454		38,123
Amortization of intangible assets		3,837		3,703		11,420		10,300		3,576		3,837		10,948		11,420
Legal and professional fees		3,194		3,352		10,196		8,885		3,826		3,194		12,129		10,196
Business development and marketing		3,616		2,383		9,975		7,071		4,628		3,616		12,096		9,975
Litigation accrual		0		(100)		0		(100)
Acquisition expenses		409		102		4,668		133		0		409		56		4,668
Acquisition-related contingent consideration adjustment		0		0		400		0		80		0		1,080		400
Other expenses		6,391		5,280		16,327		12,969		7,869		6,391		22,342		16,327
Total noninterest expenses		108,185		100,436		318,416		287,225		116,504		108,185		343,594		318,416

Income before income taxes		62,397		57,428		173,005		184,746		55,990		62,397		124,436		173,005
Income taxes		13,706		12,092		37,454		38,616		11,861		13,706		26,218		37,454
Net income	$	48,691	$	45,336	$	135,551	$	146,130	$	44,129	$	48,691	$	98,218	$	135,551

Basic earnings per share	$	0.90	$	0.84	$	2.51	$	2.70	$	0.82	$	0.90	$	1.82	$	2.51
Diluted earnings per share	$	0.90	$	0.83	$	2.49	$	2.68	$	0.82	$	0.90	$	1.82	$	2.49

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In Thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2022

2021

2022

2021
Pension and other post retirement obligations:








Amortization of actuarial losses included in net periodic pension cost, gross

$
220

$
911

$
660

$
2,733
Tax effect

(53)

(219)

(160)

(657)
Amortization of actuarial losses included in net periodic pension cost, net

167

692

500

2,076
Amortization of prior service cost included in net periodic pension cost, gross

109

50

327

150
Tax effect

(26)

(12)

(79)

(36)
Amortization of prior service cost included in net periodic pension cost, net

83

38

248

114
Other comprehensive income related to pension and other post-retirement obligations, net of taxes

250

730

748

2,190

Unrealized losses on available-for-sale securities:

Net unrealized losses arising during period, gross

(301,023)

(21,268)

(919,962)

(168,621)
Tax effect

73,119

5,112

223,460

40,528
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

48,691

45,336

135,551

146,130
Comprehensive (loss) income

$
(178,963)

$
29,910

$
(560,203)

$
20,227


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Pension and other post retirement obligations:
Amortization of actuarial (gains) losses included in net periodic pension cost, gross	$	(550)	$	220	$	(1,648)	$	660
Tax effect		134		(53)		401		(160)
Amortization of actuarial (gains) losses included in net periodic pension cost, net		(416)		167		(1,247)		500

Amortization of prior service cost included in net periodic pension cost, gross		160		109		480		327
Tax effect		(39)		(26)		(117)		(79)
Amortization of prior service cost included in net periodic pension cost, net		121		83		363		248

Other comprehensive (loss) income related to pension and other post-retirement obligations, net of taxes		(295)		250		(884)		748

Net unrealized losses on investment securities:
Net unrealized holding losses on investment securities, gross		(105,326)		(301,023)		(58,105)		(919,962)
Tax effect		25,630		73,119		14,120		223,460
Net unrealized holding losses on investment securities, net		(79,696)		(227,904)		(43,985)		(696,502)

Reclassification adjustment for net losses included in net income, gross		0		0		52,329		0
Tax effect		0		0		(12,714)		0
Reclassification adjustment for net losses included in net income, net		0		0		39,615		0

Other comprehensive loss related to unrealized losses on investment securities, net of taxes		(79,696)		(227,904)		(4,370)		(696,502)

Other comprehensive loss, net of taxes		(79,991)		(227,654)		(5,254)		(695,754)
Net income		44,129		48,691		98,218		135,551
Comprehensive (loss) income	$	(35,862)	$	(178,963)	$	92,964	$	(560,203)


	As of				As of
	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Accumulated Other Comprehensive Loss By Component:
Unrealized loss for pension and other post-retirement obligations	$	(19,637)	$	(20,624)	$	(42,701)	$	(41,533)
Tax effect		4,915		5,154		10,516		10,232
Net unrealized loss for pension and other post-retirement obligations		(14,722)		(15,470)		(32,185)		(31,301)

Unrealized loss on available-for-sale securities		(965,855)		(45,893)
Unrealized loss on investment securities						(870,559)		(864,783)
Tax effect		234,196		10,736		211,051		209,645
Net unrealized loss on available-for-sale securities		(731,659)		(35,157)
Net unrealized loss on investment securities						(659,508)		(655,138)

Accumulated other comprehensive loss	$	(746,381)	$	(50,627)	$	(691,693)	$	(686,439)

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Three months ended September 30, ~~2022~~2023 and ~~2021~~2022

(In Thousands, Except Share Data)

Accumulated









Common Stock

Additional

Other

Deferred

Shares

Amount

Paid-In

Retained

Comprehensive

Treasury

Compensation


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

Net income

45,336

45,336

Other comprehensive loss, net of tax

(15,426)

(15,426)

Dividends declared:

Common, $0.43 per share

(23,142)

(23,142)

Common stock activity under employee stock plans

8,122

8

464

472

Stock-based compensation

1,594

1,594

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


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

Balance at June 30, 2023	53,528,090	$	54,364	$	1,054,871	$	1,159,126	$	(611,702)	$	(46,038)	$	6,785	$	1,617,406

Net income							44,129								44,129

Other comprehensive loss, net of tax									(79,991)						(79,991)

Dividends declared:
Common, $0.45 per share							(24,059)								(24,059)

Common stock activity under employee stock plans	71		0		47										47

Stock-based compensation					2,515										2,515

Treasury stock purchased	(100,000)										(5,108)				(5,108)

Treasury stock issued to benefit plans, net	(1,172)										(52)		52		0

Balance at September 30, 2023	53,426,989	$	54,364	$	1,057,433	$	1,179,196	$	(691,693)	$	(51,198)	$	6,837	$	1,554,939

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 to 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

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Nine months ended September 30, ~~2022~~2023 and ~~2021~~2022

(In Thousands, Except Share Data)

Accumulated









Common Stock

Additional

Other

Deferred

Shares

Amount

Paid-In

Retained

Comprehensive

Treasury

Compensation


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

Net income

146,130

146,130

Other comprehensive loss, net of tax

(125,903)

(125,903)

Dividends declared:

Common, $1.27 per share

(68,377)

(68,377)

Common stock activity under employee stock plans

317,390

317

8,824

9,141

Stock-based compensation

4,836

4,836

Distribution of stock under deferred compensation arrangements

18,089

323

694

(1,017)

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


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

Balance at December 31, 2022	53,737,249	$	54,190	$	1,050,231	$	1,152,452	$	(686,439)	$	(26,485)	$	7,756	$	1,551,705

Net income							98,218								98,218

Other comprehensive loss, net of tax									(5,254)						(5,254)

Dividends declared:
Common, $1.33 per share							(71,474)								(71,474)

Common stock activity under employee stock plans	173,610		174		537										711

Stock-based compensation					6,709										6,709

Distribution of stock under deferred compensation arrangements	19,264				(44)						1,126		(1,082)		0

Treasury stock purchased	(500,000)										(25,676)				(25,676)

Treasury stock issued to benefit plans, net	(3,134)										(163)		163		0

Balance at September 30, 2023	53,426,989	$	54,364	$	1,057,433	$	1,179,196	$	(691,693)	$	(51,198)	$	6,837	$	1,554,939

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 issued to 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

See accompanying notes 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,


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


	Nine Months Ended
	September 30,
	2023		2022
Operating activities:
Net income	$	98,218	$	135,551
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		9,781		10,956
Amortization of intangible assets		10,948		11,420
Net amortization (accretion) on securities, loans and borrowings		3,675		(14,519)
Stock-based compensation		6,709		6,047
Gain on debt extinguishment		(242)		0
Provision for credit losses		7,130		12,005
Amortization of mortgage servicing rights		654		554
Loss on sales of investment securities		52,329		0
Unrealized loss on equity securities		99		24
Income from bank-owned life insurance policies		(1,762)		(1,543)
Net gain on sale of assets		(1,067)		(570)
Change in other assets and liabilities		(2,758)		(16,889)
Net cash provided by operating activities		183,714		143,036
Investing activities:
Proceeds from maturities, calls, and paydowns of available-for-sale investment securities		582,614		210,152
Proceeds from maturities, calls, and paydowns of held-to-maturity investment securities		72		0
Proceeds from maturities and redemptions of equity and other investment securities		20,960		2,247
Proceeds from sales of available-for-sale investment securities		733,789		0
Purchases of available-for-sale investment securities		0		(1,348,400)
Purchases of held-to-maturity investment securities		(23,933)		0
Purchases of equity and other securities		(4,542)		(6,108)
Net increase in loans		(660,031)		(735,072)
Cash (paid) received for acquisitions, net of cash acquired of $0 and $84,988, respectively		(8,301)		345
Proceeds from sales of premises, equipment and other assets		5,902		1,928
Purchases of premises and equipment		(13,889)		(10,014)
Real estate limited partnership investments		0		(247)
Net cash provided by (used in) investing activities		632,641		(1,885,169)
Financing activities:
Net increase in deposits		18,480		52,858
Net (decrease) increase in overnight borrowings		(768,400)		119,800
Net (decrease) increase in securities sold under agreement to repurchase, short-term		(16,400)		28,052
Proceeds from other Federal Home Loan Bank borrowings		300,000		0
Payments on and maturities of other Federal Home Loan Bank borrowings		(2,713)		(71)
Payments of contingent consideration for acquisitions		(1,214)		0
Redemption of subordinated notes payable		(3,000)		0
Proceeds from issuance of common stock		711		1,086
Purchases of treasury stock		(25,839)		(16,555)
Increase in deferred compensation arrangements		163		177
Cash dividends paid		(71,048)		(69,681)
Withholding taxes paid on share-based compensation		(1,184)		(1,206)
Net cash (used in) provided by financing activities		(570,444)		114,460
Change in cash and cash equivalents		245,911		(1,627,673)
Cash and cash equivalents at beginning of period		209,896		1,875,064
Cash and cash equivalents at end of period	$	455,807	$	247,391
Supplemental disclosures of cash flow information:
Cash paid for interest	$	64,147	$	11,793
Cash paid for income taxes		29,198		41,061
Supplemental disclosures of noncash financing and investing activities:
Dividends declared and unpaid		24,189		23,750
Transfers from loans to other real estate		232		303
Transfers from premises and equipment, net to other assets		1,948		5,113
Acquisitions:
Fair value of assets acquired, excluding acquired cash and intangibles		243		490,623
Fair value of liabilities assumed		18		543,507
Contingent consideration in exchange for acquired assets		1,450		0

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

COMMUNITY BANK SYSTEM, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~September~~SEPTEMBER 30, ~~2022~~2023

NOTE A: BASIS OF PRESENTATION

The interim financial data as of and for the three and nine months ended September 30, ~~2022~~2023 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 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, ~~2021~~2022 filed with the Securities and Exchange Commission (“SEC”) on March 1, ~~2022.~~2023.

NOTE B: ACQUISITIONS

Current and Prior Period Acquisitions

During the nine months ended September 30, 2023, the Company, through its subsidiaries OneGroup NY, Inc. (“OneGroup”) and OneGroup Wealth Partners, Inc. (“Wealth Partners”), completed the acquisition of certain assets of five financial services companies. The acquired companies provide insurance and wealth management services and are headquartered in New York, Pennsylvania, and Florida. Total aggregate consideration for these acquisitions was $7.9 million, including $6.5 million in cash and $1.4 million in contingent consideration arrangements. The contingent consideration arrangements are based on achieving certain levels of retained revenue over a period ranging from two to five years. The fair value of these arrangements has been recorded based on the assumption that retained revenue levels will meet or exceed the required threshold for the maximum contingent consideration payments. Aggregate assets acquired were $4.9 million, including $4.7 million of customer list intangible assets and the Company recorded goodwill of $3.0 million. The effects of the acquired assets have been included in the consolidated financial statements since the date of acquisition. Revenues and direct expenses included in the consolidated statements of income for the three and nine months ended September 30, 2023 were immaterial.

On March 1, 2023, the Company completed the acquisition of certain assets of Axiom Realty Group, which includes Axiom Capital Corp., Axiom Realty Management, LLC and Axiom Realty Advisors, LLC (collectively referred to as “Axiom”) for $1.8 million in cash. The Company recorded a $1.2 million customer list intangible and recognized $0.6 million of goodwill in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date. Revenues of approximately $0.3 million and $0.4 million and direct expenses of approximately $0.5 million and $1.2 million were included in the consolidated statements of income for the three and nine months ended September 30, 2023, respectively.

On May 13, 2022, the Company completed ~~the~~its acquisition of Elmira Savings Bank (“Elmira”), a New York State chartered savings bank headquartered in Elmira, New York, for $82.2 million in cash. The acquisition ~~enhances~~enhanced 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~~$583.6 million of identifiable assets, including ~~$437.0~~$436.8 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~~Goodwill of ~~$45.8~~$42.1 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~~Revenues of approximately $3.9 million ~~acquisition-related provision for credit losses for loans acquired~~and $11.0 million and direct expenses of approximately $1.1 million and $3.5 million from the Elmira branch network, which may not include certain shared expenses, were included in the ~~transaction.~~consolidated statements of income for the three and nine months ended September 30, 2023, respectively. Revenues of approximately $4.8 million and $7.2 million and direct expenses of approximately $1.2 million and $1.8 million from the Elmira branch network were included in the consolidated statements of income for the three and nine months ended September 30, 2022, respectively. The Company incurred certain ~~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 $1.0 million and $3.0 million and direct expenses of approximately $0.4 million and $1.1 million from TGA were included in the consolidated income statements for the three and nine months ended September 30, 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, 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”) 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 $0.8 million and $3.3 million and direct expenses of approximately $1.0 million and $3.2 million from FBD were included in the consolidated statements of income for the three and nine months ended September 30, 2022, respectively.

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; 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”), 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 $0.9 million and direct expenses of approximately $0.3 million and $0.9 million from NuVantage were included in the consolidated statements of income for the three and nine months ended September 30, 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. 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 2022, the carrying amount of other liabilities associated with the FBD acquisition was adjusted as a result of an adjustment to 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. The adjustments resulted in a net decrease of $4.9 million to goodwill recognized from the Elmira acquisition at September 30, 2022.

The acquisitions generally expanded the Company’s 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

During 2022, the Company, through its subsidiary OneGroup, completed acquisitions of certain assets of four insurance agencies for an aggregate amount of $3.5 million in cash. The Company recorded a $2.9 million customer list intangible asset and a $0.1 million intangible asset for a noncompete agreement and recognized $0.5 million of goodwill in conjunction with the acquisitions. The effects of the acquired assets have been included in the consolidated financial statements since the date of acquisition. Revenues and direct expenses included in the consolidated statements of income for the three and nine months ended September 30, 2023 and 2022 were immaterial.

The assets and liabilities assumed in the acquisitions were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition, and were subject to adjustment based on updated information not available at the time of the acquisitions. Through the first nine months of 2023, the carrying amount of loans, accrued interest and fees receivable, other assets and other liabilities associated with the Elmira acquisition was adjusted upon receipt of new information. The adjustments resulted in a net decrease to goodwill of $0.1 million. During the nine months ended September 30, 2023, the carrying amount of other intangibles associated with the Axiom acquisition was adjusted upon receipt of new information. The adjustment resulted in a net decrease to goodwill of $0.6 million.

The Elmira and Axiom acquisitions generally expanded the Company’s banking presence in New York. The OneGroup and Wealth Partners acquisitions generally expanded the Company’s insurance and wealth management presence in New York, Florida and Pennsylvania. Management expects that the Company will benefit from greater geographic diversity and the advantages of other synergistic business development opportunities.

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


	2022						2021								2023						2022
(000s omitted)	Elmira		Other⁽¹⁾		Total		TGA		FBD		NuVantage		Total		Axiom		Other⁽¹⁾		Total		Elmira		Other⁽²⁾		Total
Consideration:
Cash	$	82,179	$	2,464	$	84,643	$	11,620	$	15,350	$	2,900	$	29,870	$	1,819	$	6,482	$	8,301	$	82,179	$	3,477	$	85,656
Contingent consideration		0		0		0		1,500		1,400		0		2,900		0		1,450		1,450		0		0		0
Total net consideration		82,179		2,464		84,643		13,120		16,750		2,900		32,770		1,819		7,932		9,751		82,179		3,477		85,656

Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents		84,988		0		84,988		0		541		0		541		0		0		0		84,988		0		84,988
Investment securities		11,305		0		11,305		0		0		0		0		0		0		0		11,305		0		11,305
Loans, net of allowance for credit losses on PCD loans		436,948		0		436,948		0		0		0		0		0		0		0		436,796		0		436,796
Premises and equipment, net		11,303		0		11,303		279		282		199		760		25		41		66		11,303		14		11,317
Accrued interest and fees receivable		884		0		884		0		0		0		0		0		0		0		882		0		882
Other assets		25,637		0		25,637		0		579		0		579		2		175		177		30,337		0		30,337
Core deposit intangibles		7,970		0		7,970		0		0		0		0		0		0		0		7,970		0		7,970
Other intangibles		0		2,464		2,464		10,900		14,000		1,437		26,337		1,176		4,714		5,890		0		3,014		3,014
Deposits		(522,295)		0		(522,295)		0		0		0		0		0		0		0		(522,295)		0		(522,295)
Other liabilities		(2,757)		0		(2,757)		(229)		(761)		(174)		(1,164)		(9)		(9)		(18)		(3,596)		(34)		(3,630)
Other Federal Home Loan Bank borrowings		(17,616)		0		(17,616)		0		0		0		0		0		0		0		(17,616)		0		(17,616)
Total identifiable assets, net		36,367		2,464		38,831		10,950		14,641		1,462		27,053		1,194		4,921		6,115		40,074		2,994		43,068
Goodwill	$	45,812	$	0	$	45,812	$	2,170	$	2,109	$	1,438	$	5,717	$	625	$	3,011	$	3,636	$	42,105	$	483	$	42,588

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

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

The Company ~~has~~ acquired certain loans from Elmira for which there was not evidence of a more-than-insignificant deterioration in credit quality since origination (non-Purchased Credit Deteriorated, or “PCD”, loans) with an unpaid principal balance of $455.7 million at the acquisition date. Total fair value adjustments for non-PCD loans resulted in a net discount of $20.8 million.

Table of Contents

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


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

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 related to the Elmira acquisition and other intangibles related to three of the OneGroup acquisitions completed in 2022, the OneGroup and Wealth Partners acquisitions completed in 2023, and the Axiom acquisition are being amortized using an accelerated method over an estimated useful life of eight years. The other intangibles ~~related to~~associated with the ~~NuVantage~~fourth remaining OneGroup acquisition ~~and the OneGroup asset acquisitions~~ completed in 2022 are being amortized using an accelerated method over their estimated useful of life of ~~eight 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. Goodwill,~~goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the Elmira ~~acquisition,~~and Axiom acquisitions and the All Other segment for the ~~NuVantage~~OneGroup and ~~TGA~~Wealth Partners acquisitions completed in 2023 and ~~the Employee Benefit Services segment for the FBD acquisition.~~2022. Goodwill arising from the Elmira ~~and FBD acquisitions~~acquisition is not deductible for tax purposes. Goodwill arising from the ~~NuVantage~~Axiom acquisition and ~~TGA~~the OneGroup and Wealth Partners acquisitions completed in 2023 and 2022 is deductible for tax purposes.

Direct costs related to the acquisitions were expensed as incurred. Merger and acquisition integration-related expenses were immaterial for the three and nine months ended September 30, 2023. Merger and acquisition integration-related expenses were $0.4 million and $4.7 million during the three and nine months ended September 30, 2022, ~~respectively, and were $0.1 million during the three and nine months ended September 30, 2021.~~respectively. These ~~amounts~~expenses have been separately stated in the consolidated statements of income.

~~Table of Contents~~

Supplemental Pro Forma Financial Information

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

The pro forma information set forth below reflects the historical results of Elmira combined with the Company’s consolidated statements of income with adjustments related to (a) certain purchase accounting fair value adjustments and (b) amortization of core deposit intangibles. Acquisition-related expenses totaling $0.4 million and $4.7 million for the three and nine months ended September 30, 2022, respectively, related to Elmira were included in the pro forma information as if they were incurred in the first quarter of 2021. The effects of the Elmira acquisition are reflected in all periods in 2023.


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

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NOTE C: SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of the Company, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 76 through 8887 of the Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 filed with the Securities and Exchange Commission (“SEC”) on March 1, ~~2022~~2023 except as noted below.

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, ~~2022, $32.7~~2023, $35.3 million of accounts receivable, including ~~$9.9~~$8.1 million of unbilled fee revenue and ~~$3.5~~$0.9 million of unearned revenue, was recorded in the consolidated statements of condition. As of December 31, ~~2021, $31.6~~2022, $33.3 million of accounts receivable, including ~~$9.1~~$8.8 million of unbilled fee revenue, and ~~$2.2~~$1.1 million of unearned revenue, was recorded in the consolidated statements of condition.

~~Premises and Equipment Held for Sale~~Loan Modifications

~~Premises and equipment designated~~The Company, in certain situations, will modify a loan with a borrower experiencing financial difficulty that results in a direct change in the timing or amount of contractual cash flows. Applicable modifications include, but are not limited to, principal forgiveness, interest rate reduction, other-than-insignificant payment delay, term extension (other than administrative) or a combination thereof. Principal forgiveness is defined as ~~held for sale totaling $5.1 million at September 30, 2022 are included~~any contractual reduction in ~~other assets on~~ the ~~consolidated statements~~amount of ~~condition and are carried at~~principal due without receiving payment or assets. Interest rate reduction is defined as the ~~lower of cost or fair value.~~

~~Table of Contents~~

~~Recently Adopted Accounting Pronouncements~~

~~In March 2020,~~change resulting in the ~~FASB issued ASU No. 2020-04,~~ ~~Facilitation~~borrower receiving a below market interest rate. A delay in payment that is other-than-insignificant is determined by considering factors including the amount of the ~~Effects~~restructured payments relative to the unpaid principal or collateral value of ~~Reference Rate Reform~~the loan, as well as the timing of the restructured payment relative to the frequency of payments due under the debt, the debt’s original contract maturity and the debt’s original expected duration. Generally, a delay in payment greater than 90 days in the last twelve months would be considered other-than-insignificant. The Company considers several factors to assess whether a borrower is experiencing financial difficulty, including, but not limited to, payment default or expected payment default, bankruptcy of the borrower, substantial doubt whether the borrower will continue as a going concern and estimates or projections of the borrower’s financial condition that indicate that the borrower will be unable to service the loan in accordance with the contractual provisions of the existing agreement. Following the adoption of ASU 2022-02 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. TheJanuary 1, 2023, the Company has established a ~~working group that includes multiple functions~~policy to ~~guide the transition from LIBOR~~identify and disclose information required by FASB ASC 310-10-50 regarding modifications made 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 utilize LIBOR, or replacement rate language, provisions, and conventionsborrowers experiencing financial difficulty.

Reclassifications

Certain reclassifications have been ~~specified. The Company continues~~made to ~~evaluate its exposure~~prior period balances 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 impact on the Company’s consolidated financial statements as the Company’s exposure to LIBOR-based loans and financial instruments is insignificant.

~~In August 2021, the FASB issued ASU 2021-06,~~ ~~Presentation of Financial Statements (Topic 205)~~, ~~Financial Services-Depository and Lending (Topic 942)~~~~, 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. 33-10835~~, ~~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~~conform to the ~~FASB Codification and the Company determined that this guidance does not have a material impact on the Company’s consolidated financial statements.~~current period’s presentation.

Recently Adopted Accounting Pronouncements ~~Not Yet Adopted~~

In March 2022, the ~~FASB~~Financial Accounting Standards Board (“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~~The Company adopted ~~the CECL accounting standard. While the~~this guidance ~~will result~~on January 1, 2023 on a prospective basis and while it resulted in expanded disclosures, ~~the Company does not expect~~ the adoption of this standard ~~will~~did not 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, 2023 and December 31, 2022 are as follows:


	September 30, 2023								December 31, 2022
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(000’s omitted)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Available-for-Sale Portfolio:
U.S. Treasury and agency securities	$	2,378,607	$	0	$	399,168	$	1,979,439	$	3,660,546	$	0	$	417,009	$	3,243,537
Obligations of state and political subdivisions		506,838		20		72,393		434,465		549,118		506		45,327		504,297
Government agency mortgage-backed securities		411,083		6		74,018		337,071		444,689		58		60,114		384,633
Corporate debt securities		8,000		0		826		7,174		8,000		0		886		7,114
Government agency collateralized mortgage obligations		10,287		0		800		9,487		13,121		1		852		12,270
Total available-for-sale portfolio	$	3,314,815	$	26	$	547,205	$	2,767,636	$	4,675,474	$	565	$	524,188	$	4,151,851

Held-to-Maturity Portfolio:
U.S. Treasury and agency securities	$	1,101,679	$	0	$	134,091	$	967,588	$	1,079,695	$	0	$	44,900	$	1,034,795
Government agency mortgage-backed securities		23,861		0		789		23,072		0		0		0		0
Total held-to-maturity portfolio	$	1,125,540	$	0	$	134,880	$	990,660	$	1,079,695	$	0	$	44,900	$	1,034,795

Equity and Other Securities:
Equity securities, at fair value	$	251	$	69	$	0	$	320	$	251	$	168	$	0	$	419
Federal Home Loan Bank common stock		26,524		0		0		26,524		47,497		0		0		47,497
Federal Reserve Bank common stock		33,568		0		0		33,568		31,144		0		0		31,144
Other equity securities, at adjusted cost		5,663		750		0		6,413		3,532		750		0		4,282
Total equity and other securities	$	66,006	$	819	$	0	$	66,825	$	82,424	$	918	$	0	$	83,342

Included in the Company’s investment securities portfolio is Federal Reserve Bank (“FRB”) common stock with a carrying value of $33.6 million and $31.1 million at September 30, 2023 and December 31, 2022, respectively. The investment in FRB stock represents approximately half of the total required subscription, and the remaining half is unpaid and remains subject to call by the FRB.

