Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

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.

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 ☑

The registrant had ~~16,038,220~~15,837,725 shares of Common Stock, $0.01 par value, outstanding as of October 31, ~~2020.~~2021.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (Continued)

Financial Institutions, Inc. (the “Company”) is a financial holding company organized in 1931 under the laws of New York State (“New York”). The Company provides diversified financial services through its subsidiaries, Five Star Bank, SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York chartered banking subsidiary, Five Star Bank (the “Bank”). The Bank also has indirect lending network relationships with franchised automobile dealers in the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after October 15, 2025, and to redeem the Notes in whole at any time upon certain other specified events. The Company intends to use the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.

In connection with the issuance and sale of the Notes, the Company entered into a registration rights agreement with the purchasers of the Notes pursuant to which the Company has agreed to take certain actions to provide for the exchange of the Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, with substantially the same terms as the Notes.

In October 2020, the Company announced the planned closure of 1 additional branch in January 2021. This location was not included in the branch consolidations announced in July, as alternative options were being considered and consolidation was not possible given its significant distance from other Five Star Bank branches. This closure is expected to result in one-time expenses related to severance costs and real estate related charges of approximately $130 thousand in the fourth quarter of 2020. Expected expense savings are anticipated at $340 thousand on an annualized basis.

In November 2020, the Company announced that its Board of Directors approved a stock repurchase program for up to 801,879 shares of its common stock, or approximately 5% of the Company’s outstanding common shares. The repurchase program permits shares to be repurchased in open market transactions and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The timing and number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to purchase any shares and it may be extended, modified or discontinued at any time.

The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates relate to the determination of the allowance for credit losses, the carrying value of goodwill and deferred tax assets, and assumptions used in the defined benefit pension plan accounting.

(1.)BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In ~~April 2019,~~2017, the United Kingdom’s Financial ~~Accounting Standards Board~~Conduct Authority (“~~FASB”~~FCA”) ~~issued ASU No. 2019-04, Codification Improvements~~, who is responsible for regulating the London Interbank Offered Rate (“LIBOR”), announced its intention that it would no longer be necessary to ~~Topic 326, Financial Instruments - Credit Losses, Topic 815,~~persuade or compel its panel banks to submit LIBOR rates after December 31, 2021. On March 5, 2021, the ICE Benchmark Administration (“IBA”), the administrator of LIBOR, released the results of its consultation on the cessation timeline for certain LIBOR tenors. In coordination with the IBA, the FCA also confirmed when certain LIBOR tenors will cease to exist. The results of the consultation indicated that certain LIBOR tenors (overnight, one-month, three-month, six-month, and twelve-month USD LIBOR) will be extended to June 30, 2023 to allow some legacy contracts that cannot be easily amended to mature on their current terms. Notwithstanding the extension of certain LIBOR tenors to 2023, banks may no longer offer new LIBOR-based contracts after December 31, 2021. Given that LIBOR is a widely used pricing index for loan and derivative contracts, a Company-wide initiative was introduced to assess all LIBOR exposures through the Company’s loan, deposit, borrowing and derivative categories, while developing a plan for the ultimate cessation of the index. In developing the transition plan, the Company has followed best practice recommendations from the Federal Reserve’s Alternative Reference Rate Committee, our third-party derivative advisor and the Internal Swaps and Derivatives ~~and Hedging, and Topic 825, Financial Instruments. With respect~~Association. To date, the Company has identified the portion of loan notes that reference LIBOR, which are primarily representative of commercial relationships. Additionally, the Company has 1 designated derivative instrument that is utilized to ~~Topic 815, Derivatives and Hedging, ASU 2019-04 clarifies that~~hedge the ~~reclassification~~LIBOR characteristic of a ~~debt security from Held~~future dated borrowing (i.e. Federal Home Loan Bank Advance). In 2015, the Company issued $40 million in fixed to ~~Maturity (“HTM”)~~floating rate subordinated notes that currently bear a fixed rate of interest at 6.00% until April 2025, when the rate converts to ~~Available for Sale (“AFS”)~~a floating rate equal to three-month LIBOR plus 3.944%; the indenture under which the ~~transition guidance in ASU No. 2017-12,~~ ~~Derivatives and Hedging (Topic 815) – Targeted Improvements~~notes were issued includes language allowing an alternate index to ~~Accounting for Hedging Activities, would not (1) call into question the classification of other HTM securities, (2)~~ be required to actually designate any reclassified security in a last-of-layer hedge, or (3) be restricted from selling any reclassified security. As part of the transition of ASU 2019-04, entities may reclassify securities that would qualify for designation as the hedged item in a last-of-layer hedging relationship from HTM to AFS; however, entities that already made such a reclassification upon their adoption of ASU 2017-12 are precluded from reclassifying additional securities. The Company did not reclassify any securities from HTM to AFS upon adoption of ASU 2017-12. The Company elected to early adopt the amendments to Topic 815 in December 2019, resultingapplied in the ~~reclassification of $26.2 million of qualified investment securities from HTM to AFS. With respect to Topic 326, Financial Instruments - Credit Losses, ASU 2019-04 clarifies~~event that LIBOR becomes unavailable at the ~~scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among~~floating rate determination date. At this time, no other things. With respect to Topic 825, Financial Instruments, on recognizing and measuring financial instruments, ASU 2019-04 addresses the scope of the guidance, the requirement for remeasurement under ASC 820 (Fair Value Measurement) when using the measurement alternative, certain disclosure requirements and which equity securitiesborrowing or deposit relationships have ~~to be remeasured at historical exchange rates. The amendments to Topic 326 and the amendments to Topic 825, under ASU 2019-04, were adopted~~been identified that utilize LIBOR as ~~of January 1, 2020 and did not have a significant impact on the Company’s financial statements.~~an index.

In March 2020, the FASB issued ASU No. 2020-04, ~~“Facilitation~~Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial ~~Reporting.” This~~Reporting. The ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative rates, such as SOFR. For instance, entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, entities can make a one-time election to sell and/or reclassify HTM debt securities that reference an interest rate affected by reference rate reform. ASU 2020-04 isbecame effective during the first quarter of 2020 and applies to contract modifications and amendments made as of the beginning of the reporting period including the ASU’s issuance date, March 12, 2020, through December 31, 2022. The ~~Company is~~adoption of this guidance in 2020 resulted in the ~~process~~application of ~~determining~~certain practical expedients, which did not have a material effect on the Company's consolidated financial statements.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to ~~elect, if any, as well as~~derivatives that are affected by the ~~timing~~discounting transition. The ASU also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and applies through December 31, 2022. The adoption of this guidance resulted in the application of ~~those elections. At this time, the Company does~~certain practical expedients, which did not ~~expect any elections to~~ have a ~~significant impact~~material effect on ~~its~~the Company's consolidated financial statements.

On July 17, 2020, the Bank announced management’s decision to adapt to a full-service branch model to streamline retail branches to better align with shifting customer needs and preferences. The transformation resulted in 6 branch closures and a reduction in staffing. The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conducted in partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping service areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and facilitate the long-term sustainability of current and future branches. The announced consolidations represented about 10 percent of the branch network and impacted approximately 6 percent of the total Company workforce. Where possible, those impacted were offered alternative roles or the opportunity to apply for open positions in other areas of the Company. Separated associates received a comprehensive severance package based on tenure. ~~The~~

In October 2020, the Company ~~expects to complete a substantial majority~~announced the planned closure of ~~these actions by December 31, 2020.~~1 additional branch that closed in January 2021. This location was not included in the branch consolidations announced in July 2020, as alternative options were being considered and consolidation was not possible given its significant distance from other Bank branches.

The Company incurred total pre-tax expense related to the branch closures of approximately ~~$1.6~~$1.7 million, including approximately ~~$0.2~~$0.2 million in employee severance, ~~$0.5~~$0.5 million in lease termination costs and ~~$0.9~~$1.0 million in valuation adjustments on branch facilities. The Company recognized all of these expenses during 2020. The Company expects ~~$0.7~~$0.8 million of total costs will result in future cash expenditures. The Company ~~recognized all of these expenses during the third quarter of 2020. The Company~~ anticipates annual expense savings of approximately ~~$2.6~~$2.7 million as a result of these branch closures.

The following table represents the consolidated statements of income classification of the ~~Company’s~~Company's restructuring charges (in thousands):

The following table represents the changes in the restructuring reserve (in thousands):

In contemplation of the transactions noted above, certain long-lived assets have met the held for sale criteria as of September 30, 2021. The Company reclassified $4.7 million from premises and equipment, net to other assets on the consolidated statement of financial condition as of September 30, 2021. NaN long-lived assets were reclassified as held for sale as of December 31, 2020.

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS (in thousands, except per share amounts).

For each of the periods presented, average shares subject to the following instruments were excluded from the computation of diluted EPS because the effect would be ~~antidilutive:~~antidilutive (in thousands):

The amortized cost and fair value of investment securities are summarized below (in thousands):

The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. For ~~AFS~~available for sale (“AFS”) debt securities, AIR totaled ~~$1.0~~$1.9 million and $1.2 million as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. For ~~HTM~~held to maturity (“HTM”) debt securities, AIR totaled ~~$1.4~~$1.0 million and ~~$1.2 million~~$905 thousand as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.

For ~~each of~~ the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, credit loss expense (credit) for HTM investment securities was ~~$0.~~$(1) thousand and $0, respectively. For the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, credit loss expense (credit) for HTM investment securities was ~~$(6)~~$(2) thousand and ~~$0,~~$(6) thousand, respectively.