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~~NOTE D: INVESTMENT SECURITIES~~

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

September 30, 2022

December 31, 2021

Gross

Gross

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrealized

Unrealized

Fair
(000’s omitted)

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value
Available-for-Sale Portfolio:









U.S. Treasury and agency securities

$
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

561,464

496

72,050

489,910

413,019

17,326

56

430,289
Government agency mortgage-backed securities

449,808

57

64,974

384,891

474,506

7,615

5,065

477,056
Corporate debt securities

8,000

0

967

7,033

8,000

39

77

7,962
Government agency collateralized mortgage obligations

14,219

1

805

13,415

19,953

410

24

20,339
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

$
198

$
10

$
439

$
251

$
212

$
0

$
463
Federal Home Loan Bank common stock

18,438

0

0

18,438

7,188

0

0

7,188
Federal Reserve Bank common stock

33,568

0

0

33,568

33,916

0

0

33,916
Other equity securities, at adjusted cost

3,408

750

0

4,158

2,562

750

0

3,312
Total equity and other securities

$
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, 2023


	Less than 12 Months					12 Months or Longer					Total
				Gross					Gross					Gross
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(000’s omitted)	#	Value		Losses		#	Value		Losses		#	Value		Losses
Available-for-Sale Portfolio:
U.S. Treasury and agency securities	0	$	0	$	0	64	$	1,979,439	$	399,168	64	$	1,979,439	$	399,168
Obligations of state and political subdivisions	285		165,835		12,417	434		263,067		59,976	719		428,902		72,393
Government agency mortgage-backed securities	65		11,134		539	727		325,079		73,479	792		336,213		74,018
Corporate debt securities	0		0		0	2		7,174		826	2		7,174		826
Government agency collateralized mortgage obligations	0		0		0	40		9,467		800	40		9,467		800
Total available-for-sale investment portfolio	350	$	176,969	$	12,956	1,267	$	2,584,226	$	534,249	1,617	$	2,761,195	$	547,205

Held-to-Maturity Portfolio:
U.S. Treasury and agency securities	23	$	967,588	$	134,091	0	$	0	$	0	23	$	967,588	$	134,091
Government agency mortgage-backed securities	16		23,072		789	0		0		0	16		23,072		789
Total held-to-maturity portfolio	39	$	990,660	$	134,880	0	$	0	$	0	39	$	990,660	$	134,880

As of December 31, 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	76	$	2,797,064	$	321,932	51	$	1,478,376	$	505,681	127	$	4,275,440	$	827,613	41	$	1,384,075	$	132,511	61	$	1,859,462	$	284,498	102	$	3,243,537	$	417,009
Obligations of state and political subdivisions	701		407,699		65,889	27		17,786		6,161	728		425,485		72,050	582		370,524		35,488	76		47,923		9,839	658		418,447		45,327
Government agency mortgage-backed securities	636		241,348		30,136	142		140,785		34,838	778		382,133		64,974	497		190,727		19,508	274		189,919		40,606	771		380,646		60,114
Corporate debt securities	1		2,746		254	1		4,287		713	2		7,033		967	0		0		0	2		7,114		886	2		7,114		886
Government agency collateralized mortgage obligations	37		11,761		634	10		1,623		171	47		13,384		805	29		9,968		600	17		2,274		252	46		12,242		852
Total available-for-sale investment portfolio	1,451	$	3,460,618	$	418,845	231	$	1,642,857	$	547,564	1,682	$	5,103,475	$	966,409	1,149	$	1,955,294	$	188,107	430	$	2,106,692	$	336,081	1,579	$	4,061,986	$	524,188

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
Held-to-Maturity Portfolio:
U.S. Treasury and agency securities																23	$	1,034,795	$	44,900	0	$	0	$	0	23	$	1,034,795	$	44,900
Total held-to-maturity portfolio																23	$	1,034,795	$	44,900	0	$	0	$	0	23	$	1,034,795	$	44,900

Table of Contents

~~As of December 31, 2021~~

Less than 12 Months

12 Months or Longer

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(000’s omitted)

#

Value

Losses

#

Value

Losses

#

Value

Losses
Available-for-Sale Portfolio:


















U.S. Treasury and agency securities

47

$
1,224,101

$
14,873

13

$
900,462

$
91,184

60

$
2,124,563

$
106,057
Obligations of state and political subdivisions

27

23,966

56

0

0

0

27

23,966

56
Government agency mortgage-backed securities

147

139,442

2,475

52

67,273

2,590

199

206,715

5,065
Corporate debt securities

1

4,923

77

0

0

0

1

4,923

77
Government agency collateralized mortgage obligations

18

3,146

24

1

53

0

19

3,199

24
Total available-for-sale investment portfolio

240

$
1,395,578

$
17,505

66

$
967,788

$
93,774

306

$
2,363,366

$
111,279

The unrealized losses reported pertaining to available-for-sale 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 carry a credit rating of A-A or ~~better as well as~~better. Additionally, a portion of the obligations of state and political subdivisions 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, based on an analysis done by the Company, 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, ~~2022~~2023 represents credit losses and no unrealized losses have been recognized in the provision for credit losses. Accordingly, there is no allowance for credit losses on the Company’s available-for-sale investment portfolio as of September 30, ~~2022.~~2023. Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled ~~$18.5~~$11.8 million at September 30, ~~2022~~2023 and is excluded from the estimate of credit losses.

Securities classified as held-to-maturity are included under the CECL methodology. Calculation of expected credit loss under CECL is done on a collective (“pooled”) basis, with assets grouped when similar risk characteristics exist. The Company notes that at September 30, 2023 all securities in the held-to-maturity classification are U.S. Treasury securities and government agency mortgage-backed securities; therefore, they share the same risk characteristics and can be evaluated on a collective basis. The expected credit loss on these securities is evaluated based on historical credit losses of this security type and the expected possibility of default in the future, and these securities are guaranteed by the U.S. government. U.S. Treasury securities and government agency mortgage-backed securities often receive the highest credit rating by rating agencies and the Company has concluded that the possibility of default is considered remote. At September 30, 2023, the U.S. Treasury securities and government agency mortgage-backed securities held by the Company in the held-to-maturity category carry an AAA rating from Moody’s Investor Services and an AA+ rating from Standard & Poor’s. On August 1, 2023, Fitch downgraded the U.S. government’s long term rating from AAA to AA+. The credit rating downgrade does not impact the Company’s conclusion regarding the credit risk of U.S. government debt securities held in its investment portfolio. The Company concludes that the long history with no credit losses for these securities (adjusted for current conditions and reasonable and supportable forecasts) indicates an expectation that nonpayment of the amortized cost basis is zero. Management has concluded that the prepayment risk associated with these securities is insignificant and it is expected to recover the recorded investment. Accordingly, there is no allowance for credit losses on the Company’s held-to-maturity debt portfolio as of September 30, 2023. Accrued interest receivable on held-to-maturity debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $2.9 million at September 30, 2023 and is excluded from the estimate of credit losses. The Company has the intent and ability to hold the securities to maturity.

The amortized cost and estimated fair value of debt securities at September 30, ~~2022,~~2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 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				Held-to-Maturity				Available-for-Sale
	Amortized		Fair		Amortized		Fair		Amortized		Fair
(000’s omitted)	Cost		Value		Cost		Value		Cost		Value
Due in one year or less	$	546,740	$	541,161	$	0	$	0	$	17,031	$	16,799
Due after one through five years		1,420,259		1,297,201		0		0		1,473,904		1,295,411
Due after five years through ten years		2,055,716		1,762,074		549,555		506,275		685,913		587,185
Due after ten years		1,649,802		1,171,947		552,124		461,313		716,597		521,683
Subtotal		5,672,517		4,772,383		1,101,679		967,588		2,893,445		2,421,078
Government agency mortgage-backed securities		449,808		384,891		23,861		23,072		411,083		337,071
Government agency collateralized mortgage obligations		14,219		13,415		0		0		10,287		9,487
Total	$	6,136,544	$	5,170,689	$	1,125,540	$	990,660	$	3,314,815	$	2,767,636

Investment securities with a ~~carrying~~fair value of ~~$2.41~~$2.19 billion and ~~$2.32~~$2.18 billion at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, were pledged to collateralize certain deposits, borrowings and potential future borrowings. Securities pledged to collateralize certain deposits and borrowings included ~~$427.2~~$542.8 million and ~~$485.4~~$466.9 million of U.S. Treasury securities that were pledged as collateral for securities sold under agreement to repurchase at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. All securities sold under agreement to repurchase as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022 have an overnight and continuous maturity.

Table of Contents

During the first quarter of 2023, the Company sold $786.1 million in book value of available-for-sale U.S. Treasury and agency securities, recognizing $52.3 million of gross realized losses. The sales were completed in January and February 2023 as part of a strategic balance sheet repositioning and were unrelated to the negative developments in the banking industry that occurred in March 2023. The proceeds from these sales of $733.8 million were redeployed entirely towards paying off existing overnight borrowings.

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)	2022		2021		2023		2022
Business lending	$	3,494,425	$	3,075,904	$	3,914,935	$	3,645,665
Consumer mortgage		2,975,521		2,556,114		3,196,764		3,012,475
Consumer indirect		1,461,235		1,189,749		1,708,302		1,539,653
Consumer direct		179,399		153,811		185,301		177,605
Home equity		433,027		398,061		444,764		433,996
Gross loans, including deferred origination costs		8,543,607		7,373,639		9,450,066		8,809,394
Allowance for credit losses		(60,363)		(49,869)		(64,945)		(61,059)
Loans, net of allowance for credit losses	$	8,483,244	$	7,323,770	$	9,385,121	$	8,748,335

The following table presents the aging of the amortized cost basis of the Company’s past due loans by segment as of September 30, ~~2022:~~2023:


	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	$	1,039	$	0	$	4,848	$	5,887	$	3,488,538	$	3,494,425	$	13,545	$	0	$	5,638	$	19,183	$	3,895,752	$	3,914,935
Consumer mortgage		12,138		3,997		20,890		37,025		2,938,496		2,975,521		15,282		2,908		25,205		43,395		3,153,369		3,196,764
Consumer indirect		11,938		215		0		12,153		1,449,082		1,461,235		15,175		290		0		15,465		1,692,837		1,708,302
Consumer direct		956		38		29		1,023		178,376		179,399		1,313		29		24		1,366		183,935		185,301
Home equity		1,761		166		2,309		4,236		428,791		433,027		3,331		504		2,255		6,090		438,674		444,764
Total	$	27,832	$	4,416	$	28,076	$	60,324	$	8,483,283	$	8,543,607	$	48,646	$	3,731	$	33,122	$	85,499	$	9,364,567	$	9,450,066

The following table presents the aging of the amortized cost basis of the Company’s past due loans by segment as of December 31, ~~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	$	5,540	$	99	$	24,105	$	29,744	$	3,046,160	$	3,075,904	$	9,818	$	0	$	4,689	$	14,507	$	3,631,158	$	3,645,665
Consumer mortgage		10,297		3,328		15,027		28,652		2,527,462		2,556,114		13,757		3,510		22,583		39,850		2,972,625		3,012,475
Consumer indirect		9,611		87		0		9,698		1,180,051		1,189,749		16,767		178		0		16,945		1,522,708		1,539,653
Consumer direct		796		22		1		819		152,992		153,811		1,307		132		28		1,467		176,138		177,605
Home equity		1,778		272		2,532		4,582		393,479		398,061		3,595		299		1,945		5,839		428,157		433,996
Total	$	28,022	$	3,808	$	41,665	$	73,495	$	7,300,144	$	7,373,639	$	45,244	$	4,119	$	29,245	$	78,608	$	8,730,786	$	8,809,394

No interest income on nonaccrual loans was recognized during the three and nine months ended September 30, ~~2022.~~2023. An immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income.

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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 based on a case-by-case evaluation. 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 and the loan has potential weaknesses, 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 loan has a well-defined weakness or weaknesses. 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, ~~2022~~2023 and December 31, ~~2021:~~2022:


	Term Loans Amortized Cost Basis by Origination Year
													Revolving																Revolving		Revolving
													Loans																Loans		Loans
(000’s omitted)													Amortized				Term Loans Amortized Cost Basis by Origination Year												Amortized		Converted
September 30, 2022	2022		2021		2020		2019		2018		Prior		Cost Basis		Total
September 30, 2023																	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Business lending:
Risk rating
Pass	$	617,776	$	422,638	$	306,960	$	325,181	$	249,442	$	710,320	$	636,686	$	3,269,003	$	290,903	$	659,190	$	325,480	$	205,591	$	224,256	$	710,607	$	721,951	$	526,358	$	3,664,336
Special mention		2,236		5,229		3,988		4,442		13,155		64,432		31,447		124,929		19,647		3,463		18,359		2,655		3,523		58,407		22,473		43,473		172,000
Classified		836		948		1,259		3,840		28,498		56,395		8,717		100,493		459		2,746		2,657		5,146		2,863		21,488		14,428		28,324		78,111
Doubtful		0		0		0		0		0		0		0		0		0		0		0		488		0		0		0		0		488
Total business lending	$	620,848	$	428,815	$	312,207	$	333,463	$	291,095	$	831,147	$	676,850	$	3,494,425	$	311,009	$	665,399	$	346,496	$	213,880	$	230,642	$	790,502	$	758,852	$	598,155	$	3,914,935

Current period gross charge-offs																	$	0	$	160	$	0	$	0	$	0	$	0	$	458	$	0	$	618


	Term Loans Amortized Cost Basis by Origination Year
													Revolving																Revolving		Revolving
													Loans																Loans		Loans
(000’s omitted)													Amortized				Term Loans Amortized Cost Basis by Origination Year												Amortized		Converted
December 31, 2021	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
December 31, 2022																	2022		2021		2020		2019		2018		Prior		Cost Basis		to Term		Total
Business lending:
Risk rating
Pass	$	524,302	$	328,885	$	320,638	$	248,175	$	186,074	$	584,912	$	524,553	$	2,717,539	$	747,573	$	373,913	$	232,591	$	246,820	$	168,468	$	604,745	$	646,771	$	401,531	$	3,422,412
Special mention		5,969		11,013		10,111		46,318		22,524		57,134		27,444		180,513		2,787		4,836		3,781		3,676		14,593		45,627		29,403		29,975		134,678
Classified		1,870		1,767		20,315		40,235		21,904		63,685		27,511		177,287		1,800		775		1,138		3,196		12,235		38,138		10,587		20,706		88,575
Doubtful		0		0		0		62		0		0		503		565		0		0		0		0		0		0		0		0		0
Total business lending	$	532,141	$	341,665	$	351,064	$	334,790	$	230,502	$	705,731	$	580,011	$	3,075,904	$	752,160	$	379,524	$	237,510	$	253,692	$	195,296	$	688,510	$	686,761	$	452,212	$	3,645,665

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 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.

Table of Contents

The following table details the balances in all other loan categories at September 30, ~~2022:~~2023:


	Term Loans Amortized Cost Basis by Origination Year
													Revolving																Revolving		Revolving
													Loans																Loans		Loans
(000’s omitted)													Amortized				Term Loans Amortized Cost Basis by Origination Year												Amortized		Converted
September 30, 2022	2022		2021		2020		2019		2018		Prior		Cost Basis		Total
September 30, 2023																	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Consumer mortgage:
FICO AB⁽¹⁾
Performing	$	346,061	$	516,066	$	231,558	$	182,908	$	103,874	$	629,948	$	1,799	$	2,012,214	$	274,173	$	358,296	$	466,228	$	203,702	$	160,654	$	629,208	$	0	$	79,618	$	2,171,879
Nonperforming		0		0		392		422		407		4,619		0		5,840		0		415		707		566		175		5,207		0		198		7,268
Total FICO AB		346,061		516,066		231,950		183,330		104,281		634,567		1,799		2,018,054		274,173		358,711		466,935		204,268		160,829		634,415		0		79,816		2,179,147
FICO CDE⁽²⁾
Performing		125,340		190,264		120,575		85,509		57,082		336,435		23,215		938,420		93,988		153,636		169,225		105,444		73,939		343,507		28,997		28,036		996,772
Nonperforming		238		1,061		1,701		1,443		1,467		13,137		0		19,047		0		1,592		1,362		1,250		1,476		13,909		0		1,256		20,845
Total FICO CDE		125,578		191,325		122,276		86,952		58,549		349,572		23,215		957,467		93,988		155,228		170,587		106,694		75,415		357,416		28,997		29,292		1,017,617
Total consumer mortgage	$	471,639	$	707,391	$	354,226	$	270,282	$	162,830	$	984,139	$	25,014	$	2,975,521	$	368,161	$	513,939	$	637,522	$	310,962	$	236,244	$	991,831	$	28,997	$	109,108	$	3,196,764

Current period gross charge-offs																	$	0	$	0	$	0	$	0	$	85	$	281	$	0	$	0	$	366

Consumer indirect:
Performing	$	620,692	$	453,478	$	143,702	$	115,304	$	62,534	$	65,310	$	0	$	1,461,020	$	573,832	$	622,019	$	306,229	$	83,299	$	55,759	$	66,874	$	0	$	0	$	1,708,012
Nonperforming		26		135		35		8		11		0		0		215		46		154		19		33		6		32		0		0		290
Total consumer indirect	$	620,718	$	453,613	$	143,737	$	115,312	$	62,545	$	65,310	$	0	$	1,461,235	$	573,878	$	622,173	$	306,248	$	83,332	$	55,765	$	66,906	$	0	$	0	$	1,708,302

Current period gross charge-offs																	$	277	$	2,551	$	1,435	$	890	$	482	$	855	$	0	$	0	$	6,490

Consumer direct:
Performing	$	72,531	$	52,234	$	19,832	$	15,548	$	7,045	$	5,615	$	6,527	$	179,332	$	66,421	$	59,136	$	30,516	$	10,059	$	6,088	$	6,337	$	6,690	$	1	$	185,248
Nonperforming		0		0		5		1		29		12		20		67		0		0		0		5		5		30		13		0		53
Total consumer direct	$	72,531	$	52,234	$	19,837	$	15,549	$	7,074	$	5,627	$	6,547	$	179,399	$	66,421	$	59,136	$	30,516	$	10,064	$	6,093	$	6,367	$	6,703	$	1	$	185,301

Current period gross charge-offs																	$	70	$	524	$	378	$	48	$	73	$	154	$	119	$	0	$	1,366

Home equity:
Performing	$	55,553	$	74,656	$	39,458	$	33,137	$	17,175	$	44,513	$	166,060	$	430,552	$	49,059	$	64,935	$	65,262	$	32,797	$	26,802	$	47,484	$	126,958	$	28,708	$	442,005
Nonperforming		0		10		122		198		153		661		1,331		2,475		0		140		10		244		280		611		942		532		2,759
Total home equity	$	55,553	$	74,666	$	39,580	$	33,335	$	17,328	$	45,174	$	167,391	$	433,027	$	49,059	$	65,075	$	65,272	$	33,041	$	27,082	$	48,095	$	127,900	$	29,240	$	444,764

Current period gross charge-offs																	$	0	$	0	$	0	$	64	$	0	$	9	$	17	$	0	$	90

~~(1)~~

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

~~(2)~~

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

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

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

Table of Contents

The following table details the balances in all other loan categories at December 31, ~~2021:~~2022:

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


													Revolving		Revolving
													Loans		Loans
(000’s omitted)	Term Loans Amortized Cost Basis by Origination Year												Amortized		Converted
December 31, 2022	2022		2021		2020		2019		2018		Prior		Cost Basis		to Term		Total
Consumer mortgage:
FICO AB⁽¹⁾
Performing	$	379,171	$	492,731	$	217,889	$	173,942	$	100,161	$	604,258	$	954	$	58,639	$	2,027,745
Nonperforming		0		75		573		184		399		4,347		0		449		6,027
Total FICO AB		379,171		492,806		218,462		174,126		100,560		608,605		954		59,088		2,033,772
FICO CDE⁽²⁾
Performing		160,388		178,262		112,640		79,357		54,861		323,189		27,884		22,056		958,637
Nonperforming		120		974		1,250		1,606		2,127		13,177		151		661		20,066
Total FICO CDE		160,508		179,236		113,890		80,963		56,988		336,366		28,035		22,717		978,703
Total consumer mortgage	$	539,679	$	672,042	$	332,352	$	255,089	$	157,548	$	944,971	$	28,989	$	81,805	$	3,012,475

Consumer indirect:
Performing	$	777,513	$	422,594	$	129,449	$	99,593	$	52,298	$	58,028	$	0	$	0	$	1,539,475
Nonperforming		18		1		53		67		15		24		0		0		178
Total consumer indirect	$	777,531	$	422,595	$	129,502	$	99,660	$	52,313	$	58,052	$	0	$	0	$	1,539,653

Consumer direct:
Performing	$	84,111	$	46,381	$	17,066	$	12,729	$	5,573	$	5,020	$	6,563	$	2	$	177,445
Nonperforming		6		51		1		1		29		50		22		0		160
Total consumer direct	$	84,117	$	46,432	$	17,067	$	12,730	$	5,602	$	5,070	$	6,585	$	2	$	177,605

Home equity:
Performing	$	69,575	$	72,270	$	37,964	$	31,506	$	16,068	$	41,097	$	132,703	$	30,569	$	431,752
Nonperforming		0		10		114		169		105		606		563		677		2,244
Total home equity	$	69,575	$	72,280	$	38,078	$	31,675	$	16,173	$	41,703	$	133,266	$	31,246	$	433,996

~~(1)~~

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

~~(2)~~

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

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

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

~~Commercial~~Business lending loans greater than $0.5 million that are on nonaccrual are individually assessed, and if necessary, a specific allocation of the allowance for credit losses is provided. A summary of individually assessed business loans as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022 follows:


	September 30,		December 31,		September 30,		December 31,
(000’s omitted)	2022		2021		2023		2022
Loans with allowance allocation	$	0	$	7,102	$	3,484	$	0
Loans without allowance allocation		3,232		7,417		1,055		3,163
Carrying balance		3,232		14,519		4,539		3,163
Contractual balance		4,201		16,963		4,555		4,201
Specifically allocated allowance		0		566		470		0

The average carrying balance of individually assessed loans was ~~$3.2~~$4.5 million and ~~$31.5~~$3.2 million for the three months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The average carrying balance of individually assessed loans was ~~$12.2~~$6.6 million and ~~$34.1~~$12.2 million for the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively. No interest income was recognized on individually assessed loans for the three or nine months ended September 30, ~~2022~~2023 and ~~2021.~~2022.

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, payment delay, interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

Table of Contents

In some cases, the Company provides multiple types of modifications on one loan. Typically, one type of modification, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another modification, such as principal forgiveness, may be granted. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. The estimate of allowance for credit losses includes historical losses from loans that were modified due to borrower financial difficulty, therefore a change to the allowance for credit losses is generally not recorded upon modification.

The following tables present the amortized cost basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below.


	Three Months Ended
	September 30, 2023
			Total Class of
	Term		Financing
(000s omitted except for percentages)	Extension		Receivable
Business lending	$	1,401	0.04	%
Total	$	1,401	0.01	%


	Nine Months Ended
	September 30, 2023
			Total Class of
	Term		Financing
(000s omitted except for percentages)	Extension		Receivable
Business lending	$	2,150	0.05	%
Consumer mortgage		198	0.01	%
Home equity		29	0.01	%
Total	$	2,377	0.03	%

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified at September 30, 2023.


					90+ Days Past
			Past Due 30 –		Due and Still		Non-
(000s omitted)	Current		89 Days		Accruing		Accrual		Total
Business lending	$	2,150	$	0	$	0	$	0	$	2,150
Consumer mortgage		0		0		0		198		198
Home equity		29		0		0		0		29
Total	$	2,179	$	0	$	0	$	198	$	2,377

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


		Three Months Ended
		September 30, 2023
		Weighted-Average
		Term Extension (Years)
Business lending		10.0
Total		10.0


		Nine Months Ended
		September 30, 2023
		Weighted-Average
		Term Extension (Years)
Business lending		8.3
Consumer mortgage		3.1
Home equity		9.9
Total		7.8

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

Prior to the adoption of ASU 2022-02 on January 1, 2023, modified loans were reviewed by the Company to identify if a troubled debt restructuring (“TDR”) had occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial standing and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. The amount of TDRs as of December 31, 2022 are presented below.


	December 31, 2022
(000’s omitted)	Nonaccrual			Accruing			Total
	#	Amount		#	Amount		#	Amount
Business lending	1	$	135	3	$	271	4	$	406
Consumer mortgage	52		2,218	46		2,114	98		4,332
Consumer indirect	0		0	56		600	56		600
Consumer direct	0		0	18		5	18		5
Home equity	9		108	9		178	18		286
Total	62	$	2,461	132	$	3,168	194	$	5,629

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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, 2022 and 2021 was immaterial.

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

September 30, 2022

December 31, 2021
(000’s omitted)

Nonaccrual

Accruing

Total

Nonaccrual

Accruing

Total


#

Amount

#

Amount

#

Amount

#

Amount

#

Amount

#

Amount
Business lending

2

$
161

3

$
282

5

$
443

10

$
1,011

4

$
811

14

$
1,822
Consumer mortgage

56

2,408

44

2,041

100

4,449

61

2,694

47

2,420

108

5,114
Consumer indirect

0

0

59

628

59

628

0

0

72

829

72

829
Consumer direct

0

0

11

4

11

4

0

0

16

7

16

7
Home equity

9

116

10

217

19

333

10

235

12

232

22

467
Total

67

$
2,685

127

$
3,172

194

$
5,857

81

$
3,940

151

$
4,299

232

$
8,239

The following table presents information related to loans modified in a TDR during the three months and nine months ended September 30, ~~2022 and 2021.~~2022. Of the loans noted in the table below, all consumer mortgage loans for the three months and nine months ended September 30, 2022 ~~and 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			Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2022
	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	0	$	0	5	$	1,925	0	$	0	0	$	0
Consumer mortgage	1		184	9		728	1		184	5		459
Consumer indirect	6		71	5		78	6		71	12		127
Consumer direct	2		3	1		2	2		3	2		3
Home equity	0		0	0		0	0		0	1		6
Total	9	$	258	20	$	2,733	9	$	258	20	$	595

Nine Months Ended

Nine Months Ended

September 30, 2022

September 30, 2021

Number of

Outstanding

Number of

Outstanding
(000’s omitted)

loans modified

Balance

loans modified

Balance
Business lending

0

$
0

5

$
1,925
Consumer mortgage

5

459

19

1,193
Consumer indirect

12

127

17

222
Consumer direct

2

3

2

8
Home equity

1

6

0

0
Total

20

$
595

43

$
3,348

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, 2023 and 2022:


	Three Months Ended September 30, 2023
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	25,291	$	(139)	$	152	$	740	$	26,044
Consumer mortgage		14,553		(143)		3		558		14,971
Consumer indirect		17,808		(2,100)		1,319		1,263		18,290
Consumer direct		3,032		(554)		217		351		3,046
Home equity		1,600		(6)		2		(2)		1,594
Unallocated		1,000		0		0		0		1,000
Allowance for credit losses – loans		63,284		(2,942)		1,693		2,910		64,945
Liabilities for off-balance-sheet credit exposures		933		0		0		(32)		901
Total allowance for credit losses	$	64,217	$	(2,942)	$	1,693	$	2,878	$	65,846


	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

2022

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~~Allowance for Credit Losses~~


	Nine Months Ended September 30, 2023
	Beginning		Charge-						Ending
(000’s omitted)	balance		offs		Recoveries		Provision		balance
Business lending	$	23,297	$	(618)	$	437	$	2,928	$	26,044
Consumer mortgage		14,343		(366)		35		959		14,971
Consumer indirect		17,852		(6,490)		4,342		2,586		18,290
Consumer direct		2,973		(1,366)		637		802		3,046
Home equity		1,594		(90)		13		77		1,594
Unallocated		1,000		0		0		0		1,000
Allowance for credit losses – loans		61,059		(8,930)		5,464		7,352		64,945
Liabilities for off-balance-sheet credit exposures		1,123		0		0		(222)		901
Total allowance for credit losses	$	62,182	$	(8,930)	$	5,464	$	7,130	$	65,846


	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

The ~~following presents by segment the activity in the~~ allowance for credit losses ~~during the three months and nine months ended~~for loans increased to $64.9 million at September 30, 2023 compared to $61.1 million at December 31, 2022 and ~~2021:~~

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

~~Table of Contents~~

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%$60.4 million at September 30, 2022, ~~three basis points higher than the levels at both September 30, 2021~~reflective of a stable economic forecast and ~~December 31, 2021. Included~~an increase 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.loans outstanding.

Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled ~~$19.8~~$28.4 million at September 30, ~~2022~~2023 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”, 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.~~experience. 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 reasonable and supportable forecast period ~~using~~with a four-quarter reversion to the historical mean to use as part of the economic forecast, and utilizes a two-quarter lag adjustment for economic factors that are not dependent on collateral values and no lag ~~adjustment~~ for factors that do utilize collateral ~~values, with a four-quarter reversion to the historical mean, to use as part of the economic forecast.~~values. Management determined that these qualitative adjustments were needed to adjust historical information for expected losses and to reflect changes as a result of current conditions.

For qualitative macroeconomic adjustments, the Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that are weighted, with forecasts available as of September 30, ~~2022.~~2023. These forecasts were factored into the qualitative portion of the calculation of the estimated credit losses and include the ~~continued influence~~impact of ~~supply chain constraints~~a decline in residential real estate and ~~inflationary pressures~~vehicle prices as well as ~~their commensurate impact on collateral values and economic growth.~~inflation. The scenarios utilized forecast stable unemployment levels offset by modest GDP and household income growth and continued deterioration in ~~GDP growth, auto values,~~ residential real estate, commercial real estate and ~~median household income.~~used auto prices.

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

●

Business lending – non real estate: The Company selected projected unemployment and GDP as indicators of forecasted losses related to business 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 ~~estimation~~review of ~~credit~~estimated losses.

●

Business lending – real estate: The Company selected projected unemployment and commercial real estate values as indicators of forecasted losses related to commercial real estate 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.

~~Table of Contents~~

●

Consumer mortgages and home equity: The Company selected projected unemployment and residential real estate values as indicators of forecasted losses related to mortgage 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 selected projected unemployment and vehicle valuation indices as indicators of forecasted losses related to indirect 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 selected projected unemployment and inflation-adjusted household income as indicators of forecasted losses related to consumer direct 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~~At September 30, 2023, loans with a carrying amount of approximately $4.30 billion were pledged to secure certain borrowings with the ~~carrying amounts~~FHLB and FRB. There were $315.8 million of borrowings outstanding under these arrangements at September 30, 2023.

During the nine months ended September 30, 2023, the Company did not purchase any loans, while the Company sold $4.6 million of secondary market eligible residential consumer mortgage loans during the period. During the nine months ended September 30, 2022, the Company purchased $436.9 million of loans ~~purchased~~in connection with the acquisition of Elmira, consisting of $125.3 million of business lending loans, $271.4 million of consumer mortgage loans, $9.4 million of consumer indirect loans, $12.5 million of consumer direct loans and $18.3 million of home equity loans. The Company sold $4.5 million of secondary market eligible residential consumer mortgage loans during the nine months ended September 30, ~~2022 by portfolio segment:~~2022.

Business

Consumer

Consumer

Consumer

Home

(000’s omitted)

lending

mortgage

indirect

direct

equity

Total
Purchases

$
125,288

$
271,408

$
9,383

$
12,511

$
18,429

$
437,019
Sales

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, 2022 were sales of secondary market eligible residential mortgage loans.

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, 2022						December 31, 2021						September 30, 2023						December 31, 2022
	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	$	77,373	$	(63,823)	$	13,550	$	69,403	$	(60,316)	$	9,087	$	77,373	$	(68,286)	$	9,087	$	77,373	$	(65,069)	$	12,304
Other intangibles		119,263		(68,573)		50,690		116,799		(60,660)		56,139		125,703		(78,852)		46,851		119,813		(71,121)		48,692
Total amortizing intangibles	$	196,636	$	(132,396)	$	64,240	$	186,202	$	(120,976)	$	65,226	$	203,076	$	(147,138)	$	55,938	$	197,186	$	(136,190)	$	60,996

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


(000’s omitted)	(000’s omitted)			(000’s omitted)
Oct - Dec 2022		$	3,771
2023			13,567
Oct - Dec 2023					$	3,563
2024			11,482			12,808
2025			9,783			10,927
2026			8,685			9,625
2027						4,049
Thereafter			16,952			14,966
Total		$	64,240		$	55,938

Shown below are the components of the Company’s goodwill at December 31, ~~2021~~2022 and September 30, ~~2022:~~2023:



(000’s omitted)	December 31, 2021		Activity		September 30, 2022		December 31, 2022		Additions		September 30, 2023
Goodwill	$	799,109	$	45,875	$	844,984	$	841,841	$	3,555	$	845,396

~~Table of Contents~~

~~NOTE G: MANDATORILY REDEEMABLE PREFERRED SECURITIES~~

As of September 30, 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 trust was 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 G: BORROWINGS

During the third quarter of 2023, the Company secured $300.0 million of fixed rate FHLB term borrowings. The borrowings consisted of a $100.0 million five year fixed rate advance with a rate of 4.50% and a $200.0 million five year monthly amortizing advance with a rate of 4.78%, both of which have contractual final maturity dates in August 2028.

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 $4.3 million contribution to its defined benefit pension plan in the second quarter of 2023. The Company made a $0.1 million contribution to its defined benefit pension plan in the first quarter of 2022. ~~The Company made a $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 first quarter of 2021.~~

The post-retirement benefits component of net periodic benefit cost for the three and nine months ended September 30, 2023 and 2022 is immaterial. The pension benefits component of net periodic benefit cost for the three and ~~2021~~nine months ended September 30, 2023 and 2022 is as follows:


	Pension Benefits								Post-retirement Benefits								Pension Benefits
	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,
(000’s omitted)	2022		2021		2022		2021		2022		2021			2022	2021		2023		2022		2023		2022
Service cost	$	1,240	$	1,480	$	3,720	$	4,440	$	0	$	0	$	0	$	0	$	1,108	$	1,240	$	3,324	$	3,720
Interest cost		1,334		1,259		4,002		3,777		11		11		33		33		1,890		1,334		5,670		4,002
Expected return on plan assets		(4,756)		(4,696)		(14,268)		(14,087)		0		0		0		0		(4,020)		(4,756)		(12,060)		(14,268)
Amortization of unrecognized net loss		211		900		633		2,700		9		11		27		33
Amortization of unrecognized net (gain) loss																		(555)		211		(1,665)		633
Amortization of prior service cost		154		95		462		284		(45)		(45)		(135)		(134)		205		154		615		462
Net periodic benefit	$	(1,817)	$	(962)	$	(5,451)	$	(2,886)	$	(25)	$	(23)	$	(75)	$	(68)	$	(1,372)	$	(1,817)	$	(4,116)	$	(5,451)

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, ~~2022.~~2023.

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

~~Table of Contents~~

The following is a reconciliation of basic to diluted earnings per share for the three and nine months ended September 30, ~~2022~~2023 and ~~2021:~~2022:


	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)	2022		2021		2022		2021		2023		2022		2023		2022
Net income	$	48,691	$	45,336	$	135,551	$	146,130	$	44,129	$	48,691	$	98,218	$	135,551
Income attributable to unvested stock-based compensation awards		(142)		(110)		(386)		(340)		(158)		(142)		(327)		(386)
Income available to common shareholders	$	48,549	$	45,226	$	135,165	$	145,790	$	43,971	$	48,549	$	97,891	$	135,165

Weighted-average common shares outstanding – basic		53,830		54,025		53,915		53,960		53,502		53,830		53,673		53,915
Basic earnings per share	$	0.90	$	0.84	$	2.51	$	2.70	$	0.82	$	0.90	$	1.82	$	2.51

Net income	$	48,691	$	45,336	$	135,551	$	146,130	$	44,129	$	48,691	$	98,218	$	135,551
Income attributable to unvested stock-based compensation awards		(142)		(110)		(386)		(340)		(158)		(142)		(327)		(386)
Income available to common shareholders	$	48,549	$	45,226	$	135,165	$	145,790	$	43,971	$	48,549	$	97,891	$	135,165

Weighted-average common shares outstanding – basic		53,830		54,025		53,915		53,960		53,502		53,830		53,673		53,915
Assumed exercise of stock options		302		385		328		431		104		302		135		328
Weighted-average common shares outstanding – diluted		54,132		54,410		54,243		54,391		53,606		54,132		53,808		54,243
Diluted earnings per share	$	0.90	$	0.83	$	2.49	$	2.68	$	0.82	$	0.90	$	1.82	$	2.49

Stock Repurchase Program

At its December ~~2020~~2022 meeting, the ~~Company’s~~ Board of Directors of the Company (the “Board”) approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to ~~2.68 million~~2,697,000 shares of the Company’s common stock, in accordance with securities and banking laws and regulations, ~~through December 31, 2021. At its December 2021 meeting,~~during the Board approved a new stock repurchase program for 2022, authorizing the repurchase of up to 2.70 million shares of the Company’s common stock, in accordance with securities and banking laws and regulations, through December 31, 2022.twelve-month period starting January 1, 2023. 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~~There were 500,000 shares of treasury stock purchases made under this authorization during the first nine months of 2023 with an average price paid per share of $51.35.

At its December 2021 meeting, the Board approved a stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,697,000 shares of the Company’s common stock, in accordance with securities and banking laws and regulations, during the twelve-month period starting January 1, 2022. There were 250,000 shares of treasury stock purchases made under ~~the authorized plan~~this authorization in 2022, all of which were repurchased during the first nine months of 2022, ~~and did not repurchase any shares under the authorized plan during the first nine months~~with an average price paid per share of ~~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.~~$65.51.

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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)	2022		2021		2023		2022
Commitments to extend credit	$	1,561,281	$	1,443,879	$	1,532,806	$	1,486,791
Standby letters of credit		51,635		42,684		58,552		57,347
Total	$	1,612,916	$	1,486,563	$	1,591,358	$	1,544,138

~~Table of Contents~~

The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings or other matters in which claims for monetary damages are asserted. As of September 30, ~~2022,~~2023, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of ~~litigation~~such pending or threatened matters against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such ~~legal proceedings.~~matters. 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~~such matters 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 not believed to be ~~between $0 and $1 million~~material in the aggregate. This ~~estimated range~~ is based on information currently available to the Company and involves elements of judgment and significant uncertainties. ~~Although~~While the Company does not believe that the outcome of pending or threatened litigation or other matters will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

On May 11, 2023, the FDIC issued a notice of proposed rulemaking that would implement a special assessment to recover the uninsured deposit losses from recent bank failures. The FDIC has proposed collecting the special assessment over eight quarterly assessment periods beginning in 2024 at an annual rate of approximately 12.5 basis points of uninsured deposits that exceeded $5 billion as of December 31, 2022. There is sufficient uncertainty around the final FDIC regulation that would impact both the timing and amount recognized in the consolidated financial statements. While the Company continues to assess the impact of the special assessment to the Company’s future operating results, if the final rule for the FDIC special assessment is enacted as proposed, the impact is not expected to be material to the Company’s consolidated financial statements.

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.

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


	September 30, 2022								September 30, 2023
							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	$	4,206,653	$	68,787	$	0	$	4,275,440	$	1,921,264	$	58,175	$	0	$	1,979,439
Obligations of state and political subdivisions		0		489,910		0		489,910		0		434,465		0		434,465
Government agency mortgage-backed securities		0		384,891		0		384,891		0		337,071		0		337,071
Corporate debt securities		0		7,033		0		7,033		0		7,174		0		7,174
Government agency collateralized mortgage obligations		0		13,415		0		13,415		0		9,487		0		9,487
Total available-for-sale investment securities		4,206,653		964,036		0		5,170,689		1,921,264		846,372		0		2,767,636
Equity securities		439		0		0		439		320		0		0		320
Mortgage loans held for sale										0		604		0		604
Commitments to originate real estate loans for sale		0		0		(32)		(32)		0		0		13		13
Forward sales commitments		0		15		0		15		0		10		0		10
Interest rate swap agreements asset		0		2		0		2
Interest rate swap agreements liability		0		(2)		0		(2)
Total	$	4,207,092	$	964,051	$	(32)	$	5,171,111	$	1,921,584	$	846,986	$	13	$	2,768,583

~~Table of Contents~~


	December 31, 2021								December 31, 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	$	3,900,924	$	97,640	$	0	$	3,998,564	$	3,178,189	$	65,348	$	0	$	3,243,537
Obligations of state and political subdivisions		0		430,289		0		430,289		0		504,297		0		504,297
Government agency mortgage-backed securities		0		477,056		0		477,056		0		384,633		0		384,633
Corporate debt securities		0		7,962		0		7,962		0		7,114		0		7,114
Government agency collateralized mortgage obligations		0		20,339		0		20,339		0		12,270		0		12,270
Total available-for-sale investment securities		3,900,924		1,033,286		0		4,934,210		3,178,189		973,662		0		4,151,851
Equity securities		463		0		0		463		419		0		0		419
Commitments to originate real estate loans for sale		0		0		51		51		0		0		5		5
Forward sales commitments		0		32		0		32		0		5		0		5
Interest rate swap agreements asset		0		296		0		296		0		1		0		1
Interest rate swap agreements liability		0		(3)		0		(3)		0		(1)		0		(1)
Total	$	3,901,387	$	1,033,611	$	51	$	4,935,049	$	3,178,608	$	973,667	$	5	$	4,152,280

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~~interest rate swap yield ~~curve,~~curves, 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.

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●

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 $0.6 million at September 30, 2023. There were no mortgage loans held for sale at December 31, 2022. Mortgage loans held for sale are included in other assets in the consolidated statements of condition. 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.

●

Interest rate ~~swaps~~swap agreements – 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, 2022								December 31, 2021								September 30, 2023								December 31, 2022
							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		Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Individually assessed loans	$	0	$	0	$	0	$	0	$	0	$	0	$	1,820	$	1,820	$	0	$	0	$	3,014	$	3,014	$	0	$	0	$	0	$	0
Other real estate owned		0		0		527		527		0		0		718		718		0		0		578		578		0		0		503		503
Mortgage servicing rights		0		0		1,844		1,844		0		0		810		810		0		0		309		309		0		0		1,169		1,169
Contingent consideration		0		0		(3,500)		(3,500)		0		0		(3,100)		(3,100)		0		0		(2,950)		(2,950)		0		0		(2,800)		(2,800)
Total	$	0	$	0	$	(1,129)	$	(1,129)	$	0	$	0	$	248	$	248	$	0	$	0	$	951	$	951	$	0	$	0	$	(1,128)	$	(1,128)

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Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for 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~~are classified as Level 3.

Other real estate owned (“OREO”) is valued at the time the loan is foreclosed upon and the asset is transferred to OREO. 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 ~~23.2%~~9.0% to ~~73.5%~~73.8% at September 30, ~~2022~~2023 and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. 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~~mortgage servicing rights class exceeds its estimated fair value. Impairment is recognized through a valuation allowance. There is a valuation allowance of approximately ~~$0.1~~$1.2 million and $0.7 million at September 30, ~~2022~~2023 and ~~there was no valuation allowance at~~ December 31, ~~2021.~~2022, respectively.

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 ~~the~~an asset or liability based on future cash flows over a discrete projection period, discounted to present value using an appropriate rate of return. The assumptions used in the valuation calculation are based on significant unobservable inputs, therefore such valuations ~~classify~~are classified as Level 3.

The contingent consideration related to the Fringe Benefits Design of Minnesota, Inc. (“FBD”) acquisition completed in 2021 was revalued at June 30, 2023. The range of the undiscounted amounts the Company could pay under the agreement remained at between zero and $2.7 million. Key assumptions include (1) a discount rate of 6.91% applied to present value the payment, and (2) probability of achievement of retained revenue level of 37.8%. Based on the results of the June 2023 revaluation, the Company recorded a reduction to the fair value of the contingent consideration of $0.1 million which is included in the consolidated statements of income as an acquisition-related contingent consideration adjustment. The adjusted fair value at June 30, 2023 was $1.0 million. No adjustments were made to the fair value of the contingent consideration related to the FBD acquisition during the three months ended September 30, 2023.

The contingent consideration related to the Thomas Gregory Associates Insurance Brokers, Inc. (“TGA”) acquisition completed by OneGroup in 2021 was revalued at June 30, 2023. The range of the undiscounted amounts the Company could pay under the agreement remained at between zero and $3.4 million. Key assumptions include (1) a discount rate range of 6.73% to 6.94% applied to present value the payment, and (2) probability of achievement of retained revenue level of 86.1%. Based on the results of the June 2023 revaluation, the Company recorded an increase to the fair value of the contingent consideration of $1.1 million which is included in the consolidated statements of income as an acquisition-related contingent consideration adjustment. The adjusted fair value at June 30, 2023 was $2.8 million. In the third quarter of 2023, the first of the two required payments were made on the contingent consideration in the amount of $2.4 million, based on actual retained revenue results. An additional $0.1 million adjustment was recorded to adjust the fair value of the remaining contingent consideration liability, resulting in a fair value of $0.5 million at September 30, 2023.

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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

Significant Unobservable

Fair Value at

Range

Fair Value at

Input Range

(000’s omitted, except per loan data)

September 30, 2022

Valuation Technique

Significant Unobservable Inputs

(Weighted Average)

September 30, 2023

Valuation Technique

Significant Unobservable Inputs

(Weighted Average)

Individually assessed loans

3,014

Fair value of collateral

Estimated cost of disposal/market adjustment

27.2

Other real estate owned

527

Fair value of collateral

Estimated cost of disposal/market adjustment

23.2% - 73.5% (39.9%)

578

Fair value of collateral

Estimated cost of disposal/market adjustment

9.0% – 73.8% (38.5%)

Commitments to originate real estate loans for sale

(32)

Discounted cash flow

Embedded servicing value

1.0

Discounted cash flow

Embedded servicing value

1.0

Mortgage servicing rights

1,844

Discounted cash flow

Weighted average constant prepayment rate

3.5% - 4.1% (3.6%)

309

Discounted cash flow

Weighted average constant prepayment rate

5.6% - 6.1% (5.6%)

Weighted average discount rate

4.6% - 4.8% (4.8%)

Weighted average discount rate

5.3% - 5.7% (5.7%)

Adequate compensation

7/loan

Adequate compensation

7/loan

Contingent consideration

(3,500)

Discounted cash flow

Discount rate

4.4% - 4.6% (4.5%)

(2,950)

Discounted cash flow

Discount rate

6.7% - 6.9% (6.9%)

Probability adjusted level of retained revenue

$3.3 million - $5.4 million

Probability of achievement

37.8% - 100.0% (70.9%)

Significant

Unobservable Input

Significant Unobservable

Fair Value at

Range

Fair Value at

Input Range

(000's omitted, except per loan data)

December 31, 2021

Valuation Technique

Significant Unobservable Inputs

(Weighted Average)

December 31, 2022

Valuation Technique

Significant Unobservable Inputs

(Weighted Average)

Individually assessed loans

1,820

Fair value of collateral

Estimated cost of disposal/market adjustment

9.0% - 43.1% (43.1%)

Other real estate owned

718

Fair value of collateral

Estimated cost of disposal/market adjustment

31.8% - 42.3% (33.3%)

503

Fair value of collateral

Estimated cost of disposal/market adjustment

9.0% - 72.8% (35.7%)

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

810

Discounted cash flow

Weighted average constant prepayment rate

6.4% - 15.2% (14.0%)

1,169

Discounted cash flow

Weighted average constant prepayment rate

2.9% - 3.3% (2.9%)

Weighted average discount rate

2.3% - 2.7% (2.6%)

Weighted average discount rate

4.6% - 4.9% (4.9%)

Adequate compensation

7/loan

Adequate compensation

7/loan

Contingent consideration

(3,100)

Discounted cash flow

Discount rate

1.4% - 1.7% (1.5%)

(2,800)

Discounted cash flow

Discount rate

5.9% - 6.2% (6.1%)

Probability adjusted level of retained revenue

$3.0 million - $5.8 million

Probability of achievement

44.9% - 53.5% (50.1%)

The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that, if changed, could result in higher or lower fair value measurements of these assets as of the reporting date. 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 OREOother real estate owned was calculated by dividing the total of the differences between the appraisal values of the real estate and the book values of the real estate divided by the totals of the appraisal values of the real estate. 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. The weighted average of the probability of achievement was determined by calculating the proportion of the probability-weighted payment of the total maximum payment, weighted by the amount of the payment as part of the total fair value of contingent consideration.

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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, ~~2022~~2023 and December 31, ~~2021~~2022 are ~~as follows:~~presented below. The table presented below excludes other financial instruments for which the carrying value approximates fair value including cash and cash equivalents, accrued interest receivable and accrued interest payable.


	September 30, 2022				December 31, 2021				September 30, 2023				December 31, 2022
	Carrying				Carrying				Carrying		Fair		Carrying		Fair
(000’s omitted)	Value		Fair Value		Value		Fair Value		Value		Value		Value		Value
Financial assets:
Net loans	$	8,483,244	$	8,192,522	$	7,323,770	$	7,523,024	$	9,385,121	$	8,836,726	$	8,748,335	$	8,696,185
Held-to-maturity securities										1,125,540		990,660		1,079,695		1,034,795
Financial liabilities:
Deposits		13,486,321		13,450,034		12,911,168		12,911,197		13,030,788		12,997,731		13,012,308		12,981,487
Overnight borrowings		119,800		119,800		0		0		0		0		768,400		768,400
Securities sold under agreement to repurchase, short-term		352,772		352,772		324,720		324,720		330,252		330,252		346,652		346,652
Other Federal Home Loan Bank borrowings		19,472		19,201		1,888		1,907		316,837		313,111		19,474		19,377
Subordinated notes payable		3,256		3,256		3,277		3,277		0		0		3,249		3,249

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.

Held-to-maturity U.S. Treasury and agency securities have been classified as a Level 1 valuation. The fair values of held-to-maturity U.S. Treasury and agency investment securities are based upon quoted prices, if available. If quoted prices are not available, fair values are measured using quoted market prices for similar securities or model-based valuation techniques. Held-to-maturity government agency mortgage-backed securities have been classified as a Level 2 valuation. The fair values of held-to-maturity government agency mortgage-backed securities are based on current market rates for similar products.

Deposits have been classified as a Level 2 valuation. 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 notes payable have been classified as a Level 2 valuation. The fair value of ~~short-term~~overnight 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~~other FHLB borrowings and subordinated notes payable 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~~subordinated notes payable, and their fair values, are not material as of the reporting dates.

Other financial assets and liabilities – ~~Cash~~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.

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NOTE 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 of Benefit Plans Administrative Services, LLC, BPAS Actuarial and Pension Services, LLC, BPAS Trust Company of Puerto Rico, ~~Fringe Benefits Design of Minnesota, Inc. (“FBD”),~~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.~~OneGroup. The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies (See Note A, Summary of Significant Accounting Policies of the most recent Form 10-K for the year ended December 31, ~~2021~~2022 filed with the SEC on March 1, ~~2022)~~2023).