Investment securities with a total fair value of ~~$634.4~~$861.2 million and ~~$676.9~~$567.4 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

The scheduled maturities of securities available for sale and securities held to maturity at September 30, ~~2020~~2021 are shown below (in thousands). Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

Unrealized losses on investment securities for which an allowance for credit losses has not been recorded and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands):

The total number of securities positions in the investment portfolio in an unrealized loss position at September 30, ~~2020~~2021 was 1699 compared to 918 at December 31, ~~2019.~~2020. At September 30, ~~2020,~~2021, the Company had ~~a position~~positions in 16 investment ~~security~~securities with a fair value of ~~$8 thousand~~$16.8 million and a total unrealized loss of ~~less than $1~~$541 thousand dollars that has been in a continuous unrealized loss position for more than 12 months. At September 30, ~~2020,~~2021, there were a total of 1593 securities positions in the Company’s investment portfolio with a fair value of ~~$83.2~~$768.3 million and a total unrealized loss of ~~$206 thousand~~$11.8 million that had been in a continuous unrealized loss position for less than 12 months. At December 31, ~~2019,~~2020, the Company had ~~positions~~a position in 341 investment ~~securities~~security with a fair value of ~~$47.2 million~~8 thousand dollars and a total unrealized loss of ~~$659~~less than 1 thousand dollars that had been in a continuous unrealized loss position for more than 12 months. At December 31, ~~2019,~~2020, there were a total of 577 securities positions in the Company’s investment portfolio with a fair value of ~~$178.7~~$29.1 million and a total unrealized loss of ~~$1.6 million~~$68 thousand that had been in a continuous unrealized loss position for less than 12 months. The unrealized loss on investment securities was predominantly caused by changes in market interest rates subsequent to purchase. The fair value of most of the investment securities in the Company’s portfolio fluctuates as market interest rates change.

As of September 30, 2021 and December 31, 2020, 0 allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities ~~are~~were impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

The Company’s HTM investment securities include debt securities that are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. In addition, the Company’s HTM investment securities include debt securities that are issued by state and local government agencies, or municipal bonds.

The Company monitors the credit quality of our municipal bonds through the use of a credit rating agency or by ratings that are derived by an internal scoring model. The scoring methodology for the internally derived ratings is based on a series of financial ratios for the municipality being reviewed as compared to typical industry figures. This information is used to determine the financial strengths and weaknesses of the municipality, which is indicated with a numeric rating. This number is then converted into a letter rating to better match the system used by the credit rating agencies. As of September 30, ~~2020, $151.6~~2021, $111.0 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with ~~$8.5~~$5.8 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating. Additionally, no municipal bonds were rated below investment grade. As of December 31, 2020, $135.7 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $8.5 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating. Additionally, one municipal bond iswas rated below investment grade, with a BB+ Standard & Poor’s equivalent rating. The below investment grade bond ~~was recently upgraded from a Standard & Poor’s equivalent rating of BB-, represents~~represented exposure of ~~$279~~$279 thousand, or ~~0.18%~~0.19% of the municipal bond portfolio and ishad been closely monitored for repayment.

As of September 30, 2021 and December 31, 2020, the Company had 0 past due or nonaccrual held to maturity investment securities.

The Company’s loan portfolio consisted of the following as of the dates indicated (in thousands):

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled ~~$7.1~~$5.9 million and ~~$4.2~~$4.3 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act established the PPP, an expansion of the SBA’s 7(a) loan program and the EIDL, administered directly by the SBA. The Company had ~~$270.5~~$121.4 million and $253.1 million of PPP loans (included in Commercial business above) as of September 30, ~~2020.~~2021 and December 31, 2020, respectively. In addition, the CARES Act provides that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Accordingly, the Company had ~~$526.7~~$532.4 million of loans with modifications related to COVID-19 during 2020, with $61.4 million and $113.0 million still on deferral as of September 30, ~~2020.~~2021 and December 31, 2020, respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, AIR for loans totaled ~~$13.7~~$12.8 million and ~~$9.1~~$13.6 million, respectively, and is included in other assets on the Company’s consolidated statements of financial condition.

The Company had $11.4 million of PPP loans 30-59 days past due (included in Commercial business above) as of September 30, 2021. Repayment of PPP loans is 100% secured by guarantees from the SBA.

There were 0 loans past due greater than 90 days and still accruing interest as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. There were ~~$141~~$1 thousand and $6$231 thousand in consumer overdrafts which were past due greater than 90 days as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

The Company recognized 0 interest income on nonaccrual loans during the nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. Commercial loans modified in a TDR may involve temporary interest-only payments, term extensions, reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, collateral concessions, forgiveness of principal, forbearance agreements, or substituting or adding a new borrower or guarantor.

There were 0 loans modified as a TDR during the nine months ended September 30, ~~2020~~2021 and 2019. During the third quarter of 2020, the Company discovered that the previously reported 2020 TDR was reported in error. This correction had no impact to any other section within our consolidated financial statements and the Company does not consider this correction to be material to any previously issued consolidated financial statement.2020. There were 0 loans modified as a TDR within the previous 12 months that defaulted during the nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020. For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due.

Management has determined that specific commercial loans on nonaccrual status, ~~and~~ all loans that have had their terms restructured in a troubled debt restructuring and other loans deemed appropriate by management where repayment is expected to be provided substantially through the operation or sale of the collateral to be collateral dependent loans. Collateral dependent loans at September 30, 2021 and December 31, 2020 included certain criticized COVID-19 bridge loans not otherwise classified as nonaccrual. The following table presents the amortized cost basis of collateral dependent loans by collateral type as of September 30, 2021 and December 31, 2020 (in thousands):

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors such as the fair value of collateral. The Company analyzes commercial business and commercial mortgage loans individually by classifying the loans as to credit risk. Risk ratings are updated any time the situation warrants. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans that do not meet the criteria above that are analyzed individually as part of the process described above are considered “uncriticized” or pass-rated loans and are included in groups of homogeneous loans with similar risk and loss characteristics.

The Company utilizes payment status as a means of identifying and reporting problem and potential problem retail loans. The Company considers nonaccrual loans and loans past due greater than 90 days and still accruing interest to be non-performing. The following ~~table sets~~tables set forth the Company’s retail loan portfolio, categorized by performance status, as of the dates indicated (in thousands):

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. The Company adopted ASU 2016-13 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net reduction of retained earnings of $8.7 million upon adoption. The transition adjustment includes an increase in credit-related reserves of $9.6 million, $14 thousand, and $2.1 million for loans, held to maturity investment securities and unfunded commitments, respectively, net of the corresponding increase in deferred tax assets of $3.0 million.

~~The following table sets forth the changes in the allowance for credit losses - loans for the three- and nine-month periods ended September 30, 2019 (in thousands):~~

~~Loans and the related allowance for credit losses - loans are presented below as of the dates indicated (in thousands):~~

Commercial business loans primarily consist of loans to small to mid-sized businesses in our market area in a diverse range of industries. These loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic conditions, including the impact of the COVID-19 pandemic on small to mid-sized business in our market area, and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, potentially resulting in higher potential losses on an individual customer basis. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral securing the loan. Economic events, including the impact of the COVID-19 pandemic on the ability of the tenants to pay rent at these properties, or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Company’s commercial real estate loans and on the value of such properties.

Residential real estate loans (comprised of conventional mortgages and home equity loans) and residential real estate lines (comprised of home equity lines) are generally made based on the borrower’s ability to make repayment from his or her employment and other income but are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, including the impact of the COVID-19 pandemic on the employment income of these borrowers, the characteristics of individual borrowers, and the nature of the loan collateral.

Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances such as job loss, illness or personal bankruptcy, including the heightened risk that such circumstances may arise as a result of the COVID-19 pandemic. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

The carrying amount of goodwill totaled ~~$66.1~~$67.1 million and $66.1 million as of both September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. The Company performs a goodwill impairment test on an annual basis as of October 1st or more frequently if events and circumstances warrant.

Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based on the volatility in the capital markets in 2020 and overall economic conditions as a result of the COVID-19 pandemic accompanied by a decline in the Company’s stock price, a quantitative assessment was performed for the Banking segment in the third quarter of 2020. Based on this quantitative assessment, the Company concluded that goodwill was 0t impaired for the Banking segment. Based on its qualitative assessment for each of(1) All Other includes the SDN, Courier Capital and HNP Capital reporting units

Goodwill and other intangible assets added during the ~~Company concluded that it~~period relates to the acquisition of assets of Landmark, which was ~~more likely than not that goodwill~~completed on February 1, 2021 and the acquisition of assets of North Woods, which was ~~0t impaired as of September 30, 2020. Therefore, no quantitative assessment was deemed necessary as of September 30, 2020.~~completed on August 2, 2021. See Note 2 – Business Combinations for additional information.

The Company has other intangible assets that are amortized, consisting of core deposit intangibles and other intangibles (primarily related to customer relationships). Gross carrying amount, accumulated amortization and net book value, were as follows (in thousands):

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities, and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate caps and interest rate swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During the first nine months of ~~2020~~2021 and in ~~2019,~~2020, such derivatives were used to hedge the variable cash flows associated with short-term borrowings. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a period of approximately 60 months. As of September 30, ~~2020,~~2021, the Company had 1 outstanding forward starting interest rate derivative with a notional value of ~~$50.0~~$50.0 million that was designated as a cash flow hedge of interest rate risk. The derivative becomes effective in April ~~2022.~~2022.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s cash flow hedge derivatives did not have any hedge ineffectiveness recognized in earnings during the nine months ended September 30, 2020 and 2019. During the next twelve months, the Company estimates that ~~$283~~$142 thousand will be reclassified ~~as an increase to~~into interest expense.

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

The Company has agreements with certain of its derivative counterparties that contain one or more of the following provisions: (a) if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations, and (b) if the Company fails to maintain its status as a well-capitalized institution, the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

The Company extends rate lock agreements to borrowers related to the origination of residential mortgage loans. To mitigate the interest rate risk inherent in these rate lock agreements when the Company intends to sell the related loan, once originated, as well as closed residential mortgage loans held for sale, the Company enters into forward commitments to sell individual residential mortgages. Rate lock agreements and forward commitments are considered derivatives and are recorded at fair value.