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		Banking		Benefit Services		All Other		Eliminations		Total
Three Months Ended September 30, 2023
Net interest income											$	107,169	$	486	$	131	$	0	$	107,786
Provision for credit losses												2,878		0		0		0		2,878
Noninterest revenues												18,448		30,777		20,438		(2,077)		67,586
Amortization of intangible assets												1,004		1,596		976		0		3,576
Acquisition expenses												0		0		0		0		0
Acquisition-related contingent consideration adjustment												0		0		80		0		80
Other operating expenses												78,884		18,996		17,045		(2,077)		112,848
Income before income taxes											$	42,851	$	10,671	$	2,468	$	0	$	55,990
Assets											$	15,160,821	$	237,310	$	103,721	$	(115,530)	$	15,386,322
Goodwill											$	732,598	$	85,384	$	27,414	$	0	$	845,396
Core deposit intangibles & Other intangibles											$	10,110	$	28,258	$	17,570	$	0	$	55,938

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

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Employee





Consolidated
(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

$
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


			Employee						Consolidated
(000's omitted)	Banking		Benefit Services		All Other		Eliminations		Total
Nine Months Ended September 30, 2023
Net interest income	$	326,621	$	1,129	$	345	$	0	$	328,095
Provision for credit losses		7,130		0		0		0		7,130
Loss on sales of investment securities		(52,329)		0		0		0		(52,329)
Gain on debt extinguishment		242		0		0		0		242
Other noninterest revenues		54,397		90,416		60,764		(6,425)		199,152
Amortization of intangible assets		3,370		4,860		2,718		0		10,948
Acquisition expenses		16		0		40		0		56
Acquisition-related contingent consideration adjustment		0		(100)		1,180		0		1,080
Other operating expenses		232,647		56,709		48,579		(6,425)		331,510
Income before income taxes	$	85,768	$	30,076	$	8,592	$	0	$	124,436

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

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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, ~~2022~~2023 and ~~2021,~~2022, although in some circumstances the second and first quarters of ~~2022~~2023 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~~Company's Consolidated Financial Statements and related notes that appear on pages 3 through ~~32.~~34. 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 ~~2022,~~2023, “last year” and equivalent terms refer to calendar year ~~2021,~~2022, “third quarter” refers to the three months ended September 30, ~~2022,~~2023, “YTD” refers to the nine months ended September 30, ~~2022,~~2023, and earnings per share (“EPS”) figures refer to diluted EPS.

This MD&A contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption “Forward-Looking ~~Statements,”~~Statements” on page ~~53.~~57.

Critical Accounting Policies and Estimates

As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could meaningfully differ from these estimates. Management believes that the critical accounting estimates include the allowance for credit losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation, the carrying value of goodwill and other intangible assets and acquired loan valuations. A summary of the accounting policies used by management is disclosed in the MD&A on pages 31-33 and Note A, “Summary of Significant Accounting Policies” on pages ~~76-88~~76-87 of the most recent Form 10-K (fiscal year ended December 31, ~~2021)~~2022) filed with the Securities and Exchange Commission (“SEC”) on March 1, ~~2022.~~2023, and there have been no material changes. A summary of new accounting policies used by management is disclosed in Note C, ~~“Accounting~~“Significant Accounting Policies” beginning on ~~pages 12-13~~page 12 of this Form 10-Q.

Table of Contents

Supplemental Reporting of Non-GAAP Results of Operations

The Company also provides supplemental reporting of its results on an “operating,” “adjusted” ~~and~~or “tangible” basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), accretion on acquired non-purchased credit deteriorated (“PCD”) loans, acquisition expenses, acquisition-related contingent consideration ~~adjustments, litigation accrual expenses and the~~adjustment, acquisition-related provision for credit losses, unrealized ~~gain (loss)~~loss (gain) on equity ~~securities.~~securities, realized loss on investment securities and gain on debt extinguishment. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions. In addition, the Company provides supplemental reporting for “adjusted pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, acquisition-related contingent consideration ~~adjustments, litigation accrual expenses and the~~adjustment, unrealized ~~gain (loss)~~loss (gain) on equity securities, realized loss on investment securities and gain on debt extinguishment from income before income taxes. Although adjusted pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the ~~adoption~~impact of CECL, helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions. The Company also provides supplemental reporting of its net interest margin on a “fully tax-equivalent” basis, which includes an adjustment to net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable. Although fully tax-equivalent net interest margin is a non-GAAP measure, the Company’s management believes this information helps enhance comparability of the ~~Current Expected Credit Losses (“CECL”) model and the economic uncertainty caused by the COVID-19 pandemic. Earnings~~performance of assets that have different tax liabilities. Diluted earnings per share were ~~$0.90~~$0.82 in the third quarter of ~~2022, up $0.07,~~2023, down $0.08, or ~~8.4%~~8.9%, from the third quarter of ~~2021.~~2022. Diluted adjusted net earnings per share, a non-GAAP measure, were $0.86 in the third quarter of 2023, compared to $0.94 in the third quarter of 2022, ~~compared to $0.87 in the third quarter of 2021, a $0.07~~an $0.08 per share, or ~~8.0%~~8.5%, ~~increase.~~decrease. Adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, was ~~$1.25~~$1.10 per ~~weighted average diluted~~ share in the third quarter of ~~2022, up $0.21,~~2023, down $0.15, or ~~20.2%~~12.0%, from the third quarter of ~~2021.~~2022. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table ~~10.~~11.

~~Table of Contents~~

Executive Summary

The Company’s business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services, including benefits administration, insurance services and wealth management services, to retail, commercial, institutional and municipal customers. The Company’s banking subsidiary is Community Bank, N.A. (the “Bank” or “CBNA”). The Company’s Benefit Plans Administrative Services, Inc. (“BPAS”) subsidiary is a leading provider of employee benefits administration, trust services, collective investment fund administration, and actuarial consulting services to customers on a national scale. In addition, the Company offers comprehensive financial planning, ~~insurance~~trust administration and wealth management services through its Community Bank Wealth Management Group operating unit and insurance services through its OneGroup NY, Inc. (“OneGroup”) operating ~~units.~~unit.

The Company’s core operating objectives are: (i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies, certain selective de novo expansions and divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and ~~optimize~~mitigate interest rate ~~risk, yield~~ and liquidity risk and optimize net interest income generation, (iv) increase the noninterest component of total revenues through growth in existing banking, employee benefit, insurance and wealth management services business units, and the acquisition of additional financial services and banking businesses, and (v) utilize technology to deliver customer-responsive products and services and improve efficiencies.

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

On May 13, 2022, the Company completed its merger with Elmira Savings Bank (“Elmira”), a New York State chartered savings bank headquartered in Elmira, New York, for $82.2 million in cash. The merger enhanced the Company’s presence in five counties in New York’s Southern Tier and Finger Lakes regions. In connection with the merger, the Company added eight full-service offices to its branch service network and acquired approximately $579.0 million36

Table 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.Contents

Third quarter 2023 net income ~~increased~~decreased $4.6 million, or 9.4%, compared to ~~last year’s~~the third quarter ~~by $3.4 million, or 7.4%,~~of 2022, while YTD net income decreased $37.3 million, or 27.5% compared to the equivalent ~~2021 timeframe by $10.6 million, or 7.2%.~~2022 timeframe. Earnings per share of ~~$0.90~~$0.82 for the third quarter of ~~2022~~2023 was ~~$0.07 more~~$0.08 less than the third quarter of ~~2021, whereas~~ 2022, while 2023 YTD earnings per share of ~~$2.49~~$1.82 was ~~$0.19~~$0.67 lower than ~~2021~~2022 YTD earnings per share. The ~~increases~~decrease in net income and earnings per share between the ~~quarters were~~quarterly periods was due to ~~increases~~an increase in operating expenses and a decrease in net interest income, ~~and~~partially offset by an increase in noninterest revenues and ~~a decrease in fully-diluted average shares outstanding, offset, in part, by higher noninterest expenses and increases~~decreases in the provision for credit losses, income taxes and ~~income taxes.~~fully-diluted shares outstanding. The ~~decreases~~YTD decrease in net income and earnings per share ~~between~~was primarily the result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale investment securities during the first quarter of 2023 in connection with a balance sheet repositioning executed in order to reduce overnight borrowings and improve net interest income and margin. The sales were completed in January and February 2023 and preceded the negative developments in the banking industry that occurred in March 2023. The YTD ~~periods were due to~~decrease in net income and earnings per share was also reflective of increases in ~~noninterest~~operating 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, the provision for credit losses and fully-diluted shares outstanding.

Third quarter and YTD net income adjusted to exclude acquisition expenses, acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, ~~litigation accrual expenses~~gain on debt extinguishment, realized loss on sales of investment securities and the unrealized ~~gain (loss)~~loss on equity securities (“operating net income”), a non-GAAP measure, ~~increased $3.7~~decreased $4.8 million, or ~~8.1%~~9.8%, as compared to the third quarter of ~~2021~~2022 and decreased ~~$3.5~~$2.5 million, or ~~2.4%~~1.7%, compared to September YTD ~~2021.~~2022. Earnings per share adjusted to exclude acquisition expenses, acquisition-related contingent consideration ~~adjustments,~~adjustment, acquisition-related provision for credit losses, ~~litigation accrual expenses~~gain on debt extinguishment, realized loss on sales of investment securities and the unrealized ~~gain (loss)~~loss on equity securities (“operating earnings per share”), a non-GAAP measure, of ~~$0.90~~$0.82 for the third quarter ~~of 2022 increased $0.07~~decreased $0.08 compared to the third quarter of ~~2021.~~2022. Operating earnings per share of ~~$2.62~~$2.60 for the first nine months of ~~2022~~2023 decreased ~~$0.06~~$0.02 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 ~~10.~~11.

The Company’s deposit base and liquidity position continues to be strong, as the Company maintained total immediately available liquidity sources of $4.81 billion at the end of the third quarter of 2023, more than double its estimated uninsured deposits, net of collateralized and intercompany deposits. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of third quarter ending total deposits. The Company’s deposit base is well diversified across customer segments, which as of September 30, 2023 is comprised of approximately 61% consumer, 26% business and 13% municipal, and broadly dispersed with an average deposit balance per account under $20,000. Since the Federal Reserve began raising the federal funds rate on March 17, 2022 in an effort to combat inflation, the cycle-to-date deposit beta for the Company was 13% and the cycle-to-date total funding beta was 15%, reflective of a high proportion of non-interest bearing deposits, representing approximately 29% of total deposits, and the composition and stability of the customer base. In addition, more than 70% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the third quarter, and the Company does not currently utilize brokered or wholesale deposits.

Net interest margin increased seven basis points between the third quarter of 2022 and the third quarter of 2023 and increased 27 basis points on a YTD basis. Fully tax-equivalent net interest margin, a non-GAAP measure, also increased seven basis points between the third quarter of 2022 and the third quarter of 2023 and increased 28 basis points on a YTD basis. Loan balances increased on both an average and ending basis as compared to the prior year third quarter and YTD period, primarily reflective of continued strong organic loan growth along with the second quarter 2022 acquisition of Elmira Savings Bank (“Elmira”) which favorably impacted the average YTD balance growth. Deposit balances decreased on both an average and ending basis as compared to the third quarter of 2022 and YTD due in part to outflows driven by higher customer expenditure levels in the inflationary environment, as well as increased rate competition from other banks and non-depository financial institutions. However, deposit balances were up on an ending basis from the end of the prior quarter and the end of the prior year. The yield on average interest earning assets increased 76 basis points compared to the prior year third quarter and 81 basis points compared to the prior YTD period, as the yields on average loans, investments and interest-earning cash equivalents all improved. The yield on average loans for the third quarter increased 70 basis points compared to the third quarter of 2022 and 67 basis points between comparable YTD periods, driven by market-related increases in interest rates on new loans, a significant increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and a high level of new loan originations. The yield on average investments, including cash equivalents, increased 19 basis points compared to the prior year’s third quarter and 35 basis points on a YTD basis, which also benefitted from rising market interest rates and reflected the impact of the sale of certain available-for-sale investment securities during the first quarter of 2023 and the maturity of certain investment securities between the periods. The Company’s total cost of funds increased 72 basis points from last year’s third quarter and 55 basis points YTD, as the rate paid on interest-bearing deposits and the rate paid on borrowings both increased.

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Net income adjusted to exclude income taxes, provision for credit losses, acquisition expenses, 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 $67.9 million for the third quarter increased $11.4 million, or 20.1%, as compared to the third quarter of 2021. Adjusted pre-tax, pre-provision net revenue of $190.1 million for the first nine months of 2022 increased $16.3 million, or 9.4%, as compared to the first nine months of 2021. Earnings per share adjusted to exclude income taxes, provision for credit losses, acquisition expenses, 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 $1.25 for the third quarter of 2022 was $0.21 higher than the third quarter of 2021, and 2022 YTD adjusted pre-tax, pre-provision net revenue per share of $3.49 was $0.30 higher than the prior YTD period as the increases in revenues outpaced the increase in operating expenses between the periods. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 10.

Loans and deposits increased on both an ending and average basis as compared to the prior year third quarter, 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 generation and the second quarter 2022 acquisition of Elmira. The yield on average interest-earning assets increased 35 basis points compared to the prior year third quarter as the yields on average investments including cash equivalents and average loans both increased, while on a YTD basis the yield on average interest-earning 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 third quarter increased by seven basis points compared to the third quarter of 2021 and decreased 14 basis points on a YTD basis. The yield on average loans included a decline in PPP-related interest income between the 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 2022 remained consistent with the year earlier period, as the decrease in the Company’s deposit funding cost was offset by an increase in the rate on borrowings 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 have lower rates of interest than other types of wholesale borrowings.

The provision for credit losses of ~~$5.1~~$2.9 million for the third quarter and ~~$12.0~~$7.1 million for YTD ~~2022~~2023 were ~~up $6.0~~$2.2 million and ~~$23.0~~$4.9 million ~~from~~lower than the provision for credit losses for the comparable prior year periods, respectively. The third quarter and YTD 2023 provision for credit losses were reflective of a stabilizing economic outlook combined with an increase in loans outstanding while the third quarter and YTD 2022 provision for credit losses was reflective of a ~~weaker~~moderate deterioration in the economic ~~forecast and~~outlook, an 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 Elmira acquisition. ~~Comparatively,~~Asset quality remained strong during the third quarter of 2023. The nonperforming loan ratio of 0.39% at September 30, 2023 was only one basis point higher than the ratio at September 30, 2022 and three basis points above the ratio one quarter prior. The total delinquent loan ratio remained below historical averages at 0.90%, but increased slightly from 0.71% at the end of the third quarter of ~~2021, economic forecasts reflected a post-vaccine economic recovery~~2022 and ~~included~~0.83% at the ~~continuation~~end of ~~elevated real estate and vehicle collateral values, resulting in a release of reserves for~~ the ~~quarter and on a YTD basis.~~prior quarter. Net charge-offs ~~were $0.4~~continued to be well below long-term average levels at $1.2 million, or an annualized 0.05% of average loans, for the third quarter and ~~$1.3~~$3.5 million, or an annualized 0.05% of average loans, for the first nine months of ~~2022,~~2023, compared to net charge-offs of ~~$1.4~~$0.4 million, or an annualized 0.02% of average loans, for the prior year third quarter and ~~$1.1~~$1.3 million, or an annualized 0.02% of average loans, for the first nine months of ~~2021. Third~~2022.

Banking noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, were down $0.9 million, or 5.1%, as compared to the prior year’s third quarter ~~2022 nonperforming~~ and ~~delinquent loan ratios improved~~were down $1.1 million, or 2.1%, between the comparable YTD periods. The Company implemented certain deposit fee changes, including the elimination of nonsufficient and unavailable funds fees on personal accounts late in ~~comparison~~the fourth quarter of 2022. Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, were up $3.3 million, or 7.1%, as compared to the prior year’s third quarter and up $5.3 million, or 3.7%, compared to the prior YTD period. The increase in quarterly financial services business revenues reflected growth in all of the three business units while the YTD increase reflected increases in insurance services and employee benefit services revenues that were partially offset by a slight decline in wealth management services revenues.

Noninterest expenses increased $8.3 million, or 7.7%, between the third quarter of ~~2021 largely attributable~~2022 and the third quarter of 2023 and increased $25.2 million, or 7.9%, between September YTD 2022 and September YTD 2023. The YTD increase was primarily due to a $17.0 million, or 8.8%, increase in salaries and employee benefits driven by increases in merit and market-related employee wages, higher employee benefit-related expenses including higher medical expenses, and certain executive retirement-related expenses. The remaining net increase in other expense categories was due to various factors including general inflationary pressures, larger FDIC insurance expenses due in part to an increase in the base assessment rate effective on January 1, 2023, higher legal and professional fees associated with various matters, an increase in data processing and communications expenses due to the ~~upgrade~~Company’s continued investment in customer-facing and back office digital technologies and higher business development and marketing expenses due to the Company’s investment in digital marketing initiatives and higher levels of ~~several large business loans, primarily customers~~targeted advertisements intended to generate deposits. The Company has initiated a plan to optimize the retail customer service workforce which will temporarily reduce branch-related operating expenses, and reinvest in the ~~hospitality industry whose operations were negatively impacted during~~retail network through de novo branch expansion in new, more densely populated markets throughout the ~~height of~~Company’s geographic footprint.

On July 26, 2023, the ~~pandemic, from nonaccrual status~~SEC finalized rules requiring registrants to ~~accruing status during~~disclose material cybersecurity incidents that they experience on Form 8-K and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. Annual disclosures will be required in CBSI’s Annual Report on Form 10-K for the ~~fourth quarter of 2021 and first quarter of 2022~~.

year ended 2023. The Form 8-K disclosure requirements will become effective beginning on December 18, 2023.

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Net Income and Profitability

As shown in Table 1, net income for the third quarter and September YTD of ~~$48.7~~$44.1 million and ~~$135.6~~$98.2 million, respectively, ~~increased $3.4~~decreased $4.6 million, or ~~7.4%~~9.4%, as compared to the third quarter of ~~2021~~2022 and decreased ~~$10.6~~$37.3 million, or ~~7.2%~~27.5%, compared to September YTD ~~2021.~~2022. Earnings per share of ~~$0.90~~$0.82 for the third quarter was ~~$0.07 higher~~$0.08 lower than the third quarter of ~~2021,~~2022, while earnings per share for the first nine months of ~~2022~~2023 of ~~$2.49~~$1.82 was ~~$0.19~~$0.67 lower than the first nine months of ~~2021.~~2022. The ~~increases~~decrease in net income and earnings per share ~~between~~for the ~~quarters were due to increases~~quarter was reflective of an increase in operating expenses and a decrease in net interest income, ~~and~~partially offset by an increase in noninterest revenues and ~~a decrease in fully-diluted average shares outstanding, partially offset by higher noninterest expenses and increases~~decreases in the provision for credit losses, income taxes and ~~income taxes.~~fully-diluted shares outstanding. The ~~decreases~~decrease in net income and earnings per share ~~between~~for the YTD ~~periods were~~period as compared to the prior year was the result of a decrease in noninterest revenues, primarily due to ~~increases~~the impact of a $52.3 million pre-tax realized loss on sales of investment securities in ~~noninterest~~the first quarter of 2023 as part of a balance sheet repositioning, as well as an increase in operating expenses, partially offset by an increase in net interest income and decreases in the provision for credit losses, ~~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. Operating net income, a non-GAAP measure, of ~~$49.0~~$44.2 million and ~~$142.6~~$140.2 million for the third quarter and September YTD, respectively, ~~increased $3.7~~decreased $4.8 million, or ~~8.1%~~9.8%, as compared to the third quarter of ~~2021~~2022 and decreased ~~$3.5~~$2.5 million, or ~~2.4%~~1.7%, compared to September YTD ~~2021.~~2022. Operating earnings per share, a non-GAAP measure, of ~~$0.90~~$0.82 for the third quarter was ~~up $0.07~~down $0.08 compared to the third quarter of ~~2021,~~2022, while operating earnings per share of ~~$2.62~~$2.60 for the first nine months of ~~2022~~2023 was down ~~$0.06~~$0.02 compared to the first nine months of 2021. 2021 results were enhanced by a net benefit recorded in the provision for credit losses and higher 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.2022. See Table 1011 for Reconciliation of GAAP to Non-GAAP Measures.

As reflected in Table 1, third quarter net interest income of ~~$110.4~~$107.8 million was ~~up $17.8~~down $2.6 million, or ~~19.2%~~2.4%, from the comparable prior year period. The quarterly decrease resulted from a decrease in interest-earning asset balances and an increase in the rate paid on interest-bearing liabilities, partially offset by an increase in the yield on interest-earning assets and a decrease in interest-bearing liability balances. Net interest income for the first nine months of ~~2022~~2023 increased ~~$29.7~~$19.7 million, or ~~10.7%~~6.4%, versus the first nine months of ~~2021.~~2022. The ~~quarterly and~~ year-over-year ~~improvements~~improvement resulted from an increase in the yield on ~~interest-earning assets and an increase in~~average interest-earning asset balances, partially offset by ~~an increase~~a decrease in average interest-earning asset balances and increases in the cost and average ~~rate paid on~~balance of interest-bearing ~~liabilities and an increase in interest-bearing liability balances.~~liabilities.

The provision for credit losses for the third quarter of $2.9 million and September YTD ~~increased $6.0~~of $7.1 million decreased $2.2 million and ~~$23.0~~$4.9 million as compared to the third quarter and first nine months of ~~2021,~~2022, respectively. The third quarter and YTD ~~2022~~2023 provision for credit losses was reflective of a ~~weaker~~stable economic ~~forecast and an increase in loans outstanding, partially offset by~~outlook, continued low levels of net charge-offs, delinquent loans and nonperforming ~~loans.~~loans and an increase in loans outstanding. The ~~second quarter~~YTD 2022 provision for credit losses included $3.9 million of acquisition-related provision for credit losses due to the Elmira acquisition.

Third quarter and year-to-date noninterest revenues were ~~$65.2~~$67.6 million and ~~$195.0~~$147.1 million, respectively, up ~~$0.9~~$2.3 million, or ~~1.5%~~3.6%, from the third quarter of ~~2021~~2022 and ~~up $12.7~~down $48.0 million, or ~~7.0%~~24.6%, from the first nine months of ~~2021.~~2022. The increase compared to the prior year’s third quarter was a result of increases in ~~insurance services revenue, deposit service charges and fees, debit interchange and ATM fees and unrealized gains and losses on equity securities, partially offset by decreases in~~ employee benefit services revenue, insurance services revenue, other banking revenues, 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, employee benefit services revenue~~revenues and debit interchange and ATM fees, partially offset by decreases in deposit service charges and fees, mortgage banking ~~revenue,~~revenues and a larger unrealized loss on equity securities. The YTD decrease was primarily due to the incurrence of the previously mentioned $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities associated with the Company’s first quarter 2023 balance sheet repositioning, as well as decreases in deposit service charges and fees, debit interchange and ATM fees, wealth management services ~~revenue,~~revenues, mortgage banking revenues and unrealized loss on equity securities, partially offset by increases in insurance services revenues, employee benefit services revenues and other banking ~~revenue~~revenues and ~~unrealized gains and losses~~a realization of a gain on ~~equity securities.~~debt extinguishment.

Noninterest expenses of ~~$108.2~~$116.5 million and ~~$318.4~~$343.6 million for the third quarter and September YTD periods, respectively, reflected an increase of ~~$7.8~~$8.3 million, or 7.7%, from the third quarter of ~~2021~~2022 and an increase of ~~$31.2~~$25.2 million, or ~~10.9%~~7.9%, from the first nine months of ~~2021.~~2022. The increase in noninterest expenses for the ~~quarter was~~quarterly and YTD periods were due to increases in salaries and benefits, ~~business development and marketing~~other 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 a decrease in legal and 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, partially offset by decreases in acquisition-related expenses and amortization of intangible ~~assets,~~assets. Excluding acquisition-related ~~contingent consideration adjustments, occupancy and equipment~~ expenses ~~and the absence~~comprised of ~~a negative litigation accrual expense adjustment. Excluding acquisition expenses, acquisition-related~~ contingent consideration adjustments and ~~litigation accrual~~integration-related expenses, ~~2022~~2023 operating expenses were ~~$7.3~~$8.6 million, or ~~7.3%~~8.0%, higher for the third quarter and ~~$26.2~~$29.1 million, or ~~9.1%~~9.3%, higher for the year-to-date ~~timeframe, in part due~~timeframe.

The effective income tax rates were 21.2% and 21.1% for third quarter and YTD 2023, respectively, as compared to 22.0% and 21.6% for the ~~acquisition of Elmira Savings Bank~~comparable prior year periods. The decline in the ~~second~~quarterly and YTD effective income tax rates were primarily attributable to a decrease in the full-year 2023 pre-tax income projection as a result of the loss on investment security sales recognized in the first quarter of ~~2022 and financial services acquisitions.~~

2023.

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The effective income tax rates were 22.0% and 21.6% for the third quarter and YTD 2022, respectively, as compared to 21.1% and 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 adjusted to exclude stock-based compensation tax benefits for both YTD periods were 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)	2022		2021		2022		2021		2023		2022		2023		2022
Net interest income	$	110,394	$	92,611	$	308,407	$	278,670	$	107,786	$	110,394	$	328,095	$	308,407
Provision for credit losses		5,061		(944)		12,005		(11,001)		2,878		5,061		7,130		12,005
Noninterest revenues		65,249		64,309		195,019		182,300
Loss on sales of investment securities										0		0		(52,329)		0
Noninterest revenues excluding loss on sales of investment securities										67,586		65,249		199,394		195,019
Noninterest expenses		108,185		100,436		318,416		287,225		116,504		108,185		343,594		318,416
Income before income taxes		62,397		57,428		173,005		184,746		55,990		62,397		124,436		173,005
Income taxes		13,706		12,092		37,454		38,616		11,861		13,706		26,218		37,454
Net income	$	48,691	$	45,336	$	135,551	$	146,130	$	44,129	$	48,691	$	98,218	$	135,551

Diluted weighted average common shares outstanding		54,290		54,541		54,396		54,516		53,798		54,290		53,988		54,396
Diluted earnings per share	$	0.90	$	0.83	$	2.49	$	2.68	$	0.82	$	0.90	$	1.82	$	2.49

Net Interest Income

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

As shown in Table 2a, net interest income (with nontaxable income converted to a fully tax-equivalent ~~basis)~~basis, a non-GAAP measure) for the third quarter was ~~$111.5~~$108.8 million, ~~an increase~~a decrease of ~~$18.1~~$2.7 million, or ~~19.4%~~2.4%, compared to the same period last year. This was driven by a 35100 basis point increase in the rate paid on average ~~yield on interest-earnings assets~~interest-bearing liabilities and a ~~$1.08 billion increase~~$666.2 million decrease in average interest-earning assets, partially offset by a ~~nine~~76 basis point increase in the yield on average ~~rate paid on interest-bearing liabilities~~interest-earnings assets and a ~~$724.5~~$42.6 million ~~increase~~decrease in average interest-bearing liabilities in comparison to the third quarter of ~~2021.~~2022. As reflected in Table 3 for the quarter, net interest income was ~~favorably~~unfavorably impacted by ~~$12.5~~$24.3 million due to the increase in the rate paid on average ~~yield on interest-earning assets~~interest-bearing liabilities and ~~$8.1~~$5.5 million due to the volume ~~increase~~decrease in interest-earning assets, partially offset by the ~~unfavorable impacts~~favorable impact on net interest income of ~~$2.2 million due to an increase in the average rate paid on interest-bearing liabilities and $0.3~~$27.1 million due to the ~~volume~~ increase in ~~interest-bearing liabilities.~~the yield on average interest-earning assets. September YTD net interest income (with nontaxable income converted to a fully tax-equivalent basis), as reflected in Table 2b, of ~~$311.4~~$331.3 million, increased ~~$30.1~~$19.9 million, or ~~10.7%~~6.4%, from the year-earlier period. The September YTD increase resulted from an 81 basis point increase in the yield on average interest-earning assets, partially offset by a ~~$1.24 billion~~$58.4 million increase in average interest-bearing liabilities, a $412.0 million decrease in average interest-earning assets and a ~~four basis point increase in the average yield on interest-earning assets, partially offset by an $825.3 million increase in average interest-bearing liabilities and a one~~77 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~~ increase in the ~~average~~ yield on average interest-earning assets had a favorable ~~impacts~~impact on net interest income of ~~$27.6~~$85.0 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 having~~ unfavorable impacts on net interest income of ~~$0.9~~$9.4 million due to the volume decrease in average interest-earning assets, $55.6 million due to the increase in the rate paid on average interest-bearing liabilities and ~~$0.4~~$0.1 million ~~respectively.~~due to the increase in average interest-bearing liabilities.

~~The~~

Net interest margin of 3.07% and fully tax-equivalent net interest margin (non-GAAP) of ~~3.03%~~3.10% for the third quarter of ~~2022 was 29~~2023 were both seven basis points higher as compared to the third quarter of ~~2021.~~2022. The increase was the result of a 3576 basis point increase in the interest-earning asset yield and the decreases in average interest-earning asset balances and overnight borrowings driven by the sales and maturities of certain available-for-sale investment securities between the periods, partially offset by a ~~nine~~100 basis point increase in the rate paid on average interest-bearing liabilities. ~~The net~~Net interest margin of ~~2.88%~~3.13% for the first nine months of ~~2022~~2023 was ~~three~~27 basis points higher than the comparable period of ~~2021.~~2022 while the fully tax-equivalent net interest margin (non-GAAP) of 3.16% for the first nine months of 2023 was 28 basis points higher than the comparable period of 2022. The yield on interest-earning assets increased ~~four~~81 basis points, while the rate on interest-bearing liabilities increased by ~~one~~77 basis ~~point~~points for the first nine months of ~~2022~~2023 as compared to the prior year period. The decline in noninterest and low-rate checking deposit balances also had an adverse impact on the net interest margin and fully tax-equivalent net interest margin (non-GAAP) for both periods.

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The 3576 basis point increase in the ~~average~~ yield on average interest-earning assets for the quarter was the result of increases in both the ~~average~~ yield on ~~investments and cash equivalents~~average loans and the ~~average~~ yield on ~~loans. For~~average investments, including cash equivalents. The yield on average loans for the third quarter increased by 70 basis points compared to the ~~average~~third quarter of 2022. The third quarter of 2023 yield on average investments, including cash equivalents, increased ~~50 basis points and the average yield on loans increased by seven~~19 basis points compared to the prior year. The ~~four~~81 basis point increase in the yield on interest-earning assets for the first nine months of ~~2022~~2023 was the result of a 3367 basis point increase in the ~~average~~ yield on average loans and a 35 basis point increase in the yield on average investments, including cash equivalents, ~~partially offset by a 14 basis point decrease in the average yield on loans as~~ compared to the prior ~~year.~~YTD period. The ~~changes~~increase in ~~the~~ loan yields ~~included declines~~were reflective of market-related increases in ~~PPP-related~~ interest ~~income between~~rates on new loans, a significant increase in variable and adjustable rate loan yields driven by rising market interest rates, including the ~~periods. During~~prime rate and a high level of new loan originations. The increase in investment yields were driven by market interest rate increases and the ~~third quarter~~sales and maturities 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~~certain available-for-sale investment securities 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.~~ 2023.

The increase in investment yields were primarily driven by the Company meaningfully shifting the composition of earning assets away from cash equivalents that were earning a low yield at the time to higher yielding investment securities between the periods.

~~The~~rate paid on average ~~rate on~~ interest-bearing liabilities increased by ~~nine~~100 basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits increased ~~four~~92 basis points and the average rate paid on external borrowings increased 95200 basis points from the comparable prior ~~year~~ period. For the first nine months of ~~2022,~~2023, the ~~average~~ rate paid on average interest-bearing liabilities increased by ~~one~~77 basis ~~point~~points from the comparable prior year period as the ~~average~~ rate paid on average interest-bearing deposits ~~decreased one~~increased 67 basis ~~point, while~~points and the ~~average~~ rate paid on average external borrowings increased 27212 basis points. The ~~changes in the~~rate paid on average interest-bearing deposits increased as interest rates ~~paid~~ on certain interest-bearing deposits were ~~driven by increases~~raised in response to market conditions. The increase in the ~~interest rates paid on interest checking and money market deposits, while the interest rate paid on time deposits decreased. The increases in the average~~ cost of average borrowings ~~were~~was primarily the result of the greater utilization of comparatively higher rate overnight and term borrowings to fund loan growth, as well as the increase in the rates paid on customer repurchase agreements in response to market conditions.

The Company expects deposit costs to continue to increase to reflect the rapid changes in market interest rates that have occurred over the past year and that the cycle-to-date deposit beta will increase over current levels. The expected increase in deposit beta is reflective of the Company’s strategy to maintain a strong core deposit base and continue to provide competitive offerings to customers, as well as heightened competition for deposit funding in the higher rate environment. The Company has been and will be proactive in managing customer relationships with depositors, particularly large balance consumer, commercial and municipal customers, as a key component of this strategy. In addition, the Company ~~entering into an overnight borrowing position during~~expects funding costs to increase due to higher deposit costs, in part due to the ~~second quarter of 2022.~~continued migration from noninterest and low rate products to higher rate products, and potentially a greater reliance on comparatively high cost wholesale borrowings.

The third quarter and YTD average balance of investments, including cash equivalents, ~~increased $16.0 million~~decreased $1.64 billion and ~~$742.7 million,~~$1.68 billion, respectively, as compared to the corresponding prior year ~~periods.~~periods, primarily due to declines in the investment securities portfolio driven by scheduled maturities and the sales of certain available-for-sale investment securities in connection with the Company’s first quarter balance sheet repositioning. Investment security sales, maturities, calls and principal payments outpaced purchases during the third quarter ~~while investment security purchases outpaced maturities, calls~~ and ~~principal payments during the~~ YTD ~~period.~~periods. The cash equivalents component of average earning assets increased $27.5 million and decreased ~~$2.05 billion and $1.47 billion~~$436.5 million for the third quarter and YTD periods, respectively, compared to the prior year periods. The ~~decrease~~YTD decline in average cash equivalents was ~~primarily~~ due in part to the ~~Company meaningfully shifting the composition~~funding of ~~earning assets away from cash equivalents that at the time were earning a low yield to higher yielding investment securities and loans.~~strong organic loan growth. Average loan balances increased ~~$1.06 billion~~$970.3 million for the quarter and ~~$496.7 million~~$1.27 billion YTD as compared to the prior year, ~~driven by~~due to high levels of organic growth and ~~acquired growth during both periods, including~~the impact of the Elmira acquisition in May 2022, despite declines in average PPP loan balances. The change in average loan balances for the quarter and YTD periods included a $215.4 million and $300.1 million decrease in average PPP loans, respectively.acquisition.

Average interest-bearing deposits ~~increased $479.9~~decreased $180.4 million compared to the prior year quarter and ~~$733.7~~$190.8 million compared to the prior YTD period. The quarterly ~~increase~~and YTD decreases in average interest-bearing deposits ~~was~~were due to ~~increases~~decreases in ~~all deposit categories, due primarily to large inflows of government stimulus-related deposit funding~~interest checking, money market and ~~the Elmira acquisition in May 2022. The YTD~~savings deposits, partially offset by an increase in ~~average interest-bearing deposits was~~time deposits. The decrease in deposit balances were due in part to ~~increases~~outflows driven by higher customer expenditure levels in ~~savings, interest checking and money market deposits, while time deposits declined.~~the inflationary environment. The average borrowing balance, including borrowings at the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), ~~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), increased ~~$244.5~~$137.9 million and ~~$91.5~~$249.2 million for the quarter and YTD periods respectively. The ~~increases~~increase in average borrowings from the prior year quarter and YTD periods ~~were~~was primarily due to ~~increases~~an increase in overnight and term borrowings to meet the Company’s funding needs, including $300.0 million of term FHLB borrowings secured during the third quarter of 2023 at a weighted average ~~overnight borrowings and customer repurchase agreements.~~rate of 4.69%.

Table of Contents

Tables 2a and 2b below ~~set~~sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent basis (“FTE”) using a marginal income tax rate of ~~24.1% and~~ 24.2% in ~~2022~~2023 and ~~2021, respectively.~~24.1% in 2022. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment, late and other fees and the accretion of acquired loan marks. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

~~Table of Contents~~

Table 2a: Quarterly Average Balance Sheet


	Three Months Ended						Three Months Ended						Three Months Ended						Three Months Ended
	September 30, 2022						September 30, 2021						September 30, 2023						September 30, 2022
					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		Balance		Interest		Paid		Balance		Interest		Paid
Interest-earning assets:
Cash equivalents	$	25,730	$	114	1.76	%	$	2,077,996	$	794	0.15	%	$	53,279	$	669	4.97	%	$	25,730	$	114	1.76	%
Taxable investment securities ⁽¹⁾		5,701,691		23,623	1.64	%		3,800,978		16,567	1.73	%		4,080,835		18,301	1.78	%		5,701,691		23,623	1.64	%
Nontaxable investment securities ⁽¹⁾		551,610		4,681	3.37	%		384,053		3,137	3.24	%		508,356		4,325	3.38	%		551,610		4,681	3.37	%
Loans (net of unearned discount) ⁽²⁾		8,333,148		88,575	4.22	%		7,268,659		75,973	4.15	%		9,303,479		115,295	4.92	%		8,333,148		88,575	4.22	%
Total interest-earning assets		14,612,179		116,993	3.18	%		13,531,686		96,471	2.83	%		13,945,949		138,590	3.94	%		14,612,179		116,993	3.18	%
Noninterest-earning assets		941,117						1,495,792						1,177,277						941,117
Total assets	$	15,553,296					$	15,027,478					$	15,123,226					$	15,553,296

Interest-bearing liabilities:
Interest checking, savings, and money market deposits	$	8,179,556		2,206	0.11	%	$	7,701,717		792	0.04	%	$	7,584,361		14,899	0.78	%	$	8,179,556		2,206	0.11	%
Time deposits		962,777		1,649	0.68	%		960,670		2,030	0.84	%		1,377,534		9,656	2.78	%		962,777		1,649	0.68	%
Customer repurchase agreements		269,958		216	0.32	%		230,906		177	0.30	%		269,309		823	1.21	%		269,958		216	0.32	%
Overnight borrowings		188,975		1,226	2.57	%		0		0	0.00	%		163,800		2,265	5.48	%		188,975		1,226	2.57	%
FHLB borrowings		19,463		146	2.97	%		2,920		18	2.45	%		186,401		2,127	4.53	%		19,463		146	2.97	%
Subordinated notes payable		3,261		38	4.63	%		3,288		38	4.63	%		0		0	0.00	%		3,261		38	4.63	%
Total interest-bearing liabilities		9,623,990		5,481	0.23	%		8,899,501		3,055	0.14	%		9,581,405		29,770	1.23	%		9,623,990		5,481	0.23	%
Noninterest-bearing liabilities:
Noninterest checking deposits		4,192,615						3,841,646						3,810,542						4,192,615
Other liabilities		56,166						182,167						125,481						56,166
Shareholders’ equity		1,680,525						2,104,164						1,605,798						1,680,525
Total liabilities and shareholders’ equity	$	15,553,296					$	15,027,478					$	15,123,226					$	15,553,296

Net interest earnings			$	111,512					$	93,416					$	108,820					$	111,512

Net interest spread					2.95	%					2.69	%					2.71	%					2.95	%
Net interest margin on interest-earning assets					3.03	%					2.74	%					3.07	%					3.00	%
Net interest margin on interest-earning assets (FTE) (non-GAAP)																	3.10	%					3.03	%

Fully tax-equivalent adjustment ⁽³⁾			$	1,118					$	805					$	1,034					$	1,118

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

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

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

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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, 2022						September 30, 2021						September 30, 2023						September 30, 2022
					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	$	473,112	$	1,306	0.37	%	$	1,941,329	$	1,772	0.12	%	$	36,609	$	1,211	4.42	%	$	473,112	$	1,306	0.37	%
Taxable investment securities ⁽¹⁾		5,655,745		69,921	1.65	%		3,531,272		47,553	1.80	%		4,382,445		60,507	1.85	%		5,655,745		69,921	1.65	%
Nontaxable investment securities ⁽¹⁾		493,302		12,153	3.29	%		406,835		10,018	3.29	%		522,002		13,288	3.40	%		493,302		12,153	3.29	%
Loans (net of unearned discount) ⁽²⁾		7,819,306		239,322	4.09	%		7,322,581		231,920	4.23	%		9,088,402		323,261	4.76	%		7,819,306		239,322	4.09	%
Total interest-earning assets		14,441,465		322,702	2.99	%		13,202,017		291,263	2.95	%		14,029,458		398,267	3.80	%		14,441,465		322,702	2.99	%
Noninterest-earning assets		1,092,450						1,436,252						1,183,013						1,092,450
Total assets	$	15,533,915					$	14,638,269					$	15,212,471					$	15,533,915

Interest-bearing liabilities:
Interest checking, savings, and money market deposits	$	8,230,007		4,037	0.07	%	$	7,474,811		2,309	0.04	%	$	7,804,824		33,945	0.58	%	$	8,230,007		4,037	0.07	%
Time deposits		941,094		5,074	0.72	%		962,559		6,588	0.92	%		1,175,526		19,486	2.22	%		941,094		5,074	0.72	%
Customer repurchase agreements		292,411		642	0.29	%		250,638		641	0.34	%		302,270		1,947	0.86	%		292,411		642	0.29	%
Overnight borrowings		64,204		1,233	2.57	%		0		0	0.00	%		242,226		9,157	5.05	%		64,204		1,233	2.57	%
FHLB borrowings		10,890		238	2.93	%		4,634		75	2.15	%		74,415		2,394	4.30	%		10,890		238	2.93	%
Subordinated notes payable		3,268		115	4.69	%		3,294		115	4.69	%		1,023		38	4.96	%		3,268		115	4.69	%
Subordinated debt held by unconsolidated subsidiary trusts		0		0	0.00	%		20,675		293	1.89	%
Total interest-bearing liabilities		9,541,874		11,339	0.16	%		8,716,611		10,021	0.15	%		9,600,284		66,967	0.93	%		9,541,874		11,339	0.16	%
Noninterest-bearing liabilities:
Noninterest checking deposits		4,075,005						3,685,556						3,895,939						4,075,005
Other liabilities		96,763						178,402						110,973						96,763
Shareholders’ equity		1,820,273						2,057,700
Shareholders' equity														1,605,275						1,820,273
Total liabilities and shareholders’ equity	$	15,533,915					$	14,638,269					$	15,212,471					$	15,533,915

Net interest earnings			$	311,363					$	281,242					$	331,300					$	311,363

Net interest spread					2.83	%					2.80	%					2.87	%					2.83	%
Net interest margin on interest-earning assets					2.88	%					2.85	%					3.13	%					2.86	%
Net interest margin on interest-earning assets (FTE) (non-GAAP)																	3.16	%					2.88	%

Fully tax-equivalent adjustment ⁽³⁾			$	2,956					$	2,572					$	3,205					$	2,956

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

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

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

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

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Table 3: Rate/Volume


	Three months ended September 30, 2022							Nine months ended September 30, 2022					Three months ended September 30, 2023							Nine months ended September 30, 2023
	versus September 30, 2021							versus September 30, 2021					versus September 30, 2022							versus September 30, 2022
	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⁾
(000’s omitted)	Volume		Rate		Net Change		Volume		Rate		Net Change		Volume		Rate		Net Change		Volume		Rate		Net Change
Interest earned on:
Cash equivalents	$	(1,493)	$	813	$	(680)	$	(2,078)	$	1,612	$	(466)	$	205	$	350	$	555	$	(2,231)	$	2,136	$	(95)
Taxable investment securities		7,912		(856)		7,056		26,545		(4,177)		22,368		(7,144)		1,822		(5,322)		(16,952)		7,538		(9,414)
Nontaxable investment securities		1,417		127		1,544		2,130		5		2,135		(369)		13		(356)		722		413		1,135
Loans		11,295		1,307		12,602		15,378		(7,976)		7,402		11,020		15,700		26,720		41,993		41,946		83,939
Total interest-earning assets ⁽²⁾		8,076		12,446		20,522		27,652		3,787		31,439		(5,538)		27,135		21,597		(9,444)		85,009		75,565

Interest paid on:
Interest checking, savings and money market deposits		52		1,362		1,414		253		1,475		1,728		(173)		12,866		12,693		(220)		30,128		29,908
Time deposits		4		(385)		(381)		(144)		(1,370)		(1,514)		980		7,027		8,007		1,545		12,867		14,412
Customer repurchase agreements		31		8		39		98		(97)		1		(1)		608		607		23		1,282		1,305
Overnight borrowings		1,226		0		1,226		1,233		0		1,233		(182)		1,221		1,039		5,873		2,051		7,924
FHLB borrowings		123		5		128		129		34		163		1,868		113		1,981		1,995		161		2,156
Subordinated debt held by unconsolidated subsidiary trusts		0		0		0		(293)		0		(293)
Subordinated notes payable														(38)		0		(38)		(84)		7		(77)
Total interest-bearing liabilities ⁽²⁾		255		2,171		2,426		922		396		1,318		(25)		24,314		24,289		71		55,557		55,628

Net interest earnings ⁽²⁾	$	7,798	$	10,298	$	18,096	$	26,686	$	3,435	$	30,121	$	(5,160)	$	2,468	$	(2,692)	$	(9,078)	$	29,015	$	19,937

(1)	The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of such change in each component.

(2)	Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components.

Noninterest Revenues

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

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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)	2022			2021			2022			2021			2023			2022			2023			2022
Employee benefit services	$	27,884		$	29,923		$	86,385		$	83,933		$	29,997		$	27,884		$	87,946		$	86,385
Insurance services		11,332			9,176			31,521			25,538			12,113			11,332			35,495			31,521
Wealth management services		7,502			8,322			24,276			24,748			7,934			7,502			24,037			24,276
Deposit service charges and fees		10,755			8,816			29,715			24,305			9,275			10,755			27,525			29,715
Debit interchange and ATM fees		6,697			6,626			20,030			19,453			6,732			6,697			19,314			20,030
Mortgage banking		171			460			595			1,479			113			171			399			595
Other banking revenues		912			996			2,521			2,830			1,471			912			4,535			2,521
Subtotal		65,253			64,319			195,043			182,286			67,635			65,253			199,251			195,043
Unrealized (loss) gain on equity securities		(4)			(10)			(24)			14
Loss on sales of investment securities														0			0			(52,329)			0
Gain on debt extinguishment														0			0			242			0
Unrealized loss on equity securities														(49)			(4)			(99)			(24)
Total noninterest revenues	$	65,249		$	64,309		$	195,019		$	182,300		$	67,586		$	65,249		$	147,065		$	195,019

Noninterest revenues/operating revenues (FTE basis) ⁽¹⁾		37.2	%		41.0	%		38.8	%		39.6	%
Noninterest revenues/total revenues														38.5	%		37.1	%		31.0	%		38.7	%
Noninterest revenues/operating revenues (FTE basis, non-GAAP) ⁽¹⁾														38.5	%		37.2	%		37.8	%		38.8	%

(1)

For purposes of this ratio noninterest revenues excludes loss on sales of investment securities, gain on debt extinguishment and unrealized ~~gains and losses~~loss on equity securities. Operating revenues, a non-GAAP measure, is defined as net interest income on a FTE basis excluding acquired non-PCD loan accretion plus noninterest revenues, excluding loss on sales of investment securities, gain on debt extinguishment and unrealized ~~gains and losses~~loss on equity securities. See Table 1011 for Reconciliation of GAAP to Non-GAAP Measures.

As displayed in Table 4, noninterest revenues ~~excluding unrealized gain (loss) on equity securities,~~ were ~~$65.3~~$67.6 million for the third quarter of ~~2022~~2023 and ~~$195.0~~$147.1 million for the first nine months of ~~2022.~~2023. This represents an increase of ~~$0.9~~$2.3 million, or ~~1.5%~~3.6%, for the quarter and ~~an increase~~a decrease of ~~$12.8~~$48.0 million, or ~~7.0%~~24.6%, for the YTD period in comparison to the equivalent ~~2021~~2022 periods. The increase for the quarterly period was driven by increases in ~~insurance~~employee benefit services revenue, ~~and banking noninterest revenue, partially offset by declines in employee benefit~~insurance services revenue and wealth management services revenue, partially offset by a decrease in banking noninterest revenue. The ~~increase for~~YTD decrease was primarily a result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities in connection with a strategic balance sheet repositioning executed during the first quarter of 2023 to provide the Company with greater flexibility in managing balance sheet growth and deposit funding. Excluding the realized loss on sale of investment securities, unrealized loss on equity securities and gain on debt extinguishment recognized in the first quarter of 2023, noninterest revenues were up $4.2 million, or 2.2%, between September YTD ~~period~~2023 and September YTD 2022 which was ~~due to~~driven by increases in insurance services ~~revenue, banking noninterest~~ revenue and employee benefit services revenue, partially offset by ~~a decline~~decreases in banking noninterest revenue and wealth management services revenue.

Banking noninterest revenue of ~~$18.5~~$17.6 million for the third quarter and ~~$52.9~~$51.8 million for the first nine months of ~~2022 increased $1.6~~2023 decreased $0.9 million, or ~~9.7%~~5.1%, and ~~increased $4.8~~decreased $1.1 million, or ~~10.0%~~2.1%, respectively, as compared to the corresponding prior year periods. The quarterly ~~and YTD increases were~~decrease was driven by ~~increases~~decreases in deposit service charges and fees and mortgage banking revenues, partially offset by increases in other banking revenues and debit interchange and ATM fees. The YTD decrease was driven by decreases in deposit service charges and fees, debit interchange and ATM fees and mortgage banking revenues, partially offset by ~~decreases~~an increase in ~~mortgage banking revenues and~~ other banking revenues. The ~~increases~~decreases in deposit service charges and fees were reflective of ~~increased post-pandemic transaction activity,~~the Company’s implementation of certain deposit fee changes, including the ~~addition~~elimination of ~~new deposit relationships from~~nonsufficient and unavailable funds fees on personal accounts late in the ~~Elmira acquisition in May~~fourth quarter of 2022. The Company expects to ~~make modifications~~continue to evaluate its deposit service charges and other fees ~~over~~for further modifications during the ~~next several quarters~~last quarter of 2023 and early 2024 in order to better ~~align with industry trends~~serve the Company’s customers by offering an array of products and services designed to ~~ensure the Company continues to provide customers with affordable and competitive~~meet their particular type of banking ~~options.~~needs.