The changes in shares of common stock were as follows for the three and nine months ended September 30, 2021 and 2020:

In November 2020, the Company’s Board of Directors authorized a share repurchase program for up to 801,879 shares of common stock. Repurchased shares are recorded in treasury stock, at cost, which includes any applicable transaction costs. 238,439 shares were repurchased at an average price of $24.30 during the nine months ended September 30, 2021. NaN shares were repurchased under this program during the three months ended September 30, 2021 and ~~2019:~~during the year ended December 31, 2020. As of September 30, 2021, the remaining number of shares authorized for repurchase under the repurchase program was 563,440.

The following tables present the components of other comprehensive income (loss) for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 (in thousands):

(1) Includes amounts related to the amortization/accretion of unrealized net gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category. The unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield.

Activity in accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 was as follows (in thousands):

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 (in thousands):

(1) These items are included in the computation of net periodic pension expense. See Note 14 – Employee Benefit Plans for additional information.

The Company maintains certain share-based compensation plans, approved by the Company’s shareholders, that are administered by the Management Development and Compensation Committee (the “MD&C Committee”) of the Board. The share-based compensation plans were established to allow for the grant of compensation awards to attract, motivate and retain employees, executive officers and non-employee directors who contribute to the long-term growth and profitability of the Company and to give such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Company’s success.

The grant-date fair value for the RSUs granted during the nine months ended September 30, ~~2020~~2021 is equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.

~~NaN~~Fifty percent of the PSUs that ultimately vest is contingent on achieving specified return on average equity (“ROAE”) targets relative to the SNL Small Cap Bank & Thrift Index, a market index the MD&C Committee has selected as a peer group for this purpose. These shares will be earned based on the Company’s achievement of a relative ROAE performance requirement, on a percentile basis, compared to the SNL Small Cap Bank & Thrift Index over a three-year performance period ended December 31, ~~2022.~~ 2023. During the three months ended September 30, 2021, the SNL Small Cap Bank & Thrift Index was delisted and the Company is currently evaluating an alternative market index. The shares earned based on the achievement of the ROAE performance requirement, if any, will vest on the third anniversary of the grant date assuming the recipient’s continuous service to the ~~Company.~~Company. The remaining 50fifty percent of the PSUs that ultimately vest is contingent upon achievement of an average return on average assets (“ROAA”) performance requirement over a three-year performance period ended December 31, ~~2022.~~ 2023. The shares earned based on the achievement of the ROAA performance requirement, if any, will vest on the third anniversary of the grant date assuming the recipient’s continuous service to the ~~Company.~~ Company.

The grant-date fair values for both the ROAE and the ROAA portions of PSUs granted during the nine months ended September 30, ~~2020~~2021 are equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.

During the nine months ended September 30, ~~2020,~~2021, the Company issued a total of ~~5,403~~3,680 shares of common stock ~~in-lieu~~in lieu of cash for the annual retainer of 46 non-employee directors and granted a total of ~~12,798~~9,350 restricted shares of common stock to non-employee directors, of which ~~6,399~~4,670 shares vested immediately and ~~6,399~~4,680 shares will vest after completion of a one-year service requirement. The market value of the stock and restricted stock at the close of the Nasdaq Global Select Market on the date of grant was ~~$17.57.~~$32.06.

At September 30, ~~2020,~~2021, there was ~~$2.5~~$2.9 million of unrecognized compensation expense related to unvested restricted stock awards and restricted stock units that is expected to be recognized over a weighted average period of ~~1.96~~1.95 years.

The Company uses the Black-Scholes valuation method to estimate the fair value of its stock option awards. There were 0 stock options awarded during the first nine months of 2020 or 2019. There was 0 unrecognized compensation expense related to unvested stock options as of September 30, 2020. There was 0 stock option activity for the nine months ended September 30, 2020.

The Company amortizes the expense related to share-based compensation awards over the vesting period. Share-based compensation expense is recorded as a component of salaries and employee benefits in the consolidated statements of income for awards granted to management and as a component of other noninterest expense for awards granted to directors. The share-based compensation expense included in the consolidated statements of income, is as follows (in thousands):

The components of the Company’s net periodic benefit expense for its pension and post-retirement obligations were as follows (in thousands):

The net periodic benefit expense is recorded as a component of salaries and employee benefits in the consolidated statements of income. The Company’s funding policy is to contribute, at a minimum, an actuarially determined amount that will satisfy the minimum funding requirements determined under the appropriate sections of the Internal Revenue Code. The Company has 0 minimum required contribution for the ~~2020~~2021 fiscal year.

The Company has financial instruments with off-balance sheet risk established in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk extending beyond amounts recognized in the financial statements.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is essentially the same as that involved with extending loans to customers. The Company uses the same credit underwriting policies in making commitments and conditional obligations as for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee. Commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers.

At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the allowance for credit losses for unfunded commitments totaled ~~$3.1~~$1.9 million and ~~$0,~~$3.1 million, respectively, and was included in other liabilities on the Company's consolidated statements of financial condition. For the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, credit loss (benefit) expense for unfunded commitments was ~~$461~~$(206) thousand and ~~$0,~~$461 thousand, respectively. For the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, credit loss (benefit) expense for unfunded commitments was ~~$959~~$(1.2) million and $959 thousand, ~~and $0,~~ respectively.

In the ordinary course of business, there are various threatened and pending legal proceedings against the Company. Management believes that the aggregate liability, if any, arising from such litigation, except for the matter described below, would not have a material adverse effect on the Company’s consolidated financial statements.

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 as filed with the SEC on March ~~4, 2020~~15, 2021 and as disclosed in Part II, Item 1 of this Quarterly Report on Form 10-Q, we are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs sought class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs ~~seek~~sought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed. The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and ~~Pennsylvania and are seeking statutory damages, interest and declaratory relief. The Company is pursuing insurance coverage for these claims, including reimbursement for defense costs.~~Pennsylvania. We dispute and believe we have meritorious defenses against these claims and plan to vigorously defend ourselves.

On September 30, 2021, the Court granted plaintiffs’ motion for class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). We estimate there may be approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes. We filed a motion seeking permission to appeal the class certification ruling to the Superior Court of Pennsylvania and a stay of proceedings pending any such appeal. We also filed a motion to dismiss the action for lack of standing. We have not accrued a contingent liability for this matter at this time because, given our defenses, we are unable to conclude whether a liability is reasonably probable to occur nor are we able to currently reasonably estimate the amount of potential loss.

If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will insure the legal costs, settlements or judgments we incur in excess of our deductible. If we are unsuccessful in defending ourselves from these claims or ~~if we elect to settle these claims and~~ if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially adversely affect our business, results of operations and financial condition.

Determination of Fair Value – Assets Measured at Fair Value on a Recurring and Nonrecurring Basis

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. There have been no changes in the valuation techniques used during the current period. The fair value hierarchy is as follows:

Transfers between levels of the fair value hierarchy are recorded as of the end of the reporting period.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities available for sale: Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Derivative instruments: The fair value of derivative instruments is determined using quoted secondary market prices for similar financial instruments and are classified as Level 2 in the fair value hierarchy.

Loans held for sale: The fair value of loans held for sale is determined using quoted secondary market prices and investor commitments. Loans held for sale are classified as Level 2 in the fair value hierarchy.

Collateral dependent loans: Fair value of collateral dependent loans with specific allocations of the allowance for credit losses – loans is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and collateral value is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised and reported values may be 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 client and the client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Long-lived assets held for sale: The fair value of the long-lived assets held for sale was based on estimated market prices from independently prepared current appraisals and are classified as Level 2 in the fair value hierarchy.

Loan servicing rights: Loan servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. The significant unobservable inputs used in the fair value measurement of the Company’s loan servicing rights are the constant prepayment rates and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions. Loan servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

Other real estate owned (foreclosed assets): Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. 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 client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Commitments to extend credit and letters of credit: Commitments to extend credit and fund letters of credit are principally at current interest rates, and, therefore, the carrying amount approximates fair value. The fair value of commitments is not material.

There were 0 transfers between Levels 1 and 2 during the nine months ended September 30, 2019. There were 0 liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2019.

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value as of September 30, ~~2020~~2021 (dollars in thousands).

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

There were 0 assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.

The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

The estimated fair value approximates carrying value for cash and cash equivalents, Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, accrued interest receivable, non-maturity deposits, short-term borrowings and accrued interest payable.

The Company has 21 reportable ~~segments:~~segment, Banking, which includes all of the company’s retail and ~~Non-Banking. These~~commercial banking operations. This reportable ~~segments have~~segment has been identified and organized based on the nature of the underlying products and services applicable to ~~each~~the segment, the type of customers to whom those products and services are offered and the distribution channel through which those products and services are made available.

~~The Banking segment includes all of~~All other segments that do not meet the ~~Company’s retail and commercial banking operations. The Non-Banking segment~~quantitative threshold for separate reporting have been grouped as “All Other.” This “All Other” grouping includes the activities of SDN, a full-service insurance agency that provides a broad range of insurance services to both personal and business clients, and Courier Capital and HNP Capital, our investment advisor and wealth management firms that provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement ~~plans.~~plans, and Holding ~~company~~Company amounts, which are the primary differences between segment amounts and consolidated totals, ~~and are reflected in the Holding Company and Other column below,~~ along with amounts to eliminate balances and transactions between segments.

The following tables present information regarding our business segments as of and for the periods indicated (in thousands).