Employee benefit services revenue ~~decreased $2.0~~increased $2.1 million, or ~~6.8%~~7.6%, ~~but increased $2.5~~and $1.6 million, or ~~2.9%~~1.8%, for the three and nine months ended September 30, ~~2022,~~2023, respectively, as compared to the equivalent prior year ~~periods. The decline~~periods primarily related to new business and a significant year-over-year increase in ~~quarterly revenues was driven by decreases in employee benefit trust and custodial fees, reflecting~~ the ~~adverse impact~~total participants under administration, along with a modest increase from market-related headwinds, while the growth on a YTD basis was primarily driven by incremental revenues from the acquisition of Fringe Benefits Design of Minnesota, Inc. (“FBD”) during the third quarter of 2021.market appreciation. Insurance services revenue was up ~~$2.2~~$0.8 million, or ~~23.5%~~6.9%, and ~~$6.0~~$4.0 million, or ~~23.4%~~12.6%, for the third quarter and YTD periods, respectively, driven primarily by a strong premium market and organic expansion, ~~as well as~~along with growth resulting from acquisitions between the second quarter 2021 acquisition of a Florida-based personal lines insurance agency, the third quarter 2021 acquisition of a Boston-based specialty-lines insurance broker and the first quarter 2022 acquisitions of three other insurance agencies.periods. Wealth management services revenue was ~~down $0.8~~up $0.4 million, or ~~9.9%~~5.8%, for the third quarter of ~~2022 and $0.5~~2023, but down $0.2 million, or ~~1.9%~~1.0%, for September ~~2022~~2023 YTD as compared to the same time periods of ~~2021, primarily driven by more challenging investment market conditions.~~

2022.

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The ratio of noninterest revenues to total revenues was 38.5% for the third quarter of 2023 and 31.0% for September YTD 2023, compared to 37.1% for the prior year’s third quarter and 38.7% for September YTD 2022. The quarterly increase was due to noninterest revenues increasing 3.6% while net interest income decreased 2.4% driven by higher funding costs. The YTD decrease was primarily the result of the $48.0 million, or 24.6%, decrease in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities, while net interest income increased 6.4%, driven by net interest margin expansion.

The ratio of noninterest revenues to operating revenues (FTE ~~basis)~~basis, non-GAAP), as defined in footnote 1 of Table 4 above, was ~~37.2%~~38.5% for the quarter and ~~38.8%~~37.8% for the nine months ended September 30, ~~2022,~~2023, respectively, versus ~~41.0%~~37.2% and ~~39.6%~~38.8% for the comparable periods of ~~2021.~~2022. The ~~decrease for~~increase between the ~~year-to-date period is~~quarterly periods was due to a ~~function of a 7.0%~~3.7% increase in adjusted noninterest revenues, while adjusted net interest income (FTE basis) ~~increased 10.7%~~decreased 2.4%. The year-to-date decrease ~~for the quarterly periods is reflective~~was a function of a ~~1.5%~~6.4% increase in ~~adjusted noninterest revenues while~~ adjusted net interest income (FTE basis) while adjusted noninterest revenues increased ~~19.2%~~2.2%.

Noninterest Expenses

Table 5 below sets forth the quarterly and YTD results of the major noninterest expense categories for the current and prior year, as well as efficiency ratios (defined below), a standard measure of expense utilization effectiveness commonly used in the banking industry.

Table 5: Noninterest Expenses


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
(000’s omitted)	2022			2021			2022			2021			2023			2022			2023			2022
Salaries and employee benefits	$	66,190		$	62,883		$	193,236		$	178,407		$	70,687		$	66,190		$	210,208		$	193,236
Data processing and communications														15,480			14,184			42,900			40,454
Occupancy and equipment		10,364			9,867			31,740			31,437			10,358			10,364			31,835			31,740
Data processing and communications		14,184			12,966			40,454			38,123
Amortization of intangible assets		3,837			3,703			11,420			10,300			3,576			3,837			10,948			11,420
Legal and professional fees		3,194			3,352			10,196			8,885			3,826			3,194			12,129			10,196
Business development and marketing		3,616			2,383			9,975			7,071			4,628			3,616			12,096			9,975
Litigation accrual		0			(100)			0			(100)
Acquisition expenses		409			102			4,668			133			0			409			56			4,668
Acquisition-related contingent consideration adjustment		0			0			400			0			80			0			1,080			400
Other		6,391			5,280			16,327			12,969			7,869			6,391			22,342			16,327
Total noninterest expenses	$	108,185		$	100,436		$	318,416		$	287,225		$	116,504		$	108,185		$	343,594		$	318,416

Operating expenses⁽¹⁾/average assets		2.65	%		2.55	%		2.60	%		2.53	%
Efficiency ratio⁽²⁾		59.3	%		61.7	%		60.0	%		60.1	%
Noninterest expenses/average assets														3.06	%		2.76	%		3.02	%		2.74	%
Operating expenses⁽¹⁾/average assets (non-GAAP)														2.96	%		2.65	%		2.91	%		2.60	%
Efficiency ratio (GAAP)														66.4	%		61.6	%		72.3	%		63.2	%
Operating efficiency ratio (non-GAAP)⁽²⁾														64.3	%		59.3	%		62.8	%		60.0	%

(1)

Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses, acquisition-related contingent consideration adjustment ~~litigation accrual expenses~~ and amortization of ~~intangibles.~~intangible assets. See Table 1011 for Reconciliation of GAAP to Non-GAAP Measures.

(2)

~~Efficiency~~Operating efficiency ratio a non-GAAP measure, is calculated as operating expenses as defined in footnote ⁽¹⁾ above divided by net interest income on a FTE basis excluding acquired non-PCD loan accretion plus noninterest revenues excluding loss on sales of investment securities, gain on debt extinguishment and unrealized ~~gains and losses~~loss on equity securities. See Table 1011 for Reconciliation of GAAP to Non-GAAP Measures.

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As shown in Table 5, the Company recorded noninterest expenses of ~~$108.2~~$116.5 million and ~~$318.4~~$343.6 million for the third quarter and YTD periods of ~~2022,~~2023, respectively, representing ~~increases~~an increase of ~~$7.8~~$8.3 million, or 7.7%, for the quarter and ~~$31.2~~an increase of $25.2 million, or ~~10.9%~~7.9%, ~~from~~for the ~~prior year periods, respectively. Acquisition~~YTD period. Third quarter and YTD 2023 noninterest expenses included $0.1 million and $1.1 million of acquisition expenses and acquisition-related contingent consideration ~~adjustments of~~adjustment, respectively, compared to $0.4 million and $5.1 million ~~are included~~ in third quarter and YTD 2022, ~~noninterest expenses,~~ respectively. Salaries and employee benefits increased ~~$3.3~~$4.5 million, or ~~5.3%~~6.8%, and ~~$14.8~~$17.0 million, or ~~8.3%~~8.8%, for the third quarter and YTD periods of ~~2022,~~2023, respectively, as compared to the corresponding periods of 2021. The increase in salaries and benefits expense was driven by increases in merit-related employee wages, acquisition-related additions to staffing, higher payroll taxes and higher employee benefit-related expenses.2022. The remaining change to noninterest expenses are attributed to ~~occupancy~~data processing and ~~equipment~~communications (up ~~$0.5~~$1.3 million for the quarter and ~~up $0.3~~$2.4 million YTD), ~~data processing~~occupancy and ~~communications (up $1.2 million for~~equipment (consistent between the ~~quarter~~quarters and ~~$2.3 million YTD), amortization of intangible assets (up~~up $0.1 ~~million for the quarter and $1.1~~ million YTD), legal and professional fees ~~(down $0.2~~(up $0.6 million for the quarter and ~~up $1.3~~$1.9 million YTD), business development and marketing (up ~~$1.2~~$1.0 million for the quarter and ~~$2.9~~$2.1 million YTD), amortization of intangible assets (down $0.3 million for the quarter and $0.5 million YTD) and other expenses (up ~~$1.1~~$1.5 million for the quarter and ~~$3.4~~$6.0 million YTD). ~~Noninterest~~

The increase in salaries and benefits was driven by merit and market-related increases in employee wages, higher employee medical expenses and certain executive retirement expenses. Other expenses were ~~generally~~ up primarily due to increases in insurance expenses, travel-related expenses and non-service related components of the net periodic pension benefit credit. The higher insurance costs included in other expenses reflected larger FDIC insurance expenses due in part to an increase in the ~~level of business activities~~base assessment rate effective January 1, 2023. Legal and ~~incremental expenses~~professional fees were up on a YTD basis primarily due to ~~the end of most pandemic-related restrictions as well as the costs~~fees associated with ~~operating an expanded franchise subsequent to the Elmira and financial services acquisitions, including increases in business development and marketing expenses, insurance and travel-related expenses.~~various matters. The increase in data processing and communications expenses was due to the Company’s continued investment in ~~customer-facing~~customer-interfacing and ~~back office~~ digital technologies and the upgrading of operational support systems between the comparable periods. ~~The slight increase~~Business development and marketing expenses increased due to the Company’s investment in ~~occupancy~~digital marketing initiatives and ~~equipment expense was driven by inflationary pressures, partially offset by branch office consolidations between the periods.~~higher levels of targeted advertisements intended to generate deposit inflows.

The Company’s GAAP efficiency ratio ~~(as defined in the table above)~~ was ~~59.3%~~66.4% for the third quarter ~~2.4~~of 2023, 4.8 percentage points ~~favorable~~unfavorable to the comparable quarter of ~~2021.~~2022. This resulted from ~~operating~~total noninterest expenses ~~(as described above)~~ increasing ~~7.5%~~7.7% due to the factors noted above, while total revenues decreased 0.2%, ~~while operating revenues (as described above) increased 11.8%.~~primarily due to lower net interest income driven by higher funding costs. The GAAP efficiency ratio of ~~60.0%~~72.3% for September YTD 2023 was 9.1 percentage points unfavorable to the 63.2% GAAP efficiency ratio for September YTD 2022. The increase in the GAAP efficiency ratio between the comparable YTD periods was the result of total revenues decreasing 5.6% primarily due to the $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the first ~~nine months~~quarter of ~~2022 was 0.1 percentage point favorable compared~~2023, while total noninterest expenses increased 7.9% due to the first nine months of 2021 due to 9.0% higher operating expenses (as described above), while operating revenues (as described above) increased by 9.3%. Current year operating expenses, excluding amortization of intangible assets, acquisition expenses, acquisition-related contingent consideration adjustments and litigation accrualfactors noted above. Annualized current quarter noninterest expenses as a percentage of average assets increased ~~0.10~~0.30 percentage points versus the third quarter of the prior year as noninterest expenses increased 7.7% while average assets decreased 2.8%. On a YTD basis, annualized noninterest expenses as a percentage of average assets increased 0.28 percentage points as noninterest expenses increased 7.9% while average assets decreased 2.1%. Noninterest expenses increased between both periods due to the factors noted above and average assets decreased between both periods primarily due to the aforementioned sale of certain available-for-sale investment securities during the first quarter of 2023.

The Company’s operating efficiency ratio (a non-GAAP measure, as defined in the table above) was 64.3% for the third quarter, 5.0 percentage points unfavorable to the comparable quarter of 2022. This resulted from operating expenses (as defined above) increasing 8.6%, while operating revenues (as defined above) increased 0.1%. The operating efficiency ratio (non-GAAP) of 62.8% for the first nine months of 2023 was 2.8 percentage points unfavorable compared to the first nine months of 2022 due to 9.8% higher operating expenses (as defined above), while operating revenues (as defined above) increased by 4.8%. Current year operating expenses (as defined above) as a percentage of average assets (non-GAAP) increased 0.31 percentage points versus the prior year quarter and ~~increased 0.07 percentage points versus~~ the prior year-to-date period as operating expenses (as defined above) increased atwhile average assets decreased on both a ~~faster rate than average assets.~~quarterly and YTD basis. Operating expenses (as defined above) increased ~~7.5%~~8.6% for the quarter and ~~increased 9.0%~~9.8% for the year-to-date period, while average assets ~~increased 3.5%~~decreased 2.8% for the quarter and ~~increased 6.1%~~2.1% for the year-to-date ~~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.~~period.

Income Taxes

The third quarter and YTD ~~2022~~2023 effective income tax rates were ~~22.0%~~21.2% and ~~21.6%~~21.1%, respectively, as compared to ~~21.1%~~22.0% and ~~20.9%~~21.6% for the comparable periods of ~~2021.~~2022. The ~~effective tax rate~~decrease in the third quarter ~~of 2021 was driven down by~~and YTD 2023 effective income tax rates are primarily attributable to a decrease in the ~~Company’s full year effective tax rate projection. The increase~~full-year 2023 pre-tax income projection as a result of the loss on investment security sales recognized in the ~~YTD effective tax rate was fully attributable to lower levels~~first quarter of ~~tax benefits related to stock-based compensation activity.~~2023. The Company recorded a ~~$0.6~~$0.3 million and ~~$2.0~~$0.6 million reduction in income tax expense associated with stock-based compensation tax benefits for YTD ~~2022~~2023 and YTD ~~2021,~~2022, respectively. The effective tax rates adjusted to exclude stock-based compensation tax benefits for the third quarter and YTD ~~2022~~2023 were ~~both 22.0%~~21.2% and 21.3%, respectively, as compared to ~~21.1% and~~ 22.0%, for both of the comparable periods of ~~2021, respectively.~~2022.

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Investment Securities

The carrying value of investment securities (including unrealized gains and losses) was ~~$5.23~~$3.96 billion at the end of the third quarter, a decrease of $1.35 billion, or 25.5%, from December 31, 2022 and $1.27 billion, or 24.2%, lower than September 30, 2022. The balance of cash equivalents was $260.0 million at the end of the third quarter, an increase of ~~$248.2~~$241.6 million from December 31, ~~2021~~2022 and ~~$823.9~~$230.0 million ~~higher than September 30, 2021. The carrying value of cash equivalents was $30.0 million at the end of the third quarter, a decrease of $1.69 billion from December 31, 2021 and $2.07 billion~~ from September 30, ~~2021.~~2022. The book value of investment securities (excluding unrealized gains and losses) of ~~$6.19~~$4.51 billion at the end of the third quarter ~~increased $1.17~~decreased $1.33 billion from December 31, ~~2021~~2022 and ~~increased $1.74~~$1.69 billion from September 30, ~~2021.~~2022. During the first nine months of ~~2022,~~2023, the Company purchased ~~$1.14 billion of U.S. Treasury and agency securities with an average yield of 1.62%, $34.6~~$23.9 million of government agency mortgage-backed securities with an average yield of ~~2.75%~~5.49%, ~~and $182.0 million of obligations of state and political subdivisions with an average yield of 3.96%. Additionally,~~which the Company ~~acquired $11.3 million of investments from Elmira during the second quarter of 2022.~~classified as held-to-maturity. These additions were ~~partially~~ offset by ~~$212.4~~proceeds of $733.8 million from the sale of certain available-for-sale U.S. Treasury securities associated with the first quarter 2023 balance sheet repositioning and $582.6 million of investment maturities, calls and principal payments during the first nine months of ~~2022.~~2023. Additionally, there was ~~$14.8~~$30.1 million of net accretion on investment securities during the first nine months of ~~2022.~~2023. The effective duration of the investment securities portfolio was 7.2 years at the end of the third quarter of 2023, as compared to 6.3 years at the end of 2022 and 6.5 years at the end of the third quarter of ~~2022, as compared to 7.5 years at the end of 2021 and 7.6 years at the end of the third quarter of 2021.~~2022.

~~Table of Contents~~

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or ~~losses.~~losses in the available-for-sale and equity securities portfolio. At September 30, ~~2022,~~2023, the investment portfolio excluding held-to-maturity investment securities had a ~~$964.9~~$546.4 million net unrealized loss, as compared to a ~~$44.9~~$522.7 million net unrealized loss at December 31, ~~2021~~2022 and a ~~$47.5~~$964.9 million net unrealized loss at September 30, ~~2021.~~2022. These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases, maturities and ~~maturities~~reclassifications that have occurred over the past 12 ~~months.~~months and the recognition of the loss on sales of available-for-sale investment securities related to aforementioned balance sheet repositioning.

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

Table 6: Investment Securities


	September 30,		December 31,			September 30,	September 30,		December 31,			September 30,
(000’s omitted)	2022		2021			2021	2023		2022			2022
Available-for-Sale Portfolio:
U.S. Treasury and agency securities	$	4,275,440	$	3,998,564	$	3,393,260	$	1,979,439	$	3,243,537	$	4,275,440
Obligations of state and political subdivisions		489,910		430,289		421,965		434,465		504,297		489,910
Government agency mortgage-backed securities		384,891		477,056		510,676		337,071		384,633		384,891
Corporate debt securities		7,033		7,962		8,078		7,174		7,114		7,033
Government agency collateralized mortgage obligations		13,415		20,339		24,392		9,487		12,270		13,415
Total available-for-sale portfolio		5,170,689		4,934,210		4,358,371		2,767,636		4,151,851		5,170,689

Equity and Other Securities:
Held-to-Maturity Portfolio:
U.S. Treasury and agency securities								1,101,679		1,079,695		0
Government agency mortgage-backed securities								23,861		0		0
Total held-to-maturity portfolio								1,125,540		1,079,695		0

Equity and other Securities:
Equity securities, at fair value		439		463		459		320		419		439
Federal Home Loan Bank common stock		18,438		7,188		7,251		26,524		47,497		18,438
Federal Reserve Bank common stock		33,568		33,916		33,916		33,568		31,144		33,568
Other equity securities, at adjusted cost		4,158		3,312		3,401		6,413		4,282		4,158
Total equity and other securities		56,603		44,879		45,027		66,825		83,342		56,603

Total investments	$	5,227,292	$	4,979,089	$	4,403,398	$	3,960,001	$	5,314,888	$	5,227,292

Loans

Loans ended the third quarter at ~~$8.54~~$9.45 billion, ~~an increase~~$640.7 million, or 7.3%, higher than at December 31, 2022 and $906.5 million, or 10.6%, higher than at September 30, 2022.

Table of $1.26 billion, or 17.3%, from one year earlier and an increase of $1.17 billion, or 15.9%, from the end of 2021. The increase during the last twelve months was driven by increases in all loan categories, including consumer mortgage, business lending, consumer indirect, home equity and consumer direct loans, due to the Elmira acquisition and net organic growth, despite a $156.2 million decrease in PPP loans due to loan forgiveness activities.Contents

The business lending portfolio consists of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and vehicle dealer floor plan financing. The business lending portfolio increased ~~$402.2~~$420.5 million, or ~~13.0%~~12.0%, from September 30, ~~2021~~2022 and increased ~~$418.5~~$269.3 million, or ~~13.6%~~7.4%, from December 31, ~~2021, including $125.3 million~~2022, driven by net organic growth. Growth in commercial mortgages drove the majority of the increase between both periods, in particular commercial real estate multi-family and commercial real estate non-owner occupied, followed by commercial real estate owner occupied, and to a lesser extent increases in commercial and industrial lines of credit, partially offset by decreases in commercial and industrial term loans. While certain macroeconomic concerns are emerging related to non-owner occupied commercial real estate, the Company’s exposure to this portfolio remains diverse and relatively low at 186% of total bank-level regulatory capital, 24% of total loans ~~acquired from Elmira~~and 15% of total assets. The balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the second quarter of 2022. The increase in the business lending portfolio was driven by the Elmira acquisition and organic growth despite decreases in PPP loans of $156.2 million from September 30, 2021 and $82.0 million from December 31, 2021.Company’s market areas. Competitive conditions for business lending continue to prevail in both the digital marketplace and geographic regions in which the Company operates. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category.

Consumer mortgages increased ~~$504.5~~$221.2 million, or ~~20.4%~~7.4%, from one year ago and increased ~~$419.4~~$184.3 million, or ~~16.4%~~6.1%, from December 31, ~~2021, including $271.4 million~~2022, reflective of ~~loans acquired from Elmira~~organic growth. Over the past year, the Company produced net organic growth in the ~~second quarter of 2022. In addition~~consumer mortgage segment due 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, recruitment of additional mortgage loan originators and proactive business development efforts, in addition to strong housing 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. The Company is currently holding almost all of its new consumer mortgage production in portfolio.efforts. Home equity loans increased ~~$37.6~~$11.7 million, or ~~9.5%~~2.7%, from one year ago, and increased ~~$35.0~~$10.8 million, or ~~8.8%~~2.5%, from December 31, ~~2021, including $18.4 million~~2022, in part aided by lower levels of ~~loans acquired from Elmira~~consumer mortgage refinancing-related payoffs and paydowns in the ~~second quarter of 2022.~~higher interest rate environment.

~~Table of Contents~~

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine, and ~~other~~ recreational vehicle dealerships (referred to as “consumer indirect”), increased ~~$316.7~~$253.0 million, or ~~23.9%~~15.4%, from one year ago and increased ~~$297.1~~$176.3 million, or ~~22.1%~~10.3%, from December 31, ~~2021, including $21.9 million~~2022. The increase was primarily due to the Company offering competitive pricing, benefitting from reduced participation by certain competitors and capturing an increased share of ~~loans acquired from Elmira~~the solid sales volumes that existed in ~~the second quarter of 2022. Despite national vehicle supply shortages, the Company’s~~its market area and dealer network ~~have experienced robust sales activity,~~ which, combined with higher vehicle sales prices, ~~have~~ resulted in significant growth in the Company’s consumer indirect ~~portfolio.~~portfolio, despite national vehicle shortages. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer direct loans ~~provide~~have historically provided attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.

Asset Quality

The following table sets forth the allocation of the allowance for credit losses by loan category as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to ~~changes~~change when the risk factors of each component part change. The allocation is not indicative of ~~either~~ the specific ~~amounts~~amount of future net charge-offs that will be incurred in each 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 7, ~~the~~ total allowance for credit losses at the end of the third quarter was ~~$60.4~~$64.9 million, an increase of ~~$10.9~~$4.6 million, or ~~21.9%~~7.6%, from one year earlier and an increase of ~~$10.5~~$3.9 million, or ~~21.0%~~6.4%, from the end of ~~2021, driven primarily by significant loan growth during the intervening period.~~2022.

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Table 7: Allowance for Credit Losses by Loan Type


													September 30, 2023				December 31, 2022				September 30, 2022
															Percent of				Percent of				Percent of
	September 30, 2022				December 31, 2021				September 30, 2021						Total				Total				Total
(000’s omitted except for ratios)	Allowance		Loan Mix		Allowance		Loan Mix		Allowance		Loan Mix		Allowance		Loans		Allowance		Loans		Allowance		Loans
Business lending	$	23,931	40.9	%	$	22,995	41.7	%	$	22,319	42.5	%	$	26,044	41.4	%	$	23,297	41.4	%	$	23,931	40.9	%
Consumer mortgage		13,818	34.8	%		10,017	34.7	%		9,745	33.9	%		14,971	33.8	%		14,343	34.2	%		13,818	34.8	%
Consumer indirect		17,018	17.1	%		11,737	16.1	%		12,045	16.1	%		18,290	18.1	%		17,852	17.5	%		17,018	17.1	%
Consumer direct		3,015	2.1	%		2,306	2.1	%		2,670	2.1	%		3,046	2.0	%		2,973	2.0	%		3,015	2.1	%
Home equity		1,581	5.1	%		1,814	5.4	%		1,720	5.4	%		1,594	4.7	%		1,594	4.9	%		1,581	5.1	%
Unallocated		1,000	0.0	%		1,000	0.0	%		1,000	0.0	%		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	%
Total													$	64,945	100.0	%	$	61,059	100.0	%	$	60,363	100.0	%

As demonstrated in Table 7, the consumer direct and ~~discussed previously, business lending and consumer~~indirect installment loan portfolios carry higher credit risk than ~~residential real estate,~~the business lending, consumer mortgage and ~~as a result, these loans carry allowance for credit losses that cover~~home equity portfolios and therefore the Company allocates a higher ~~percentage of their total portfolio balances.~~proportional allowance to these portfolios. The unallocated allowance is maintained for potential inherent losses in the specific portfolios that are not captured due to model imprecision. The unallocated allowance of $1.0 million at September 30, ~~2022~~2023 was consistent with December 31, ~~2021~~2022 and September 30, ~~2021.~~2022. The changes in allowance allocations reflect management’s continued refinement of its loss estimation techniques. However, given the inherent imprecision in the many estimates used in the determination of the allocated portion of the allowance, management remained conservative in the approaches used to establish the overall allowance for credit losses. Management considers the allocated and unallocated portions of the allowance for credit losses to be prudent and reasonable. ~~Furthermore, the Company’s allowance for credit losses is general in nature and is available to absorb losses from any loan category.~~

~~Table of Contents~~

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

Table 8: Loan Ratios


	September 30,			December 31,			September 30,			September 30,			December 31,			September 30,
	2022			2021			2021			2023			2022			2022
Allowance for credit losses/total loans		0.71	%		0.68	%		0.68	%		0.69	%		0.69	%		0.71	%
Allowance for credit losses/nonperforming loans		186	%		110	%		73	%		176	%		183	%		186	%
Nonaccrual loans/total loans		0.33	%		0.57	%		0.91	%		0.35	%		0.33	%		0.33	%
Allowance for credit losses/nonaccrual loans		215	%		120	%		75	%		196	%		209	%		215	%
Net charge-offs (annualized) to average loans outstanding (quarterly):
Business lending		(0.03)	%		0.10	%		0.08	%		0.00	%		0.01	%		(0.03)	%
Consumer mortgage		0.01	%		0.00	%		0.02	%		0.02	%		0.01	%		0.01	%
Consumer indirect		0.09	%		0.24	%		0.14	%		0.18	%		0.46	%		0.09	%
Consumer direct		0.32	%		0.53	%		0.34	%		0.73	%		0.41	%		0.32	%
Home equity		0.02	%		0.01	%		0.02	%		0.00	%		(0.01)	%		0.02	%
Total loans		0.02	%		0.09	%		0.07	%		0.05	%		0.09	%		0.02	%

Net charge-offs during the third quarter of ~~2022~~2023 were ~~$0.4~~$1.2 million, ~~a decrease~~an increase of ~~$1.0~~$0.9 million compared to the third quarter of ~~2021. The business lending, consumer indirect and consumer mortgage~~2022. All portfolios except the home equity portfolio experienced ~~lower~~higher net ~~charge-offs during~~charge-off levels in the third quarter of ~~2022 as~~2023 compared to the third quarter of 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.2022. The total net charge-off ratio (net charge-offs annualized as a percentage of average loans outstanding for the quarter) for the third quarter was ~~0.02%~~0.05%, ~~seven and five~~four basis points lower than the ~~ratios~~ratio at December 31, 2022 and three basis points higher than the ratio at September 30, 2022. Despite the increase in net charge-offs in the third quarter of 2023, the net charge-off ratio remains well below the Company’s average for the ~~fourth and third quarters~~past ten years of ~~2021, respectively.~~0.12%. Net charge-off ratios for the third quarter of ~~2022~~2023 for the ~~business lending, consumer indirect and~~ consumer mortgage, ~~portfolios were below the Company’s average for the trailing eight quarters, while the net charge-off ratios for the~~ consumer direct and home equity portfolios were above the Company’s average for the trailing eight quarters, while the net charge-off ratio for the business lending and consumer indirect portfolios were below the Company’s average for the trailing eight quarters. Economic conditions have been relatively stable with the unemployment rate in particular remaining low and supporting the continued historically low levels of net charge-offs experienced by the Company.