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

This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

Statements and financial analysis contained in this Quarterly Report on Form 10-Q that are based on other than historical data are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019~~2020 (the “Form 10-K”), including, but not limited to, those presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Factors that might cause such material differences include, but are not limited to:

•

~~Liquidity is essential to our businesses;~~



Acquisitions may disrupt our business and dilute shareholder value;

•

~~We rely on dividends from our subsidiaries for most of our revenue;~~

•

~~We may not be able to attract and retain skilled people;~~

•

~~Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business;~~

•

~~If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses;~~

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

Our tax strategies and the value of our deferred tax assets and liabilities could adversely affect our operating results and regulatory capital ratios;



Liquidity is essential to our businesses;



We rely on dividends from our subsidiaries for most of our revenue;



If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses;



We face competition in staying current with technological changes and banking alternatives to compete and meet customer demands;



We rely on other companies to provide key components of our business infrastructure;



A breach in security of our or third-party information systems, including the occurrence of a cyber incident or a deficiency in cybersecurity, or a failure by us to comply with New York State cybersecurity regulations, may subject us to liability, result in a loss of customer business or damage our brand image;



We are subject to interest rate risk, and a rising rate environment may reduce our income and result in higher defaults on our loans, whereas a falling rate environment may result in earlier loan prepayments than we expect, which may reduce our income;



The soundness of other financial institutions could adversely affect us;



We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all;



We may not pay or may reduce the dividends on our common stock;



We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could dilute our current shareholders or negatively affect the value of our common stock;



Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect;



The market price of our common stock may fluctuate significantly in response to a number of factors;



We may not be able to attract and retain skilled people;



We use financial models for business planning purposes that may not adequately predict future results;



We depend on the accuracy and completeness of information about or from customers and counterparties;



Our business may be adversely affected by conditions in the financial markets and economic conditions generally; and



Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other external events could significantly impact our business.

•

~~We face competition in staying current with technological changes and banking alternatives to compete and meet customer demands;~~

•

~~We rely on other companies to provide key components of our business infrastructure;~~

•

~~Any future FDIC insurance premium increases may adversely affect our earnings;~~

•

~~We are highly regulated, and any adverse regulatory action may result in additional costs, loss of business opportunities, and reputational damage;~~

•

~~Legal and regulatory proceedings and related matters could adversely affect us and the banking industry in general;~~

•

~~The policies of the Federal Reserve have a significant impact on our earnings;~~

•

~~The soundness of other financial institutions could adversely affect us;~~

•

~~Our business may be adversely affected by conditions in the financial markets and economic conditions generally;~~

•

~~We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all;~~

•

~~We may not pay or may reduce the dividends on our common stock;~~

•

~~Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect; and~~

•

~~The market price of our common stock may fluctuate significantly in response to a number of factors.~~

We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advise readers that various factors, including those described above, could affect our financial performance and could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected. See also Item 1A, Risk Factors, in the Form 10-K ~~and Item 1A, Risk Factors, below~~ for further information. Except as required by law, we do not undertake, and specifically disclaim any obligation to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

GENERAL

The Parent is a financial holding company headquartered in New York State, providing diversified financial services through its subsidiaries, Five Star Bank (the “Bank”), SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York-chartered banking subsidiary, the Bank. Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and other funding sources) and noninterest income, particularly fees and other revenue from insurance, investment advisory and financial services provided to customers or ancillary services tied to loans and deposits. Business volumes and pricing drive revenue potential, and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth, and competitive conditions within the marketplace. We are not able to predict market interest rate fluctuations with certainty and our asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on our results of operations and financial condition.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Our business strategy has been to maintain a community bank philosophy, which consists of focusing on and understanding the individualized banking and other financial needs of individuals, municipalities and businesses of the local communities surrounding our primary service area. We believe this focus allows us to be more responsive to our customers’ needs and provide a high level of personal service that differentiates us from larger competitors, resulting in long-standing and broad-based banking relationships. Our core customers are primarily small- to medium-sized businesses, individuals and community organizations who prefer to build banking, insurance and wealth management relationships with a community bank that combines high quality, competitively-priced products and services with personalized service. Because of our identity and origin as a locally operated bank, we believe that our level of personal service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local communities.

A key aspect of our current business strategy is to foster a community-oriented culture where our customers and employees establish long-standing and mutually beneficial relationships. We believe that we are well-positioned to be a strong competitor within our market area because of our focus on community banking needs and customer service, our comprehensive suite of deposit, loan, insurance and wealth management

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products typically found at larger banks, our highly experienced management team and our strategically located banking centers. We have evolved to meet changing customer needs by opening what we refer to as financial solution center branches. These financial solution center branches have a smaller footprint than our traditional branches, focus on technology to provide solutions that fit our customer preferences for transacting business with us, and are staffed by certified personal bankers who are trained to meet a broad array of customer needs. In recent years, we have opened four financial solution centers in the Rochester and Buffalo markets. We believe that the foregoing factors all help to grow our core deposits, which supports a central element of our business strategy - the growth of a diversified and high-quality loan portfolio.

EXECUTIVE OVERVIEW

Summary of ~~2020~~2021 Third Quarter Results

Net ~~income decreased $560 thousand, or 4%,~~income increased $4.9 million to $17.2 million for the third quarter of 2021 compared to $12.3 million for the third quarter of ~~2020 compared to $12.8 million for the third quarter of 2019.~~2020. Net income available to common shareholders for the third quarter of ~~2020~~2021 was ~~$11.9~~$16.8 million, or ~~$0.74~~$1.05 per diluted share, compared with ~~$12.5~~$11.9 million, or ~~$0.78~~$0.74 per diluted share, for the third quarter of last year. Return on average common equity was ~~10.72%~~13.94% and return on average assets was ~~1.02%~~1.27% for the third quarter of ~~2020~~2021 compared to ~~12.00%~~10.72% and ~~1.19%~~1.02%, respectively, for the third quarter of ~~2019.~~2020.

~~Third~~The increase in net income for the third quarter ~~results were negatively impacted by~~of 2021 reflected a ~~higher provision~~$541 thousand benefit for credit losses ~~of $4.0 million,~~ as compared to ~~$1.8~~a provision of $4.0 million in the third quarter of ~~2019.~~ ~~The higher provision was driven by~~2020. Continued improvement in the ~~adoption~~national unemployment forecast, positive trends in qualitative factors and a relatively low level of ~~the current expected~~net charge-offs resulted in a release of credit loss ~~(“CECL”) standard~~reserves and ~~uncertainty around~~ the ~~long-term impact of~~corresponding benefit for credit losses in the ~~COVID-19 pandemic on the economic environment.~~quarter.

Net interest income totaled $38.3 million in the third quarter of 2021, up from $35.5 million in the third quarter of ~~2020, up from $32.5 million in the third quarter of 2019. This~~2020. The increase was primarily the result of an increase in interest-earning assets and a ~~change~~decrease in ~~the~~interest expense. The decrease in interest expense was primarily due to a favorable shift in deposit categories, with a lower allocation of time deposits, coupled with a lower interest-bearing cost of funds. Average Federal Reserve interest-earning ~~asset mix as loans became a larger percentage of the portfolio. Average~~cash, average investment securities and average loans were up ~~$368.2~~$35.3 million, $407.6 million and $110.1 million, respectively, in the third quarter of ~~2020~~2021 compared to the same quarter in ~~2019.~~2020.

The provision for credit losses - loans was a $334 thousand benefit in the third quarter of 2021 compared to a provision of $3.6 million in the third quarter of ~~2020 compared to $1.8 million in the third quarter of 2019.~~2020. Net charge-offs during the recent quarter were $587 thousand compared to $488 thousand ~~down from $4.6 million~~ in the third quarter of ~~2019.~~2020. Net charge-offs expressed as an annualized percentage of average loans outstanding ~~were~~was 0.06% during the third quarter of ~~2020 compared with 0.58% in the third quarter of 2019.~~2021 and 2020. See the “Allowance for Credit Losses - Loans” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion regarding the ~~increase in the~~ provision (benefit) for credit losses - loans and ~~the decrease in~~ net charge-offs.

Noninterest income ~~was relatively flat at $12.4~~totaled $12.1 million in ~~both~~ the third quarter of ~~2020 and~~2021, compared to $12.2 million in the third quarter of ~~2019. Changes~~2020. The decrease in noninterest income for the third quarter ~~were~~was primarily ~~attributed~~due to ~~increases~~decreases in income from derivative instruments, net, gain on sale of loans held for sale and ~~income from derivative instruments, net, partially offset by decreases in~~ net gain on investment securities, partially offset by increases in insurance income, investment advisory income and ~~service charges on deposits. Net gain on sale of loans held for sale of~~income from investments in limited partnerships. Income from derivative instruments, net was $1.6 million ~~was recognized in~~lower than the third quarter of ~~2020 due to increased residential real estate loans for sale volume and an increase in margin on these transactions.~~2020. Income from derivative instruments, ~~of $1.9 million was recognized in the third quarter of 2020 driven primarily by an increase in~~net is based on the number and value of interest rate swap transactions executed ~~and reflects growth and maturity~~during the quarter combined with the impact of changes in the ~~Company’s commercial loan business. The Company sold investment securities during~~fair market value of borrower-facing trades. Net gain on sale of loans held for sale was $797 thousand lower than the third quarter of 2020, ~~generating~~primarily due to lower transaction volume. Sale volume and margin were at historically high levels in the third quarter of 2020, driven by mortgage refinancing activity. No gain or loss was recognized on investment securities in the quarter compared to a ~~net~~ gain of $554 thousand asin the third quarter of 2020. The increase in insurance income of $507 thousand from the third quarter of 2020 was driven by the two 2021 bolt on acquisitions (North Woods in August and Landmark in February) and growth in the legacy SDN business, including the impact of increasing insurance premiums. The increase in investment advisory income of $526 thousand was primarily due to an increase in assets under management driven by a combination of market gains, new customer accounts and contributions to existing accounts. Income from investments in limited partnerships increased $799 thousand compared to ~~a net gain~~the third quarter of ~~$1.6~~2020.

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Noninterest expense totaled $29.2 million in the third quarter of ~~2019. The Company recognized $1.3 million in service charges on deposits in the third quarter of 2020 as~~2021, compared ~~to $1.9~~to $28.5 million in the third quarter of 2019 primarily due to the Company’s COVID-19 relief initiatives of waiving or eliminating fees, implemented from March 23, 2020 through July 9, 2020, and the Company not re-initiating ATM access fees until September 19, 2020.

~~Noninterest expense in the third quarter of 2020 totaled $28.7 million compared with $25.9 million in the third quarter of 2019.~~ The increase in noninterest expense was primarily the result of increases in salaries and employee benefits expense, occupancy and equipment expense and computer and data processing expense, partially offset by decreases in restructuring charges ~~incurred~~and advertising and promotions expense. Salaries and benefits expense increased primarily due to higher incentive compensation and commissions, investments in personnel and the impact of 2021 acquisitions. Occupancy and equipment expense increased primarily as a result of the purchase of security equipment for multiple locations, timing differences related to the outsourcing of property management services and expenses related to two Five Star Bank branches opened in Buffalo in June 2021. Computer and data processing expense increased primarily as a result of the Company’s investments in technology, including digital banking initiatives. Restructuring charges in the third quarter of 2020 ~~and increases in salaries and employee benefits, computer and data processing and FDIC assessments. Restructuring charges of $1.4 million represent~~represents non-recurring real estate related charges related to the ~~previously described branch closings~~closure of six bank branches and ~~staff reduction announced~~a staffing reduction. The decrease in ~~July 2020. The increase in salaries~~advertising and employee benefits includes $224 thousand of non-recurring severance costs incurred in connection with the previously described branch closings and staff reduction announced in July 2020. The increase in computer and data processingpromotions expense was ~~primarily due to costs~~ related to the ~~Bank’s new online~~ongoing evolution of our long-term marketing strategy and ~~mobile platform, Five Star Bank Digital Banking, launched~~a temporary reduction in the second quarter of 2020. FDIC assessments were $594 thousand in the third quarter of 2020 compared to $7 thousand in the third quarter of 2019. The FDIC minimum reserve ratio was exceeded in 2018, resulting in credits used to offset expense in 2019 and the first quarter of 2020.external advertising expense.

The regulatory Common Equity Tier 1 Ratio and Total Risk-Based Capital Ratio were ~~10.19%~~10.24%, and ~~12.74%~~13.25%, respectively, at September 30, ~~2020.~~2021. See the “Liquidity and Capital Management” section of this Management’s Discussion and Analysis for further discussion regarding regulatory capital and the Basel III capital rules.

~~Enterprise Standardization Program~~Acquisition of North Woods Capital Benefits

On August 2, 2021, North Woods Capital Benefits LLC (“North Woods”) was acquired by the Company’s insurance subsidiary SDN. North Woods was a Buffalo-based employee benefits and human resources advisory firm with a mission of helping clients of all sizes navigate the complexities of employee benefits, human resources and compliance to control costs and maximize long-term savings.

The ~~Company’s enterprise standardization program is focused on improving operational efficiency~~acquisition expands SDN’s employee benefits business and ~~enhancing future profitability. On July 17, 2020,~~adds important expertise in ~~connection with the program,~~ employee benefits and human resources consulting. William (Bill) Wadsworth, North Woods’ Founder, continues his long-term client relationships in his new role leading SDN’s employee benefits practice. Sarah Kirke, former Director of Client Service and HR Consulting at North Woods, serves as Employee Benefits Account Manager and HR Consultant at SDN.

Elmira Branch Relocation

Five Star Bank ~~announced changes~~opened its relocated branch in the City of Elmira on August 2, 2021. The new branch is in a newly-constructed building that is part of the New York State Downtown Revitalization Initiative. Consumers and businesses can access a full spectrum of banking and lending services, insurance and wealth management and investment services at the new branch.

The branch is designed to ~~adapt to~~serve as a ~~full-service branch model to streamline retail branches to better align~~financial solution center, with no teller lines and no barriers between bank associates and customers. It features a blend of new technology including Interactive Teller Machines and the comfort of community banking with Certified Personal Bankers. Our new design aligns services with shifting customer needs and ~~preferences.~~

~~The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conducted~~preferences including rapid advancements in ~~partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping service~~

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financial technology that enable consumers to bank virtually from anywhere, anytime.~~Table of Contents~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

~~areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and facilitate the long-term sustainability of current and future branches.~~

The July announcement included the consolidation of eleven branches into five, resulting in six branch closings and a reduction in staffing. The consolidations represent about ten percent of the branch network and impacted approximately six percent of the Company’s total workforce. These actions resulted in one-time expenses related to severance and real estate related charges of approximately $1.6 million in the third quarter of 2020. Expense savings of $2.6 million are anticipated on an annualized basis.

In October 2020, the Company announced the planned closure of one additional branch in January 2021. This location was not included in the branch consolidations announced in July, as alternative options were being considered and consolidation was not possible given its significant distance from other Five Star Bank ~~branches. This closure~~ is expected to result in one-time expenses related to severance costs and real estate related charges of approximately $130 thousand in the fourth quarter of 2020. Expected expense savings are anticipated at $340 thousand on an annualized basis.

The enterprise standardization program is not yet complete as we continue to evaluate activities and functions across the organization, focusing on ways to improve operational efficiency while enhancing the employee and customer experience.

~~Subordinated Note Issuance~~

On October 7, 2020, the Company completed a private placement of $35.0 million of fixed-to-floating rate subordinated notes due 2030 (the “Notes”) to qualified institutional buyers and accredited institutional investors. The Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equalcommitted to the ~~then current three-month secured overnight financing rate (“SOFR”) plus 4.265% basis points, payable quarterly until maturity.~~

~~The Company is entitled to redeem the Notes,~~use of green and energy efficient materials in whole or in part, on any interest payment date on or after October 15, 2025, and in whole at any time upon certain other specified events. The Company intends to use the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.

In connection with the issuance and sale of the Notes, the Company entered into a registration rights agreement with the purchasers of the Notes pursuant to which the Company has agreed to take certain actions to provideconstruction. Materials sourced for the ~~exchange~~Elmira branch received certifications from Cradle to Cradle, Declare, Forest Stewardship Council, Green Square and GreenGuard. Materials with a high percentage of recycled content were used when possible and energy-efficient LED lighting was used throughout the ~~Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, with substantially the same terms as the Notes.~~interior and exterior.

~~Stock Repurchase Program~~

Operational, Accounting and Reporting Impacts Related to the COVID-19 Pandemic

The COVID-19 pandemic has negatively impacted the global economy, including our operating footprint of Western and Central New York. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act ~~provides~~provided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:

•

~~Accounting for Loan Modifications~~ - The CARES Act provides that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.



Accounting for Loan Modifications - The CARES Act provided that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

•

~~Paycheck Protection Program~~ - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA.



Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. On December 27, 2020, the Consolidated Appropriations Act, 2021 provided approximately $284 billion for PPP loans in an additional round of funding under the program and extended the PPP through March 31, 2021. This additional round of PPP loan funding is authorized for first-time borrowers and for second draws be certain borrowers who have previously received PPP loans. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extended the program to May 31, 2021.

•

~~Mortgage Forbearance~~ - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance.



Mortgage Forbearance - Under the CARES Act, a borrower with a federally backed mortgage loan that was experiencing financial hardship due to COVID-19 was able to request a forbearance until September 30, 2021.

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Also, in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:



Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.



Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.



Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

•

~~Accounting for Loan Modifications~~ - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.

•

~~Past Due Reporting~~ - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

•

~~Nonaccrual Status and Charge-offs~~ ~~- During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified~~.

Effective March 23, 2020 through July 9, 2020, for consumer customers, the Bank waived early CD penalty fees for withdrawals up to $20,000 (limited to one penalty-free withdrawal per CD account); eliminated all insufficient funds (overdrafts) and returned item fees; eliminated all Pay by Phone fees; waived all late fees; offered the opportunity for monthly mortgage, home equity loan or home equity line payment relief; offered the opportunity to defer unsecured consumer loans or lines of credit and secured consumer loans and lines of credit payments; and offered unsecured personal loans up to $5,000, up to 60 months at 2.95% APR subject to credit ~~approval (additional terms and conditions may apply). In addition,~~approval. ATM access fees were reinitiated on September 19, 2020.

~~Business customers are being faced with challenging and unique circumstances. The Bank’s relationship bankers are highly skilled in providing tailored financial solutions designed to meet~~As part of the ~~specific, individual needs~~first round of ~~each business and they are actively reaching out to each business customer to understand how the Bank can help, given each unique business circumstance.~~

~~As of October 23, 2020,~~PPP loans we have helped more than 1,700 customers obtain more than $270 million in loans ~~through~~as of December 31, 2020. We have helped customers complete the forgiveness process for approximately $239 million of PPP loans in the first nine months of 2021. Also, during the first nine months of 2021, we have helped customers obtain approximately $107 million of new PPP loans under the second round of the PPP. Additionally, as of September 30, 2021, approximately 3%2% of our commercial loan and mortgage customers, 1% of our residential real estate loans and lines customers and less than 1% of our indirect loans customers have active payment ~~deferrals.~~deferrals in accordance with the previously noted loan modifications under the CARES Act or agencies guidelines.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Net interest income is our primary source of revenue, comprising 76% of revenue during the nine months ended September 30, ~~2020.~~2021. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities and repricing frequencies.

We use interest rate spread and net interest margin to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and shareholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.