Table of Contents

Other real estate owned (“OREO”) at September 30, ~~2022~~2023 was ~~$0.5~~$0.6 million. This compares to ~~$0.7~~$0.5 million at both December 31, 2022 and September 30, 2022. At September 30, 2023, OREO consisted of 10 residential properties with a total value of $0.6 million. This compares to seven residential properties with a total value of $0.5 million at December 31, ~~2021~~2022, and ~~$0.9 million at September 30, 2021. At September 30, 2022, OREO consisted of~~ eight residential properties with a total value of $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 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 September 30, ~~2021.~~2022.

Approximately 15% of the nonperforming loans at September 30, ~~2022~~2023 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type. ~~The~~While the level of nonperforming business loans ~~decreased significantly from~~was $0.8 million higher than the prior year, the business lending nonperforming loans ratio was consistent as ~~the economic environment improved and businesses resumed normal operations. The Company upgraded several large~~ business ~~loans for customers~~conditions in the hospitality industry that had previously requested extended loan repayment forbearance due to pandemic-related hardship from nonaccrual to accruing status during the first quarter of 2022 and fourth quarter of 2021. These borrowers 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.Company’s market area remain stable.

Approximately ~~77%~~76% of nonperforming loans at September 30, ~~2022~~2023 were comprised of consumer mortgages. Collateral values of residential properties within most of the Company’s ~~geographic footprint~~market areas have generally remained stable or ~~have~~ increased over the past several years. ~~Additionally, strong economic conditions prior~~Although high inflation has had some adverse impact on consumers, the unemployment rate remains low and this has contributed to ~~COVID-19 and~~ the ~~generally positive economic recovery following, including low unemployment levels, have positively impacted consumers and resulted~~credit performance in ~~generally more favorable nonperforming~~the consumer mortgage ~~ratios throughout the past few years.~~loan segment remaining favorable. The remaining 8%9% 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 ~~186%~~176% at the end of the third quarter, as compared to ~~110%~~183% at year-end ~~2021~~2022 and ~~73%~~186% at September 30, ~~2021.~~2022. The ~~increase~~decrease in this ratio between the annual quarterly periods was primarily driven by the ~~decrease~~increases in nonperforming business ~~loans noted above combined with a $10.9 million increase in~~loan and consumer mortgage levels rising proportionally more than the allowance for credit losses.

~~Table of Contents~~

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

Delinquent loans ~~(30~~(defined as loans 30 days or more past due ~~through nonaccruing)~~or in nonaccrual status) as a percent of total loans was ~~0.71%~~0.90% at the end of the third quarter, 29one basis point above the 0.89% at year-end 2022 and 19 basis points ~~below~~above the ~~1.00% at year-end 2021 and 57 basis points below the 1.28%~~0.71% at September 30, ~~2021.~~2022. The business lending delinquency ratio at the end of the third quarter of ~~0.17%~~0.49% was 80nine basis points ~~below~~above the level of ~~0.97%~~0.40% at December 31, ~~2021~~2022 and ~~155~~32 basis points ~~below~~above the level of ~~1.72%~~0.17% at September 30, ~~2021, largely attributable to the reclassification of certain business loans’ status from nonaccrual to accruing during the fourth quarter of 2021 and first quarter of~~ 2022. The delinquency ~~ratio~~rates for the ~~home equity portfolio~~consumer indirect and consumer direct portfolios decreased as compared to the levels at ~~both~~ December 31, ~~2021~~2022, while delinquency rates in the consumer mortgage and home equity portfolios increased. The delinquency rates for all loan portfolios increased compared to the levels at September 30, ~~2021, while consumer installment and consumer mortgage increased slightly relative to those same periods.~~

~~Prediction~~2022. Despite the increase in delinquent loans in the third quarter of ~~future~~2023, the current quarter delinquency ~~and credit loss performance is difficult, because although, until recently, economic growth had been above~~rates remained below the Company’s average for ~~most~~the past ten years of 2021 and the unemployment rate remains low, there continues to be uncertainty regarding the economic fallout created by supply chain constraints and inflationary pressures, as 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.1.04%.

The Company recorded a ~~$5.1~~$2.9 million provision for credit losses in the third quarter of ~~2022, including a $0.1 million net benefit related to off-balance sheet credit exposures.~~2023. The third quarter provision for credit losses was ~~$6.0~~$2.2 million ~~higher~~lower than the equivalent prior year period’s ~~net benefit in the~~ provision for credit losses of ~~$0.9 million, which was reflective~~$5.1 million. The third quarter of an2023 provision for credit losses reflects stable economic ~~recovery related to~~forecasts and asset quality metrics as well as net loan growth between the ~~cessation of most pandemic-related restrictions and included the continuation of elevated real estate and vehicle collateral values, resulting in a release of reserves in that quarter.~~periods. The allowance for credit losses of ~~$60.4~~$64.9 million as of September 30, ~~2022~~2023 increased ~~$10.5~~$3.9 million compared to December 31, ~~2021~~2022 and increased ~~$10.9~~$4.6 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 was ~~0.71%~~0.69% at September 30, 2023, consistent with the level at December 31, 2022 ~~an increase of three~~and two basis points ~~from~~lower than the ~~levels~~level at ~~both December 31, 2021 and~~ September 30, ~~2021.~~2022. Refer to Note E: Loans ofand Allowance for Credit Losses in the ~~Consolidated Financial Statements~~notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

As of September 30, ~~2022,~~2023, the net purchase discount related to the ~~$1.28~~$1.09 billion of remaining non-PCD ~~acquired~~ loan balances acquired in prior period acquisitions was approximately ~~$25.6~~$21.6 million, or ~~1.99%~~2.0% of that portfolio.

4851

Table of Contents

Deposits

As shown in Table 9, average deposits of ~~$13.33~~$12.77 billion in the third quarter were ~~$830.9~~$562.5 million, or ~~6.6%~~4.2%, ~~higher~~lower than the third quarter of 2021, primarily due to larger than anticipated net inflows of funds related to government stimulus and PPP 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 $502.8~~decreased $408.1 million, or ~~3.9%~~3.1%, from the fourth quarter of last year, ~~primarily due~~while on an ending basis total deposits increased $18.5 million, or 0.1%, from December 31, 2022. The mix of average deposit balances changed as the weighting of non-maturity deposits (noninterest checking, interest checking, savings and money market) to total deposits has decreased from the ~~addition of acquired Elmira deposit liabilities between the periods.~~prior year levels. Average noninterest checking deposits as a percentage of average total deposits was ~~31.4%~~29.8% in the third quarter compared to ~~30.7%~~31.4% in the third quarter of ~~2021~~2022 and 31.9% in the fourth quarter of last year. ~~Non-maturity~~Average non-maturity deposits ~~(noninterest checking, interest checking, savings and money markets) represent 92.8%~~represented 89.2% of the Company’s ~~average~~ deposit funding base ~~during~~and time deposits represented 10.8% of total average deposits in the third quarter of ~~2022, while time deposits represent~~2023 compared to 92.8% and 7.2% ~~of total average deposits.~~, respectively, in the equivalent period year period. The quarterly average cost of deposits was ~~0.11%~~0.76% for the third quarter of ~~2022,~~2023, compared to ~~0.08%~~0.18% for the fourth quarter of ~~2021~~2022 and ~~0.09%~~0.11% in the third quarter of ~~2021,~~2022, reflective of ~~increases~~the increase in the ~~interest rates paid on interest checking and money market deposits, while the~~average interest rate paid on ~~time~~interest-bearing deposits ~~decreased.~~as interest rates on certain interest-bearing deposits were raised in response to market conditions, as well as a decline in the proportion of noninterest and low-rate deposit balances. The Company continues to focus on expanding its ~~core~~ deposit relationship base through its ~~proactive marketing efforts,~~ competitive product offerings and high quality customer service.

The Company’s deposit base is well diversified across customer segments, which as of September 30, 2023 is comprised of approximately 61% consumer, 26% business and 13% municipal, and broadly dispersed with an average personal deposit account balance of approximately $12,000 and average business deposit relationship of approximately $62,000, while the Company’s total average deposit account balance is under $20,000. In addition, at the end of the quarter, 70% of the Company’s total deposits were in checking and savings accounts and the weighted-average age of the Company’s non-maturity deposit accounts was approximately 15 years. As of September 30, 2023, the Company’s total uninsured deposits, net of collateralized and intercompany deposits, is estimated at approximately $2.11 billion. This amount is determined by adjusting the amounts reported in the Bank Call Report by intercompany deposits, which are not external customers and are therefore eliminated in consolidation, and municipal deposits which are collateralized by certain pledged investment securities. The Bank Call Report estimated uninsured deposit balances at September 30, 2023 are reported gross at $3.92 billion, which includes intercompany account balances of $334.2 million and collateralized deposits of $1.47 billion. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of third quarter ending total deposits.

Average nonpublic fund deposits for the third quarter of ~~2022 increased $839.6~~2023 decreased $422.2 million, or ~~7.5%~~3.6%, versus the fourth quarter of ~~2021~~2022 and ~~increased $983.5~~decreased $589.4 million, or ~~8.9%~~4.9%, versus the year-earlier ~~period.~~period as competition intensified in the rising interest rate environment. Average public fund deposits for the third quarter ~~decreased $336.8~~increased $14.1 million, or ~~20.2%~~1.1%, from the fourth quarter of ~~2021~~2022 and ~~decreased $152.6~~increased $26.9 million, or ~~10.3%~~2.0%, from the third quarter of ~~2021.~~2022, primarily due to the Company’s competitive pricing and business development efforts. Average public fund deposits as a percentage of total average deposits ~~decreased~~increased from ~~11.9% in the third quarter of 2021 to~~ 10.0% in the third quarter of 2022 to 10.6% in the third quarter of 2023..

Table 9: Quarterly Average Deposits


	September 30,		December 31,		September 30,		September 30,		December 31,		September 30,
(000’s omitted)	2022		2021		2021		2023		2022		2022
Noninterest checking deposits	$	4,192,615	$	3,935,586	$	3,841,646	$	3,810,542	$	4,198,086	$	4,192,615
Interest checking deposits		3,299,612		3,215,815		3,147,360		2,951,592		3,264,432		3,299,612
Savings deposits		2,460,915		2,227,776		2,197,592		2,344,630		2,441,720		2,460,915
Money market deposits		2,419,029		2,510,766		2,356,765		2,288,139		2,383,216		2,419,029
Time deposits		962,777		942,205		960,670		1,377,534		893,074		962,777
Total deposits	$	13,334,948	$	12,832,148	$	12,504,033	$	12,772,437	$	13,180,528	$	13,334,948
Nonpublic fund deposits	$	12,005,491	$	11,165,894	$	11,022,010	$	11,416,091	$	11,838,284	$	12,005,491
Public fund deposits		1,329,457		1,666,254		1,482,023		1,356,346		1,342,244		1,329,457
Total deposits	$	13,334,948	$	12,832,148	$	12,504,033	$	12,772,437	$	13,180,528	$	13,334,948

Table of Contents

Borrowings

Borrowings, excluding securities sold under agreement to repurchase, at the end of the third quarter of ~~2022~~2023 totaled ~~$142.5~~$316.8 million. This was ~~$137.4~~$474.3 million ~~higher~~lower than borrowings at December 31, ~~2021~~2022 and ~~$136.3~~$174.3 million above the level at the end of the third quarter of ~~2021.~~2022. The ~~increases were~~increase from the prior year third quarter was primarily due to an increase in ~~overnight~~other FHLB borrowings of ~~$119.8~~$297.4 million as the Company secured $300.0 million of fixed rate FHLB term borrowings in the third quarter of 2023 to support the funding of ~~strong~~continued loan ~~growth and $17.6 million of FHLB borrowings acquired~~growth. The decrease from the ~~Elmira acquisition during the second~~fourth quarter of ~~2022.~~2022 was primarily related to a decrease in overnight borrowings of $768.4 million as the Company utilized proceeds from its first quarter securities sales and subsequent investment security maturities to pay down these borrowings.

Securities sold under agreement to repurchase, also referred to as customer repurchase agreements, represent collateralized municipal and commercial customer accounts that price and operate similar to a deposit instrument. Customer repurchase agreements were ~~$352.8~~$330.3 million at the end of the third quarter of ~~2022, an increase~~2023, a decrease of ~~$28.1~~$16.4 million and ~~$36.0~~$22.5 million from ~~their levels at~~ December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, respectively.

~~Table of Contents~~

Shareholders’ Equity and Regulatory Capital

Total shareholders’ equity was ~~$1.46~~$1.55 billion at the end of the third quarter, ~~down $639.6~~up $3.2 million from the balance at December 31, ~~2021.~~2022. The ~~decrease~~increase was driven by ~~$695.7~~net income of $98.2 million, $6.7 million recognized from employee stock options earned and net activity under the Company’s employee stock plans of $0.7 million, partially offset by $5.3 million of other comprehensive loss, net of tax, dividends declared of ~~$70.2~~$71.5 million and common stock repurchased of ~~$16.4 million, partially offset by net income of $135.6 million, net activity under the Company’s employee stock plan of $1.6 million, and $5.5 million recognized from employee stock options earned.~~$25.7 million. The other comprehensive loss, net of tax, was comprised of a ~~$696.5~~$4.4 million decrease in the after-tax market value adjustment on the available-for-sale investment portfolio due to ~~a significant amount~~movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases, sales, maturities and reclassifications that have occurred over the past nine months and the recognition of the loss on sales of available-for-sale investment securities ~~being purchased~~related to aforementioned balance sheet repositioning, and a ~~meaningful upward movement in market interest rates between the periods, partially offset by a positive $0.8~~negative $0.9 million adjustment to the funded status of the Company’s retirement plans. Over the past 12 months, total shareholders’ equity ~~decreased $608.8~~increased $93.8 million, ~~as a decrease~~driven primarily by an increase in the market value adjustment on investments, ~~dividends declared and common stock repurchase activity more than offset~~ net income, the accretion of the market value adjustment associated with the transfer of securities from the available-for-sale portfolio to the held-to-maturity portfolio and the issuance of ~~common~~ stock in association with the employee stock plan, ~~and the Company’s benefit plans,~~partially offset by dividends declared, common stock repurchase activity and the change in the funded status of the Company’s defined benefit pension and other postretirement plans.

The dividend payout ratio (dividends declared divided by net income) for the first nine months of ~~2022~~2023 was ~~51.8%~~72.8%, compared to ~~46.8%~~51.8% for the nine months ended September 30, ~~2021.~~2022. Excluding the after-tax impact of the loss on sales of investment securities, the YTD 2023 dividend payout ratio was 51.3%. Dividends declared for the first nine months of ~~2022~~2023 increased ~~2.7%~~1.8% compared to the first nine months of ~~2021,~~2022, as the Company’s quarterly dividend per share was raised from $0.43 to $0.44 in the third quarter of 2022 and from $0.44 to $0.45 in the third quarter of 2023, while net income decreased ~~7.2%~~27.5% versus the equivalent year-to-date period due to increases in ~~the provision for credit losses, acquisition-related provision for credit losses~~operating expenses and ~~noninterest expenses, including a $4.9 million increase in acquisition-related noninterest expenses,~~realized loss on investment securities, partially offset by increases in net interest income and noninterest ~~revenues. The 2022 dividend increase marked~~revenues and a decrease in the ~~Company’s 30~~^th ~~consecutive~~provision for credit losses. Excluding the after-tax impact of the securities sales in the first quarter of 2023, net income increased 2.8% between the first nine months of 2023 and the equivalent prior year ~~of increased dividend payouts to common shareholders.~~period. Additionally, the number of common shares outstanding decreased ~~0.4%~~0.6% over the last twelve months, as common stock repurchases outweighed new issuance activity in the Company’s employee stock plans. During the third quarter of 2023, the Company announced a one-cent, or 2.3%, increase in the quarterly dividend to $0.45 per share on its common stock, which marked the 31^st consecutive year of dividend increases for the Company.

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.~~statements and ability to pay dividends. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s ~~assets, liabilities,~~on 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.

Table of Contents

The Company and the Bank are required to maintain a “capital conservation ~~buffer,”~~buffer” for risk-weighted capital parameters, composed entirely of common equity Tier 1 capital, in addition to minimum risk-based capital ratios. The required capital conservation buffer is 2.5% as of September 30, ~~2022~~2023 and December 31, ~~2021.~~2022. Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company and the Bank must maintain:

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

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

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

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

As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”. As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, 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
%

Table 10: Regulatory Ratios


	September 30, 2023				December 31, 2022				September 30, 2022
	Community Bank		Community		Community Bank		Community		Community Bank		Community
	System, Inc.		Bank, N.A.		System, Inc.		Bank, N.A.		System, Inc.		Bank, N.A.
Tier 1 leverage ratio	9.44	%	7.83	%	8.79	%	7.26	%	8.78	%	7.03	%
Common equity Tier 1 capital ratio	14.98	%	12.37	%	15.71	%	12.86	%	15.50	%	12.44	%
Tier 1 risk-based capital ratio	14.98	%	12.37	%	15.71	%	12.86	%	15.50	%	12.44	%
Total risk-based capital ratio	15.68	%	13.07	%	16.40	%	13.56	%	16.19	%	13.14	%

~~Table of Contents~~

The Company’s Tier 1 leverage ratio, a primary measure of regulatory capital as defined above, was ~~8.78%~~9.44% at the end of the third quarter, ~~down 31 basis~~up 0.65 percentage points from ~~year-end 2021~~December 31, 2022 and ~~44 basis~~0.66 percentage points ~~below~~above its level one year earlier. The ~~decrease~~increase in the Tier 1 leverage ratio in comparison to December 31, ~~2021~~2022 was the result of ending shareholders’ equity, excluding intangibles (net of associated deferred tax liabilities or “net intangibles”) and other comprehensive income or loss items, increasing ~~1.2%~~0.6%, while average assets, excluding intangibles and the market value adjustment on investments, decreased 6.3%. The Tier 1 leverage ratio increased compared to the prior year’s third quarter as ~~the impact of~~shareholders’ equity, excluding net intangibles and other comprehensive income or loss items, increased 3.2% as net earnings retention outweighed ~~the intangible assets added from the Elmira acquisition and~~ share repurchases, while average assets, excluding intangibles and the market value adjustment on investments, ~~increased 4.8%, primarily due to strong organic loan growth and the Elmira acquisition.~~decreased 4.1%. The ~~Tier 1 leverage ratio decreased compared to the prior year’s third quarter as~~increase in shareholders’ equity, excluding net intangibles and other comprehensive income ~~increased 2.9%, as~~or loss items, between both periods was primarily due to net earnings retention, that despite the negative impact of ~~earnings retention~~the realized loss on investment security sales in connection with the first quarter 2023 balance sheet repositioning, outweighed ~~Elmira acquisition-related intangible assets and~~ share ~~repurchases, while~~repurchases. The decrease in average assets, excluding intangibles and the market value adjustment on investments, ~~increased 8.1%~~between both periods was primarily due to ~~continued inflows~~the impact from the Company’s first quarter 2023 balance sheet repositioning.

Table of ~~customer deposits, organic loan growth~~Contents

The shareholders’ equity-to-assets ratio was 10.11% at the end of the third quarter of 2023 compared to 9.80% at December 31, 2022 and ~~the acquisition of Elmira.~~9.37% at September 30, 2022. The ~~net~~ tangible equity-to-assets ratio (a non-GAAP measure) of ~~4.08% decreased 4.61~~4.81% increased 0.17 percentage points from December 31, ~~2021~~2022 and ~~decreased 4.51~~increased 0.73 percentage points versus September 30, ~~2021 (See~~2022 (see Table 1011 for Reconciliation of ~~Quarterly~~ GAAP to Non-GAAP Measures). The ~~decrease~~increase in the ~~net~~ tangible ~~equity to net tangible assets~~equity-to-assets ratio (non-GAAP) from one year prior was primarily driven by a ~~$644.8~~$97.4 million, or ~~51.8%~~16.2%, ~~decrease~~increase in tangible equity due to the decline in accumulated other comprehensive loss related to the ~~after-tax market value adjustment on available-for-sale~~Company’s investment securities portfolio due in part to the timing of the reclassification of certain investment securities from the available-for-sale portfolio to the held-to-maturity portfolio in the fourth quarter of 2022 and a ~~$41.1~~$204.6 million, ~~net increase~~or 1.4%, decrease in ~~intangible~~tangible assets due primarily to the ~~Elmira acquisition~~aforementioned sales and maturities of certain available-for-sale investment securities. The increase in the net tangible equity-to-assets ratio (non-GAAP) from December 31, 2022 was driven by a ~~$227.5~~$3.2 million, or ~~1.6%~~0.5%, increase in tangible equity, while tangible assets decreased $449.4 million, or 3.0%, primarily due to the ~~Elmira acquisition~~reduction in investment securities and ~~net inflows of deposits. The decrease in the net tangible equity to net tangible assets ratio (non-GAAP)~~borrowings resulting from the ~~fourth~~Company’s first quarter ~~of 2021 was driven by a $679.8 million decrease in tangible equity due to the impact of the Elmira acquisition, the purchase of securities in late 2021~~balance sheet repositioning and ~~early 2022 and higher market interest rates on the after-tax market value adjustment on available-for-sale~~ investment ~~securities, while tangible assets increased $1.7 million.~~maturities.

Liquidity

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

Given the uncertain nature of the Company’s ~~customers’~~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 when needed. Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity must be supplemented with additional sources such as credit lines from correspondent banks and borrowings from the FHLB and the Federal Reserve. Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements, large certificates of deposit and the brokered CD market. The primary ~~source~~sources of non-deposit funds are FHLB or Federal Reserve overnight advances ~~of which~~and other FHLB term borrowings. At September 30, 2023, there were ~~$119.8~~$316.8 million of ~~outstanding~~other FHLB term borrowings ~~at September 30, 2022.~~and no overnight borrowings outstanding.

The Company’s primary sources of liquidity are its liquid assets, as well as unencumbered loans and securities that can be used to collateralize additional funding. At September 30, ~~2022,~~2023, the Bank had ~~$247.4~~$455.8 million of cash and cash equivalents of which ~~$30.0~~$260.0 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks. The Company also had ~~$1.76~~$2.61 billion in unused FHLB & FRB borrowing capacity based on the Company’s quarter-end loan collateral ~~levels and had $487.7 million of funding availability at the Federal Reserve’s discount window.~~levels. Additionally, the Company ~~has $2.57~~had approximately $1.75 billion of ~~unencumbered~~ securities that could be sold or pledged at the FHLB or Federal Reserve to obtain additional funding. There was $25.0 million available in an unsecured ~~lines~~line of credit with ~~other~~a correspondent ~~banks~~bank at quarter end. The Company’s sources of immediately available liquidity of $4.81 billion at the end of the third quarter of 2023 represent over 200% of the Company’s estimated uninsured deposits, net of collateralized and intercompany deposits, estimated at approximately $2.11 billion.

The 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, ~~2022,~~2023, this ratio was ~~15.1%~~10.5% for 30-days and ~~15.3%~~9.3% for 90-days, excluding the Company’s capacity to borrow additional funds from the FHLB and other sources. This is considered to be a sufficient amount of liquidity based on the Company’s internal policy requirement of 7.5%.

~~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, ~~2022,~~2023, there is more than enough liquidity available during the next year to cover projected cash outflows. In addition, stress tests on the cash flows are performed in various scenarios ranging from high probability events with a low impact on the liquidity position to low probability events with a high impact on the liquidity position. The results of the stress tests as of September 30, ~~2022~~2023 indicate the Company has sufficient sources of funds for the next year in all simulated stressed scenarios.

Table of Contents

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~~The possibility of a funding crisis exists at all financial institutions. A funding crisis would most likely result from a shock to the financial system which disrupts orderly short-term funding operations or from a significant tightening of monetary policy that limits the national money supply. Accordingly, management has addressed this issue by formulating a Liquidity Contingency Plan, which has been reviewed and approved by both the Company’s Board of Directors (the “Board”) and the Company’s ALCO. The plan addresses the actions that the Company would take in response to both a short-term and long-term funding crisis.

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 the establishment of trigger points for monitoring such events and detailed action plans that would be initiated if those trigger points are reached. These trigger points are not by themselves definitive indicators of insufficient liquidity, but rather a mechanism for management to monitor conditions and possibly provide advance warning which could avert or reduce the impact of a crisis. Liquidity triggers are based on a variety of factors, including Company history, trends, and current operating performance, industry observations, and changes in internal and external economic factors. Indicators include: core liquidity and funding needs such as the core basic surplus, unencumbered securities to average assets, and free FHLB and FRB loan collateral to average assets; heightened funding needs indicators such as average loans to average deposits, average public and nonpublic deposits to total funding, and average borrowings to total funding; capital at risk indicators consisting mainly of regulatory ratios; asset quality indicators; and decrease in funds availability indicators which is a combination of internal and external factors such as increased restrictions on borrowing or downturns in the credit market. The Company has established three risk levels for these liquidity triggers that define the response based on the severity of the circumstances. Responses vary from an assessment of possible funding deficiencies with no impact on normal business operations to immediate action required due to impending funding problems. For more information regarding the risk factor associated with the possibility of a funding crisis, refer to the discussion under the heading “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC on March 1, 2023 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 as filed with the SEC on May 10, 2023.