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The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis (dollars in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Interest income per consolidated statements of income	$	39,719	$	42,459	$	121,131	$	126,621	$	41,227	$	39,719	$	123,452	$	121,131
Adjustment to fully taxable equivalent basis		201		258		680		849		140		201		493		680
Interest income adjusted to a fully taxable equivalent basis		39,920		42,717		121,811		127,470		41,367		39,920		123,945		121,811
Interest expense per consolidated statements of income		4,220		9,976		18,327		29,882		2,954		4,220		9,590		18,327
Net interest income on a taxable equivalent basis	$	35,700	$	32,741	$	103,484	$	97,588	$	38,413	$	35,700	$	114,355	$	103,484

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Analysis of Net Interest Income for the Three Months Ended September 30, ~~2020~~2021 and ~~2019~~2020

Net interest income on a taxable equivalent basis for the three months ended September 30, ~~2020,~~2021, was ~~$35.7~~$38.4 million, an increase of ~~$3.0~~approximately $2.7 million versus the comparable quarter last year of ~~$32.7 million.~~$35.7 million. The increase in net interest income was primarily due ~~primarily~~ to ~~an increase~~increases in average loans and average investment securities of ~~$368.2~~$110.1 million, or ~~12%~~3%, and $407.6 million, or 53%, respectively, compared to the third quarter of ~~2019, partially offset by~~2020, and a decrease in ~~investment securities~~interest expense of ~~$15.9 million, or 2%, compared to the third quarter of 2019.~~$1.3 million. The decrease in ~~investment securities is~~interest expense was primarily due to a favorable shift in deposit categories, with a lower allocation of time deposits, coupled with a lower interest-bearing cost of funds. Average PPP loans, net of deferred fees were $141.3 million for the ~~result of~~three months ended September 30, 2021 compared to $263.0 million for the ~~redeployment of assets from investment securities into loans, resulting in loans comprising a higher percentage of total interest-earning assets.~~three months ended September 30, 2020.

Our net interest margin for the third quarter of ~~2020~~2021 was ~~3.22%~~3.07%, ~~seven-basis~~15-basis points lower than ~~3.29%~~3.22% for the same period in ~~2019.~~2020. This comparable period decrease was a function of a ~~16-basis~~six-basis point lower contribution from net free funds ~~partially offset by~~and a nine-basis point ~~increase~~decrease in the interest rate spread. The ~~higher~~lower interest rate spread was a result of a ~~69-basis~~29-basis point decrease in the yield on average interest-earning assets and a ~~78-basis~~20-basis point decrease in the cost of average interest-bearing liabilities.

For the third quarter of ~~2020,~~2021, the yield on average interest earning assets of ~~3.60%~~3.31% was ~~69-basis~~29-basis points lower than the third quarter of ~~2019~~2020 of ~~4.29%~~3.60%. Loan yields decreased ~~75 basis~~six-basis points during the third quarter of ~~2020~~2021 to ~~4.02%~~3.96% from ~~4.77%~~4.02%. The yield on investment securities decreased ~~17-basis~~51-basis points during the third quarter of ~~2020~~2021 to ~~2.23%~~1.72% from ~~2.40%~~2.23%. Overall, a favorable volume variance increased interest income by $3.1 million during the third quarter of 2021, while the earning asset rate changes decreased interest income by ~~$6.8 million during the third quarter of 2020 and a favorable volume variance increased interest income by $4.0~~$1.7 million which collectively drove a ~~$2.8~~$1.4 million ~~decrease~~increase in interest income.

Average interest-earning assets were $4.97 billion for the third quarter of 2021 compared to $4.41 billion for the third quarter of 2020, ~~compared to $3.96 billion for the third quarter of 2019,~~ an increase of ~~$454.9~~$553.0 million, or ~~12%~~13%, from the comparable quarter last year, with average loans up ~~$368.2~~$110.1 million from ~~$3.15~~$3.52 billion to ~~$3.52~~$3.63 billion and average securities ~~down $15.9~~up $407.6 million from ~~$785.6~~$769.7 million to ~~$769.7 million.~~$1.18 billion. The growth in average loans reflected increases in ~~the~~our commercial ~~loans, residential real estate loans~~ and ~~other~~ consumer ~~loans~~indirect loan categories. Commercial loans ~~in particular,~~ were up ~~$381.1~~$42.5 million from ~~$1.61~~$1.99 billion to ~~$1.99~~$2.03 billion, or ~~24%~~2%, from the third quarter of ~~2019.~~2020. The ~~increase~~average balances of PPP loans net of deferred fees, which are included in commercial loans, ~~was primarily driven by~~were $141.3 million and $263.0 million in the ~~PPP loans.~~ third quarter of 2021 and 2020, respectively. Residential real estate lines and loans were ~~up $37.1~~down $15.5 million, ~~partially offset by a decrease of $12.0~~or 16%, and $1.9 million, ~~in residential real estate lines.~~ or less than 1%, respectively, primarily due to consumer behavior. Consumer indirect loans ~~decreased~~increased by ~~$38.3~~$86.8 million, or 10%, and other consumer loans ~~increased~~decreased by ~~$304 thousand.~~$1.7 million, or 11%. Loans comprised ~~79.8%~~73.1% of average interest-earning assets during the third quarter of ~~2020~~2021 compared to ~~79.7%~~79.8% during the third quarter of ~~2019.~~2020. Loans generally have significantly higher yields compared to securities and federal funds sold and interest-earning deposits and, as such, have a more positive effect on the net interest margin. The yield on average loans was 3.96% for the third quarter of 2021, a decrease of six-basis points compared to 4.02% for the comparable quarter in 2020. An increase in the volume of average loans resulted in a $1.4 million increase in interest income, partially offset by a $740 thousand decrease due to the unfavorable rate variance. Securities represented 23.7% of average interest-earning assets during the third quarter of 2021 compared to 17.4% during the third quarter of 2020. The increase in investment securities is due to the redeployment of excess liquidity intended to benefit interest income. An increase in the volume of average investment securities resulted in a $1.7 million increase in interest income, partially offset by a $1.0 million decrease due to the unfavorable rate variance.

The cost of average interest-bearing liabilities of 0.32% in the third quarter of 2021 compared to 0.52% in the third quarter of 2020, was 20-basis points lower and the cost of average interest-bearing deposits decreased 22-basis points from 0.43% to 0.21%. Average short-term borrowings decreased from $57.9 million to $0 in the third quarter of 2021 compared to the same quarter of 2020. The decrease in average short-term borrowings was a result of the Company’s decision to utilize brokered deposits as a cost-effective alternative to Federal Home Loan Bank borrowings. The cost of long-term borrowings for the third quarter of 2021 decreased 56-basis points from 6.31% to 5.75% compared to the same quarter of 2020. Overall, interest-bearing liability rate and volume changes resulted in $1.3 million of lower interest expense.

Average interest-bearing liabilities of $3.65 billion in the third quarter of 2021 were $411.6 million, or 13%, higher than the third quarter of 2020. On average, interest-bearing deposits grew $435.0 million from $3.15 billion to $3.58 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up $161.2 million from $987.9 million to $1.15 billion. The increase in average deposits was primarily due to growth in non-public and public demand deposits and an increase in reciprocal deposit programs. For further discussion of the

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reciprocal deposit programs, refer to the “Funding Activities - Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in a $1.5 million decrease in interest expense during the third quarter of 2021, primarily due to the overall lower interest rate market conditions. Average borrowings decreased $23.4 million from $97.2 million to $73.8 million compared to the third quarter of 2020. Overall, short and long-term borrowing rate and volume changes resulted in $210 thousand of higher interest expense during the third quarter of 2021.

Analysis of Net Interest Income for the Nine Months Ended September 30, 2021 and 2020

Net interest income on a taxable equivalent basis for the nine months ended September 30, 2021, was $114.4 million, an increase of $10.9 million versus the comparable period last year of $103.5 million. The increase in net interest income was due primarily to increases in deferred fee amortization on PPP loans of $3.8 million, which included accelerated amortization of fees on PPP loans paid-off through the forgiveness process, increases in average loans and average investment securities of $259.4 million, or 8%, and $278.5 million, or 36%, respectively, compared to the first nine months of 2020, and a decrease in interest expense of $8.7 million. The decrease in interest expense was primarily due to a favorable shift in deposit categories, with a lower allocation of time deposits, coupled with a lower interest-bearing cost of funds. Average PPP loans, net of deferred fees were $206.9 million for the nine months ended September 30, 2021 compared to $147.0 million for the nine months ended September 30, 2020.

The net interest margin for the first nine months of 2021 was 3.14%, eleven-basis points lower than 3.25% for the same period in 2020. This comparable period decrease was a function of a nine-basis point lower contribution from net free funds, and a two-basis point decrease in interest rate spread. The lower interest rate spread was a result of a 43-basis point decrease in the yield on average interest-earning assets and a 41-basis point decrease in the cost of average interest-bearing liabilities.

For the first nine months of 2021, the yield on average earning assets of 3.40% was 43-basis points lower than the first nine months of 2020 of 3.83%. Loan yields decreased 23-basis points during the first nine months of 2021 to 4.02% from 4.25%. The yield on investment securities decreased 61-basis points during the first nine months of 2021 to 1.79% from 2.40%. Overall, a favorable volume variance increased interest income by $12.1 million during the first nine months of 2021, while the earning asset rate changes decreased interest income by $9.9 million, which collectively drove a $2.1 million increase in interest income.

Average interest-earning assets were $4.87 billion for the first nine months of 2021 compared to $4.25 billion for the first nine months of 2020, an increase of $623.3 million, or 15%, from the comparable period last year, with average loans up $259.4 million from $3.38 billion to $3.64 billion and average securities up $278.5 million from $772.1 million to $1.05 billion. The growth in average loans reflected increases in most loan categories. Commercial loans, in particular, were up $218.1 million from $1.85 billion to $2.07 billion, or 12%, from the first nine months of 2020. The average balances of PPP loans net of deferred fees, which are included in commercial loans, were $206.9 million and $147.0 million in the first nine months of 2021 and 2020, respectively. Residential real estate loans were up $12.2 million, or 2%, partially offset by a decrease of $15.7 million, or 16%, in residential real estate lines. Consumer indirect loans increased by $45.2 million, or 5%, and other consumer loans decreased by $283 thousand, or 2%. Loans represented 74.8% of average interest-earning assets during the first nine months of 2021 compared to 79.7% during the first nine months of 2020. Loans generally have significantly higher yields compared to securities and federal funds sold and interest-earning deposits and, as such, have a more positive effect on the net interest margin. The yield on average loans was 4.02% for the ~~third quarter~~first nine months of ~~2020,~~2021, a decrease of ~~75-basis~~23-basis points compared to ~~4.77%~~4.25% for first nine months of 2020. An increase in the ~~comparable quarter in 2019. An unfavorable rate variance~~volume of average loans resulted in ~~a $6.3~~an $8.1 million ~~decrease~~increase in interest income, partially offset by ~~an increase of $4.0~~a $6.1 million due to the increase in the volume of average loans. Securities represented 17.4% of average interest-earning assets during the third quarter of 2020 compared to 19.8% during the third quarter of 2019. The decrease in the volume of average securities resulted in a $110 thousand decrease in interest income, in addition to a $310 thousand decrease due to the unfavorable rate variance. Securities represented 21.6% of average interest-earning assets during first nine months of 2021 compared to 18.2% during the first nine months of 2020. The increase in investment securities is due to the redeployment of excess liquidity intended to benefit interest income. An increase in the volume of investment securities resulted in a $3.8 million increase in interest income, partially offset by a $3.6 million decrease due to the unfavorable rate variance.

The cost of average interest-bearing liabilities of ~~0.52%~~0.36% in the ~~third quarter~~first nine months of 2021 compared to 0.77% in the first nine months of 2020 ~~compared to 1.30% in~~was 41-basis points lower and the ~~third quarter of 2019, was 78-basis points lower. The~~ cost of average interest-bearing deposits decreased ~~64-basis~~42-basis points from ~~1.07%~~0.66% to ~~0.43% and the cost of~~0.24%. Average short-term borrowings decreased ~~91-basis points~~$112.1 million from ~~2.51%~~$112.5 million to ~~1.60%~~$388 thousand in the ~~third quarter~~first nine months of ~~2020~~2021 compared to the same ~~quarter~~period of ~~2019.~~2020. The decrease in ~~the cost of~~average short-term borrowings was a result of ~~decreases in~~ the ~~federal funds rate.~~Company’s decision to utilize brokered deposits as a cost-effective alternative to Federal Home Loan Bank borrowings. The cost of long-term borrowings for the ~~third quarter~~first nine months of ~~2020 increased one-basis point~~2021 decreased 55-basis points from 6.30% to ~~6.31%~~5.75% in the first nine months of 2021 compared to the same ~~quarter~~period of ~~2019.~~2020. Overall, interest-bearing liability rate and volume decreases resulted in ~~$5.8~~$8.7 million of lower interest expense.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Average interest-bearing liabilities of ~~$3.24~~$3.61 billion in the ~~third quarter~~first nine months of ~~2020~~2021 were ~~$186.9~~$421.1 million, or 6%13%, higher than the ~~third quarter~~first nine months of ~~2019.~~2020. On average, interest-bearing deposits grew ~~$457.9~~$498.7 million from ~~$2.69~~$3.03 billion to ~~$3.15~~$3.53 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up ~~$270.4~~$221.0 million from ~~$717.5~~$874.5 million to ~~$987.9 million.~~$1.10 billion. The increase in average deposits was ~~driven by PPP loan proceeds, successful business development efforts~~primarily due to growth in ~~retail banking,~~non-public and public demand deposits and an increase in reciprocal deposit ~~programs, and higher utilization of brokered deposits as a funding source.~~ programs. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities - Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in ~~a $3.9~~$8.8 million ~~decrease in~~of lower interest expense during the ~~third quarter~~first nine months of ~~2020.~~2021, primarily due to the overall lower interest rate market conditions. Average borrowings decreased ~~$271.0~~$77.6 million from ~~$368.2~~$151.7 million to ~~$97.2~~$74.1 million compared to the ~~third quarter~~first nine months of ~~2019.~~2020. Overall, short and long-term borrowing rate and volume changes resulted in ~~$1.8 million~~$35 thousand of ~~lower interest expense during the third quarter of 2020.~~

~~Analysis of Net Interest Income for the Nine Months Ended September 30, 2020 and 2019~~

Net interest income on a taxable equivalent basis for the nine months ended September 30, 2020, was $103.5 million, an increase of $5.9 million versus the comparable period last year of $97.6 million. The increase in net interest income was due primarily to an increase in average earning assets of $260.1 million or 7% compared to the first nine months of 2019.

~~- 47 -~~

~~Table of Contents~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

The net interest margin for the first nine months of 2020 was 3.25%, two-basis point lower than 3.27% for the same period in 2019. This comparable period decrease was a function of an eight-basis point increase in interest rate spread, partially offset by a ten-basis point lower contribution from net free funds. The higher ~~interest rate spread was a result of a 52-basis point decrease in the cost of average interest-bearing liabilities and a 44-basis point decrease in the yield on average interest-earning assets.~~

For the first nine months of 2020, the yield on average earning assets of 3.83% was 44-basis points lower than the first nine months of 2019 of 4.27%. Loan yields decreased 54-basis points during the first nine months of 2020 to 4.25% from 4.79%. The yield on investment securities increased two-basis points during the first nine months of 2020 to 2.40% from 2.38%. Overall, the earning asset rate changes decreased interest income by $13.5 million during the first nine months of 2020 and a favorable volume variance increased interest income by $7.8 million, which collectively drove a $5.7 million decrease in interest income.

Average interest-earning assets were $4.25 billion for the first nine months of 2020 compared to $3.99 billion for the first nine months of 2019, an increase of $260.1 million, or 7%, from the comparable period last year, with average loans up $254.3 million from $3.13 billion to $3.38 billion and average securities down $66.9 million from $839.0 million to $772.1 million. The growth in average loans reflected increases in the commercial loans and residential real estate loans categories. Commercial loans, in particular, were up $277.1 million from $1.57 billion to $1.85 billion, or 18%, from the first nine months of 2019. Loans represented 79.7% of average interest-earning assets during the first nine months of 2020 compared to 78.5% during the first nine months of 2019. Loans generally have significantly higher yields compared to securities and federal funds sold and interest-bearing deposits and, as such, have a more positive effect on the net interest margin. The yield on average loans was 4.25% for the first nine months of 2020, a decrease of 54-basis points compared to 4.79% for first nine months of 2019. An unfavorable rate variance resulted in a $13.2 million decrease in interest income, partially offset by an increase of $8.7 million due to the increase in the volume of average loans. Securities represented 18.2% of average interest-earning assets during first nine months of 2020 compared to 21.0% during the first nine months of 2019. The decrease in the volume of average securities resulted in a $1.2 million decrease in interest income, partially offset by a $109 thousand increase due to the favorable rate variance.

The cost of average interest-bearing liabilities of 0.77% in the first nine months of 2020 compared to 1.29% in the first nine months of 2019 was 52-basis points lower than the first nine months of 2019. The cost of average interest-bearing deposits decreased 40-basis points from 1.06% to 0.66% and the cost of short-term borrowings decreased 97-basis points from 2.64% to 1.67% in the first nine months of 2020 compared to the same period of 2019. The decrease in the cost of short-term borrowings was a result of decreases in the federal funds rate. The cost of long-term borrowings for the first nine months of 2020 remained relatively flat at 6.30% compared to the same period of 2019. Overall, interest-bearing liability rate and volume decreases resulted in $11.6 million of lower interest expense.

Average interest-bearing liabilities of $3.19 billion in the first nine months of 2020 were $95.9 million, or 3%, higher than the first nine months of 2019. On average, interest-bearing deposits grew $316.3 million from $2.72 billion to $3.03 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up $154.8 million from $719.6 million to $874.5 million. The increase in average deposits was driven by PPP loans, successful business development efforts in retail banking, an increase in reciprocal deposit programs, and higher utilization of brokered deposits as a funding source. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities - Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in $6.4 million of lower interest expense during the first nine months of 2020. Average borrowings decreased $220.4 million from $372.1 million to $151.7 million compared to the first nine months of 2019. Overall, short and long-term borrowing rate and volume changes resulted in $5.2 million of lower interest expense during the first nine months of 2020.2021.

~~- 48 -~~51

Table of Contents

~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

The following tables sets forth certain information relating to the consolidated balance sheets and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the periods indicated (in thousands).