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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) adverse developments in the ~~macroeconomic and other challenges and uncertainties~~banking industry related to the COVID-19 pandemic, variants of COVID-19, related vaccine and 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,recent bank failures and the ~~domestic~~potential impact of such developments on customer confidence and ~~global economy, which may have an adverse effect on the Company’s business;~~regulatory responses to these developments; (2) current and future economic and market conditions, including the effects of changes in commercial real estate and residential housing or vehicle prices, higher unemployment rates, labor shortages, supply chain disruption, inability to obtain raw materials and supplies, U.S. fiscal debt, budget and tax matters, geopolitical matters and conflicts, and any slowdown in global economic growth; (3) the effect of, and changes in, monetary and fiscal policies and laws, including future changes in Federal and state statutory income tax rates and interest rate and other policy actions of the Board of Governors of the Federal Reserve System; (4) the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin; (5) future provisions for credit losses on loans and debt securities; (6) changes in nonperforming assets; (7) the effect of a fall in stock market or bond prices on the Company’s fee income businesses, including its employee benefit services, wealth management, and insurance businesses; (8) risks related to credit quality; (9) inflation, interest rate, liquidity, market and monetary fluctuations; (10) the strength of the U.S. economy in general and the strength of the local economies where the Company conducts its business; (11) the timely development of new products and services and customer perception of the overall value thereof (including features, pricing and quality) compared to competing products and services; (12) changes in consumer spending, borrowing and savings habits; (13) technological changes and implementation and financial risks associated with transitioning to new technology-based systems involving large multi-year contracts; (14) the ability of the Company to maintain the security, including cybersecurity, of its financial, accounting, technology, data processing and other operating systems, facilities and ~~facilities;~~data; (15) effectiveness of the Company’s risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, the Company’s ability to manage its credit or interest rate risk, the sufficiency of its allowance for credit losses and the accuracy of the assumptions or estimates used in preparing the Company’s financial statements and disclosures; (16) failure of third parties to provide various services that are important to the Company’s operations; (17) any acquisitions or mergers that might be considered or consummated by the Company and the costs and factors associated therewith, including differences in the actual financial results of the acquisition or merger compared to expectations and the realization of anticipated cost savings and revenue enhancements; (18) the ability to maintain and increase market share and control expenses; (19) the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of the Company and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, service fees, risk management, securities, capital requirements, and other aspects of the financial services industry; (20) changes in the Company’s organization, compensation and benefit plans and in the availability of, and compensation levels for, employees in its geographic markets; (21) the outcome of pending or future litigation and government ~~proceedings and local, state and Federal tax audits;~~proceedings; (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)~~(23) the success of the Company at managing the risks of the foregoing.

The foregoing list of important factors is not all-inclusive. For more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to the discussion under the heading ~~“Risk~~“Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K ~~filed with Securities and Exchange Commission (“SEC”)~~ for the fiscal year ended December 31, ~~2021~~2022 as filed with the SEC on March 1, 2023 and the ~~Quarterly Report on~~ Form 10-Q for the quarter ended March 31, 2023, as filed with the SEC on May 10, ~~2022 for the quarter ended March 31, 2022.~~2023. Any forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.

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Reconciliation of GAAP to Non-GAAP Measures

Table ~~10:~~11: 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)	2022		2021		2022		2021		2023			2022			2023			2022
Income statement data
Pre-tax, pre-provision net revenue
Net income (GAAP)	$	48,691	$	45,336	$	135,551	$	146,130	$	44,129		$	48,691		$	98,218		$	135,551
Income taxes		13,706		12,092		37,454		38,616		11,861			13,706			26,218			37,454
Income before income taxes		62,397		57,428		173,005		184,746		55,990			62,397			124,436			173,005
Provision for credit losses		5,061		(944)		12,005		(11,001)		2,878			5,061			7,130			12,005
Pre-tax, pre-provision net revenue (non-GAAP)		67,458		56,484		185,010		173,745		58,868			67,458			131,566			185,010
Acquisition expenses		409		102		4,668		133		0			409			56			4,668
Loss on sales of investment securities										0			0			52,329			0
Gain on debt extinguishment										0			0			(242)			0
Acquisition-related contingent consideration adjustment		0		0		400		0		80			0			1,080			400
Unrealized loss (gain) on equity securities		4		10		24		(14)
Litigation accrual		0		(100)		0		(100)
Unrealized loss on equity securities										49			4			99			24
Adjusted pre-tax, pre-provision net revenue (non-GAAP)	$	67,871	$	56,496	$	190,102	$	173,764	$	58,997		$	67,871		$	184,888		$	190,102

Pre-tax, pre-provision net revenue per share
Diluted earnings per share (GAAP)	$	0.90	$	0.83	$	2.49	$	2.68	$	0.82		$	0.90		$	1.82		$	2.49
Income taxes		0.25		0.22		0.69		0.71		0.22			0.25			0.48			0.69
Income before income taxes		1.15		1.05		3.18		3.39		1.04			1.15			2.30			3.18
Provision for credit losses		0.10		(0.01)		0.22		(0.20)		0.06			0.10			0.13			0.22
Pre-tax, pre-provision net revenue per share (non-GAAP)		1.25		1.04		3.40		3.19		1.10			1.25			2.43			3.40
Acquisition expenses		0.00		0.00		0.08		0.00		0.00			0.00			0.00			0.08
Loss on sales of investment securities										0.00			0.00			0.97			0.00
Gain on debt extinguishment										0.00			0.00			0.00			0.00
Acquisition-related contingent consideration adjustment		0.00		0.00		0.01		0.00		0.00			0.00			0.02			0.01
Unrealized loss (gain) on equity securities		0.00		0.00		0.00		0.00
Litigation accrual		0.00		0.00		0.00		0.00
Unrealized loss on equity securities										0.00			0.00			0.00			0.00
Adjusted pre-tax, pre-provision net revenue per share (non-GAAP)	$	1.25	$	1.04	$	3.49	$	3.19	$	1.10		$	1.25		$	3.42		$	3.49

Net income
Net income (GAAP)	$	48,691	$	45,336	$	135,551	$	146,130	$	44,129		$	48,691		$	98,218		$	135,551
Acquisition expenses		409		102		4,668		133		0			409			56			4,668
Tax effect of acquisition expenses		(90)		(21)		(1,009)		(27)		0			(90)			(12)			(1,009)
Subtotal (non-GAAP)		49,010		45,417		139,210		146,236		44,129			49,010			98,262			139,210
Loss on sales of investment securities										0			0			52,329			0
Tax effect of loss on sales of investment securities										0			0			(11,171)			0
Subtotal (non-GAAP)										44,129			49,010			139,420			139,210
Gain on debt extinguishment										0			0			(242)			0
Tax effect of gain on debt extinguishment										0			0			52			0
Subtotal (non-GAAP)										44,129			49,010			139,230			139,210
Acquisition-related contingent consideration adjustment		0		0		400		0		80			0			1,080			400
Tax effect of acquisition-related contingent consideration adjustment		0		0		(86)		0		(17)			0			(231)			(86)
Subtotal (non-GAAP)		49,010		45,417		139,524		146,236		44,192			49,010			140,079			139,524
Acquisition-related provision for credit losses		0		0		3,927		0		0			0			0			3,927
Tax effect of acquisition-related provision for credit losses		0		0		(848)		0		0			0			0			(848)
Subtotal (non-GAAP)		49,010		45,417		142,603		146,236		44,192			49,010			140,079			142,603
Unrealized loss (gain) on equity securities		4		10		24		(14)
Tax effect of unrealized loss (gain) on equity securities		(1)		(2)		(5)		2
Subtotal (non-GAAP)		49,013		45,425		142,622		146,224
Litigation accrual		0		(100)		0		(100)
Tax effect of litigation accrual		0		21		0		21
Unrealized loss on equity securities										49			4			99			24
Tax effect of unrealized loss on equity securities										(10)			(1)			(21)			(5)
Operating net income (non-GAAP)		49,013		45,346		142,622		146,145		44,231			49,013			140,157			142,622
Amortization of intangibles		3,837		3,703		11,420		10,300
Tax effect of amortization of intangibles		(843)		(780)		(2,472)		(2,155)
Amortization of intangible assets										3,576			3,837			10,948			11,420
Tax effect of amortization of intangible assets										(757)			(843)			(2,333)			(2,472)
Subtotal (non-GAAP)		52,007		48,269		151,570		154,290		47,050			52,007			148,772			151,570
Acquired non-PCD loan accretion		(1,397)		(906)		(3,154)		(3,177)		(948)			(1,397)			(2,913)			(3,154)
Tax effect of acquired non-PCD loan accretion		307		191		685		666		201			307			621			685
Adjusted net income (non-GAAP)	$	50,917	$	47,554	$	149,101	$	151,779	$	46,303		$	50,917		$	146,480		$	149,101

Return on average assets
Adjusted net income (non-GAAP)									$	46,303		$	50,917		$	146,480		$	149,101
Average total assets										15,123,226			15,553,296			15,212,471			15,533,915
Adjusted return on average assets (non-GAAP)										1.21	%		1.30	%		1.29	%		1.28	%

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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)	2022			2021			2022			2021			2023			2022			2023			2022
Return on average assets
Adjusted net income (non-GAAP)	$	50,917		$	47,554		$	149,101		$	151,779
Average total assets		15,553,296			15,027,478			15,533,915			14,638,269
Adjusted return on average assets (non-GAAP)		1.30	%		1.26	%		1.28	%		1.39	%
Income statement data, continued

Return on average equity
Adjusted net income (non-GAAP)	$	50,917		$	47,554		$	149,101		$	151,779		$	46,303		$	50,917		$	146,480		$	149,101
Average total equity		1,680,525			2,104,164			1,820,273			2,057,700			1,605,798			1,680,525			1,605,275			1,820,273
Adjusted return on average equity (non-GAAP)		12.02	%		8.97	%		10.95	%		9.86	%		11.44	%		12.02	%		12.20	%		10.95	%

Net interest margin
Net interest income													$	107,786		$	110,394		$	328,095		$	308,407
Total average interest-earning assets														13,945,949			14,612,179			14,029,458			14,441,465
Net interest margin														3.07	%		3.00	%		3.13	%		2.86	%

Net interest margin (FTE)
Net interest income													$	107,786		$	110,394		$	328,095		$	308,407
Fully tax-equivalent adjustment														1,034			1,118			3,205			2,956
Fully tax-equivalent net interest income														108,820			111,512			331,300			311,363
Total average interest-earning assets														13,945,949			14,612,179			14,029,458			14,441,465
Net interest margin (FTE) (non-GAAP)														3.10	%		3.03	%		3.16	%		2.88	%

Earnings per common share
Diluted earnings per share (GAAP)	$	0.90		$	0.83		$	2.49		$	2.68		$	0.82		$	0.90		$	1.82		$	2.49
Acquisition expenses		0.00			0.00			0.08			0.00			0.00			0.00			0.00			0.08
Tax effect of acquisition expenses		0.00			0.00			(0.02)			0.00			0.00			0.00			0.00			(0.02)
Subtotal (non-GAAP)														0.82			0.90			1.82			2.55
Loss on sales of investment securities														0.00			0.00			0.97			0.00
Tax effect of loss on sales of investment securities														0.00			0.00			(0.21)			0.00
Subtotal (non-GAAP)														0.82			0.90			2.58			2.55
Gain on debt extinguishment														0.00			0.00			0.00			0.00
Tax effect of gain on debt extinguishment														0.00			0.00			0.00			0.00
Subtotal (non-GAAP)		0.90			0.83			2.55			2.68			0.82			0.90			2.58			2.55
Acquisition-related contingent consideration adjustment		0.00			0.00			0.01			0.00			0.00			0.00			0.02			0.01
Tax effect of acquisition-related contingent consideration adjustment		0.00			0.00			0.00			0.00			0.00			0.00			0.00			0.00
Subtotal (non-GAAP)		0.90			0.83			2.56			2.68			0.82			0.90			2.60			2.56
Acquisition-related provision for credit losses		0.00			0.00			0.07			0.00			0.00			0.00			0.00			0.07
Tax effect of acquisition-related provision for credit losses		0.00			0.00			(0.01)			0.00			0.00			0.00			0.00			(0.01)
Subtotal (non-GAAP)		0.90			0.83			2.62			2.68			0.82			0.90			2.60			2.62
Unrealized loss (gain) on equity securities		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
Subtotal (non-GAAP)		0.90			0.83			2.62			2.68
Litigation accrual		0.00			0.00			0.00			0.00
Tax effect of litigation accrual		0.00			0.00			0.00			0.00
Unrealized loss on equity securities														0.00			0.00			0.00			0.00
Tax effect of unrealized loss on equity securities														0.00			0.00			0.00			0.00
Operating earnings per share (non-GAAP)		0.90			0.83			2.62			2.68			0.82			0.90			2.60			2.62
Amortization of intangibles		0.07			0.07			0.21			0.19
Tax effect of amortization of intangibles		(0.02)			(0.01)			(0.05)			(0.04)
Amortization of intangible assets														0.07			0.07			0.20			0.21
Tax effect of amortization of intangible assets														(0.01)			(0.02)			(0.04)			(0.05)
Subtotal (non-GAAP)		0.95			0.89			2.78			2.83			0.88			0.95			2.76			2.78
Acquired non-PCD loan accretion		(0.02)			(0.02)			(0.06)			(0.06)			(0.02)			(0.02)			(0.06)			(0.06)
Tax effect of acquired non-PCD loan accretion		0.01			0.00			0.02			0.01			0.00			0.01			0.01			0.02
Diluted adjusted net earnings per share (non-GAAP)	$	0.94		$	0.87		$	2.74		$	2.78		$	0.86		$	0.94		$	2.71		$	2.74

Efficiency ratio – GAAP
Noninterest expenses (GAAP) - numerator													$	116,504		$	108,185		$	343,594		$	318,416
Net interest income (GAAP)														107,786			110,394			328,095			308,407
Noninterest revenues (GAAP)														67,586			65,249			147,065			195,019
Total revenues (GAAP) - denominator													$	175,372		$	175,643		$	475,160		$	503,426
Efficiency ratio (GAAP)														66.4	%		61.6	%		72.3	%		63.2	%

Noninterest operating expenses
Noninterest expenses (GAAP)	$	108,185		$	100,436		$	318,416		$	287,225		$	116,504		$	108,185		$	343,594		$	318,416
Amortization of intangibles		(3,837)			(3,703)			(11,420)			(10,300)
Amortization of intangible assets														(3,576)			(3,837)			(10,948)			(11,420)
Acquisition expenses		(409)			(102)			(4,668)			(133)			0			(409)			(56)			(4,668)
Acquisition-related contingent consideration adjustment		0			0			(400)			0			(80)			0			(1,080)			(400)
Litigation accrual		0			100			0			100
Total adjusted noninterest expenses (non-GAAP)	$	103,939		$	96,731		$	301,928		$	276,892		$	112,848		$	103,939		$	331,510		$	301,928

Efficiency ratio
Operating efficiency ratio – non-GAAP
Adjusted noninterest expenses (non-GAAP) - numerator	$	103,939		$	96,731		$	301,928		$	276,892		$	112,848		$	103,939		$	331,510		$	301,928
Fully tax-equivalent net interest income		111,512			93,416			311,363			281,242			108,820			111,512			331,300			311,363
Noninterest revenues		65,249			64,309			195,019			182,300			67,586			65,249			147,065			195,019
Acquired non-PCD loan accretion		(1,397)			(906)			(3,154)			(3,177)			(948)			(1,397)			(2,913)			(3,154)
Unrealized loss (gain) on equity securities		4			10			24			(14)
Unrealized loss on equity securities														49			4			99			24
Loss on sales of investment securities														0			0			52,329			0
Gain on debt extinguishment														0			0			(242)			0
Operating revenues (non-GAAP) - denominator	$	175,368		$	156,829		$	503,252		$	460,351		$	175,507		$	175,368		$	527,638		$	503,252
Efficiency ratio (non-GAAP)		59.3	%		61.7	%		60.0	%		60.1	%
Operating efficiency ratio (non-GAAP)														64.3	%		59.3	%		62.8	%		60.0	%

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	September 30,			December 31,			September 30,			September 30,			December 31,			September 30,
(000’s omitted)	2022			2021			2021			2023			2022			2022
Balance sheet data - at end of quarter
Total assets
Total assets (GAAP)	$	15,594,547		$	15,552,657		$	15,331,098		$	15,386,322		$	15,835,651		$	15,594,547
Intangible assets		(909,224)			(864,335)			(868,104)
Deferred taxes on intangible assets		48,893			44,160			43,768
Goodwill and intangible assets, net											(901,334)			(902,837)			(909,224)
Deferred taxes on goodwill and intangible assets, net											44,593			46,130			48,893
Total tangible assets (non-GAAP)	$	14,734,216		$	14,732,482		$	14,506,762		$	14,529,581		$	14,978,944		$	14,734,216

Total common equity
Shareholders’ Equity (GAAP)	$	1,461,163		$	2,100,807		$	2,069,934
Intangible assets		(909,224)			(864,335)			(868,104)
Deferred taxes on intangible assets		48,893			44,160			43,768
Shareholders' equity (GAAP)										$	1,554,939		$	1,551,705		$	1,461,163
Goodwill and intangible assets, net											(901,334)			(902,837)			(909,224)
Deferred taxes on goodwill and intangible assets, net											44,593			46,130			48,893
Total tangible common equity (non-GAAP)	$	600,832		$	1,280,632		$	1,245,598		$	698,198		$	694,998		$	600,832

Net tangible equity-to-assets ratio at quarter end
Shareholders' equity-to-assets ratio
Total shareholders' equity (GAAP) - numerator										$	1,554,939		$	1,551,705		$	1,461,163
Total assets (GAAP) - denominator										$	15,386,322		$	15,835,651		$	15,594,547
Shareholders' equity-to-assets ratio (GAAP)											10.11	%		9.80	%		9.37	%

Tangible equity-to-assets ratio
Total tangible common equity (non-GAAP) - numerator	$	600,832		$	1,280,632		$	1,245,598		$	698,198		$	694,998		$	600,832
Total tangible assets (non-GAAP) - denominator	$	14,734,216		$	14,732,482		$	14,506,762		$	14,529,581		$	14,978,944		$	14,734,216
Net tangible equity-to-assets ratio at quarter end (non-GAAP)		4.08	%		8.69	%		8.59	%
Tangible equity-to-assets ratio (non-GAAP)											4.81	%		4.64	%		4.08	%

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 collateralized mortgage obligation securities issued by government agencies comprise ~~90.8%~~88.4% of the total portfolio and are currently rated AAA by Moody’s Investor Services and AA+ by Standard & Poor’s. Obligations of state and political subdivisions account for ~~9.1%~~11.4% of the total portfolio, of which, ~~96.4%~~96.2% carry a minimum rating of A-. The remaining ~~0.1%~~0.2% 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 over the short and long term time horizons is an important component of the Company’s asset/liability management process, which is governed by 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 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~~The direction of interest rates, ~~on new loans~~the slope of the yield curve, the modeled changes in deposit balances and ~~a significant increase~~the cost of funds, including, the Company’s deposit and funding betas are not easily predicted 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~~current market environment, and ~~the third quarter income simulation.~~

~~While~~therefore, a wide variety of strategic balance sheet and treasury yield curve scenarios are ~~tested~~modeled on an ongoing ~~basis, the~~basis.

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The following reflects the Company’s estimated NII sensitivity as compared to the base case scenario over the subsequent twelve months based on:

●

Balance sheet levels using September 30, ~~2022~~2023 as a starting point.

●

The model assumes the Company’s average deposit balances will increase approximately ~~2.4%~~1.6% over the next twelve months.

~~Table of Contents~~

●

The model assumes the Company’s average earning asset balances will increase approximately ~~1.4%~~6.6% over the next twelve ~~months.~~months, largely due to forecasted loan growth.

●

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. ~~All loan balances are generally projected to increase modestly throughout the forecast period.~~

●

The model assumes no additional investment 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, and treasury curve rates are assumed to move upup/down in a parallel manner by the amounts listed below over a 12-month ~~period while moving~~period. Deposit balance and mix changes and 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~~resultant deposit and funding betas are assumed to move in a manner that reflects the Company’s (i) long-term historical relationship between the Company’s deposit rate movement and changes in the federal funds ~~rate. In the -100 basis point model, the prime~~rate, (ii) recent interest rate cycle experience, (iii) significant management judgment and ~~federal funds rates are dropped one hundred basis points each,~~(iv) other factors, including recent market behaviors of customers and the treasury curve assumes the same slope as the rising rate scenarios, with all points normalizing off of the three month treasury rate, which is lowered by one hundred basis points from the 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.competitors.

Net Interest Income Sensitivity Model


	Calculated annualized increase	Calculated annualized increase	Calculated annualized increase		Calculated annualized increase
	(decrease) in projected net interest	(decrease) in projected net interest	(decrease) in projected net interest		(decrease) in projected net interest
	income at September 30, 2022	income at September 30, 2022	income at September 30, 2023		income at September 30, 2023
Interest rate scenario	(000’s omitted)	(%)	(000’s omitted)		(%)
+300 basis points	($8,243)	(1.8%)
+200 basis points	($5,702)	(1.2%)	$	(12,555)	(2.8)	%
+100 basis points	($3,217)	(0.7%)	$	(6,402)	(1.4)	%
-100 basis points	($763)	(0.2%)	$	4,381	1.0	%
-200 basis points	($2,455)	(0.5%)	$	6,910	1.5	%
-300 basis points	($9,804)	(2.1%)

Projected NII over the 12-month forecast period decreases in the ~~rising~~up 100 and up 200 rate environments largely due to deposits and overnight borrowings repricing higher in year 1, which are only partially offset by loans repricing higher. ~~Over~~

Projected NII increases in the ~~longer time period, the growth in NII begins to improve in all rising~~down 100 and down 200 rate environments ~~as the impact from lower yielding assets maturing and being replaced at higher rates is significantly more material than the increase in funding costs.~~

~~In the falling rate scenarios, the Company shows interest rate risk exposure to lower rates on all terms. During the first twelve months, net interest income declines largely~~ due to lower ~~assumed rates on loan originations, and certain adjustable and variable rate loans. Modestly lower~~ funding costs ~~associated with deposits and borrowings only~~which are partially offset ~~the decrease in interest income.~~by lower income on loans.

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 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 and other developments.

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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, ~~2022.~~2023.

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, ~~2022~~2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 or other matters in which claims for monetary damages are asserted. As of September 30, ~~2022,~~2023, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of ~~litigation~~such pending or threatened matters against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such ~~legal proceedings.~~matters. 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~~such matters 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 not believed to be ~~between $0 and $1 million~~material 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 and other matters is set forth in Note J to the consolidated financial statements included under Part I, Item 1. ~~Although~~While the Company does not believe that the outcome of pending or threatened litigation or other matters will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

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, ~~2021,~~2022, as filed with the SEC on March 1, ~~2022,~~2023, and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2022,~~2023, as filed with the SEC on May 10, ~~2022.~~2023.

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

a)	~~Not applicable.~~

b)	~~Not applicable.~~

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

a)Not applicable.

b)Not applicable.

c)At its December 2022 meeting, the Board approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,697,000 shares of the Company’s common stock, in accordance with securities and banking laws and regulations, during the twelve-month period beginning January 1, 2023. 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.

~~Table of Contents~~

The following table presents stock purchases made during the third quarter of ~~2022:~~2023:

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, 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
July 1-31, 2023						1,172	$	44.36	0	2,297,000
August 1-31, 2023						100,000		51.08	100,000	2,197,000
September 1-30, 2023						0		0.00	0	2,197,000
Total ⁽¹⁾	903	$	63.64			101,172	$	51.00	100,000

(1)	Included in the common shares repurchased were ~~903~~1,172 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.

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Item 3.Defaults Upon Senior Securities

Not applicable.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

a)Not applicable.

b)Not applicable.

c)Certain of the Company’s officers or directors have made elections to participate in, and are participating in, the Company’s dividend reinvestment plan and 401(k) plan, and have made, and may from time to time make, elections to have shares withheld to cover withholding taxes or pay the exercise price of options or the settlement of restricted stock, each of which may be designed to satisfy the affirmative defense conditions of Rule 10b5-1 under the Exchange Act or may constitute non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K).

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Item 6.Exhibits


Exhibit No.		Description
10.1
~~10.1~~		~~Amendment to~~ Employment Agreement, ~~effective August 24, 2022,~~dated July 5, 2023, 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~~July 5, 2023 (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.~~ Executive Severance Plan, dated July 18, 2023. Incorporated by reference to Exhibit No. ~~10.2~~10.1 to the Current Report on Form 8-K filed on ~~August 26, 2022~~July 21, 2023 (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.⁽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.⁽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.⁽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.⁽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. ⁽²⁾
101.SCH		Inline XBRL Taxonomy Extension Schema Document ⁽²⁾
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document ⁽²⁾
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document ⁽²⁾
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document ⁽²⁾
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document ⁽²⁾
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) ⁽²⁾

(1)	Denotes management contract or compensatory plan or arrangement.

(2)	Filed herewith.

(3)	Furnished herewith.

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SIGNATURES

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

Community Bank System, Inc.

Date: November 9, ~~2022~~2023	/s/ Mark E. Tryniski
	Mark E. Tryniski, President and Chief Executive Officer


Date: November 9, ~~2022~~2023	/s/ Joseph E. Sutaris
	Joseph E. Sutaris, Treasurer and Chief Financial Officer

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	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, 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


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