	Three months ended September 30,																Three months ended September 30,
	2020								2019								2021								2020
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	121,929		$	31		0.10	%	$	19,370		$	106		2.17	%	$	157,229		$	67		0.17	%	$	121,929		$	31		0.10	%
Investment securities ⁽¹⁾:
Taxable		614,465			3,330		2.17			587,069			3,478		2.37			1,068,226			4,392		1.64			614,465			3,330		2.17
Tax-exempt ⁽²⁾		155,208			957		2.47			198,526			1,229		2.48			109,011			666		2.44			155,208			957		2.47
Total investment securities		769,673			4,287		2.23			785,595			4,707		2.40			1,177,237			5,058		1.72			769,673			4,287		2.23
Loans:
Commercial business		808,582			6,792		3.34			586,293			7,620		5.16			700,797			6,321		3.58			808,582			6,792		3.34
Commercial mortgage		1,180,747			12,160		4.10			1,021,931			13,244		5.14			1,331,063			13,004		3.88			1,180,747			12,160		4.10
Residential real estate loans		590,483			5,314		3.60			553,382			5,326		3.85			588,585			4,950		3.36			590,483			5,314		3.60
Residential real estate lines		95,288			874		3.65			107,290			1,397		5.17			79,766			672		3.35			95,288			874		3.65
Consumer indirect		830,647			10,039		4.81			868,927			9,813		4.48			917,402			10,903		4.71			830,647			10,039		4.81
Other consumer		16,445			423		10.23			16,141			504		12.40			14,718			392		10.58			16,445			423		10.23
Total loans		3,522,192			35,602		4.02			3,153,964			37,904		4.77			3,632,331			36,242		3.96			3,522,192			35,602		4.02
Total interest-earning assets		4,413,794			39,920		3.60			3,958,929			42,717		4.29			4,966,797			41,367		3.31			4,413,794			39,920		3.60
Less: Allowance for credit losses		(47,447	)							(35,271	)							(48,202	)							(47,447	)
Other noninterest-earning assets		408,986								337,152								449,459								408,986
Total assets	$	4,775,333							$	4,260,810							$	5,368,054							$	4,775,333
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	704,550		$	254		0.14	%	$	632,540			348		0.22	%	$	796,371		$	291		0.15	%	$	704,550			254		0.14	%
Savings and money market		1,574,068			1,102		0.28			956,410			1,060		0.44			1,876,394			798		0.17			1,574,068			1,102		0.28
Time deposits		867,479			2,014		0.92			1,099,212			5,869		2.12			908,351			805		0.35			867,479			2,014		0.92
Total interest-bearing deposits		3,146,097			3,370		0.43			2,688,162			7,277		1.07			3,581,116			1,894		0.21			3,146,097			3,370		0.43
Short-term borrowings		57,856			232		1.60			328,952			2,081		2.51			—			—		—			57,856			232		1.60
Long-term borrowings		39,314			618		6.31			39,244			618		6.30			73,786			1,060		5.75			39,314			618		6.31
Total borrowings		97,170			850		3.50			368,196			2,699		2.91			73,786			1,060		5.75			97,170			850		3.50
Total interest-bearing liabilities		3,243,267			4,220		0.52			3,056,358			9,976		1.30			3,654,902			2,954		0.32			3,243,267			4,220		0.52
Noninterest-bearing demand deposits		987,908								717,473								1,149,120								987,908
Other noninterest-bearing liabilities		88,882								57,578								68,158								88,882
Shareholders’ equity		455,276								429,401								495,874								455,276
Total liabilities and shareholders’ equity	$	4,775,333							$	4,260,810							$	5,368,054							$	4,775,333
Net interest income (tax-equivalent)				$	35,700							$	32,741							$	38,413							$	35,700
Interest rate spread							3.08	%							2.99	%							2.99	%							3.08	%
Net earning assets	$	1,170,527							$	902,571							$	1,311,895							$	1,170,527
Net interest margin (tax-equivalent)							3.22	%							3.29	%							3.07	%							3.22	%
Ratio of average interest-earning assets to average interest-bearing liabilities							136.09	%							129.53	%							135.89	%							136.09	%

⁽¹⁾	~~Investment securities are shown at amortized cost.~~

⁽²⁾	~~The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21% for each of the three-month periods ended September 30, 2020 and 2019.~~

(1) Investment securities are shown at amortized cost.

~~- 49 -~~(2) The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.

Nine months ended
September 30,

2021

2020

Average
Balance

Interest

Average
Rate

Average
Balance

Interest

Average
Rate

Interest-earning assets:

Table of Contents

~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

	Nine months ended September 30,
	2020								2019
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	91,263		$	266		0.39	%	$	18,495		$	297		2.15	%	$	176,653		$	155	0.12	%	$	91,263		$	266	0.39	%
Investment securities ⁽¹⁾:
Investment securities (1):
Taxable		596,604			10,649		2.38			620,607			10,949		2.35			923,162			11,751	1.70			596,604			10,649	2.38
Tax-exempt ⁽²⁾		175,455			3,237		2.46			218,388			4,047		2.47			127,368			2,345	2.45			175,455			3,237	2.46
Total investment securities		772,059			13,886		2.40			838,995			14,996		2.38			1,050,530			14,096	1.79			772,059			13,886	2.40
Loans:																							��
Commercial business		712,703			19,843		3.72			570,596			22,627		5.30			763,332			21,740	3.81			712,703			19,843	3.72
Commercial mortgage		1,138,568			37,659		4.42			1,003,593			38,994		5.19			1,306,001			38,163	3.91			1,138,568			37,659	4.42
Residential real estate loans		583,540			16,095		3.68			541,185			15,649		3.86			595,740			15,298	3.42			583,540			16,095	3.68
Residential real estate lines		99,156			2,979		4.01			108,207			4,247		5.25			83,429			2,128	3.41			99,156			2,979	4.01
Consumer indirect		834,810			29,757		4.76			890,560			29,174		4.38			879,993			31,173	4.74			834,810			29,757	4.76
Other consumer		15,691			1,326		11.29			16,029			1,486		12.40			15,408			1,192	10.35			15,691			1,326	11.29
Total loans		3,384,468			107,659		4.25			3,130,170			112,177		4.79			3,643,903			109,694	4.02			3,384,468			107,659	4.25
Total interest-earning assets		4,247,790			121,811		3.83			3,987,660			127,470		4.27			4,871,086			123,945	3.40			4,247,790			121,811	3.83
Less: Allowance for loan losses		(44,228	)							(34,759	)							(51,395	)						(44,228	)
Other noninterest-earning assets		389,047								328,369								432,818							389,047
Total assets	$	4,592,609							$	4,281,270							$	5,252,509						$	4,592,609
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	694,830		$	840		0.16	%	$	653,780		$	1,030		0.21	%	$	810,086		$	848	0.14	%	$	694,830		$	840	0.16	%
Savings and money market		1,349,931			3,724		0.37			973,005			3,143		0.43			1,819,766			2,550	0.19			1,349,931			3,724	0.37
Time deposits		989,236			10,502		1.42			1,090,896			17,281		2.12			902,883			2,896	0.43			989,236			10,502	1.42
Total interest-bearing deposits		3,033,997			15,066		0.66			2,717,681			21,454		1.06			3,532,735			6,294	0.24			3,033,997			15,066	0.66
Short-term borrowings		112,451			1,408		1.67			332,922			6,575		2.64			388			119	41.07			112,451			1,408	1.67
Long-term borrowings		39,297			1,853		6.30			39,227			1,853		6.30			73,711			3,177	5.75			39,297			1,853	6.30
Total borrowings		151,748			3,261		2.87			372,149			8,428		3.03			74,099			3,296	5.93			151,748			3,261	2.87
Total interest-bearing liabilities		3,185,745			18,327		0.77			3,089,830			29,882		1.29			3,606,834			9,590	0.36			3,185,745			18,327	0.77
Noninterest-bearing demand deposits		874,456								719,630								1,095,497							874,456
Other noninterest-bearing liabilities		85,069								56,449								69,847							85,069
Shareholders’ equity		447,339								415,361								480,331							447,339
Total liabilities and shareholders’ equity	$	4,592,609							$	4,281,270							$	5,252,509						$	4,592,609
Net interest income (tax-equivalent)				$	103,484							$	97,588							$	114,355						$	103,484
Interest rate spread							3.06	%							2.98	%						3.04	%						3.06	%
Net earning assets	$	1,062,045							$	897,830							$	1,264,252						$	1,062,045
Net interest margin (tax-equivalent)							3.25	%							3.27	%						3.14	%						3.25	%
Ratio of average interest-earning assets to average interest-bearing liabilities							133.34	%							129.06	%						135.05	%						133.34	%

⁽¹⁾

(1) Investment securities are shown at amortized cost.

(2) The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.

~~Investment securities are shown at amortized cost.~~

⁽²⁾	~~The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21% for each of the nine-month periods ended September 30, 2020 and 2019.~~

~~- 50 -~~

Table of Contents

~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands):


	Three months ended September 30, 2020 vs. 2019										Nine months ended September 30, 2020 vs. 2019									Three months ended September 30, 2021 vs. 2020									Nine months ended September 30, 2021 vs. 2020
Increase (decrease) in:	Volume			Rate				Total			Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total
Interest income:							��
Federal funds sold and interest-earning deposits	$	108		$	(183	)		$	(75	)	$	377		$	(408	)	$	(31	)	$	11		$	25		$	36		$	149		$	(260	)	$	(111	)
Investment securities:
Taxable		157			(305	)			(148	)		(427	)		127			(300	)		2,012			(950	)		1,062			4,732			(3,630	)		1,102
Tax-exempt		(267	)		(5	)			(272	)		(792	)		(18	)		(810	)		(282	)		(9	)		(291	)		(885	)		(7	)		(892	)
Total investment securities		(110	)		(310	)			(420	)		(1,219	)		109			(1,110	)		1,730			(959	)		771			3,847			(3,637	)		210
Loans:
Commercial business		2,360			(3,188	)			(828	)		4,871			(7,655	)		(2,784	)		(948	)		477			(471	)		1,434			463			1,897
Commercial mortgage		1,876			(2,960	)			(1,084	)		4,874			(6,209	)		(1,335	)		1,492			(648	)		844			5,178			(4,674	)		504
Residential real estate loans		345			(357	)			(12	)		1,189			(743	)		446			(17	)		(347	)		(364	)		331			(1,128	)		(797	)
Residential real estate lines		(143	)		(380	)			(523	)		(333	)		(935	)		(1,268	)		(135	)		(67	)		(202	)		(436	)		(415	)		(851	)
Consumer indirect		(444	)		670				226			(1,893	)		2,476			583			1,033			(169	)		864			1,602			(186	)		1,416
Other consumer		9			(90	)			(81	)		(31	)		(129	)		(160	)		(45	)		14			(31	)		(24	)		(110	)		(134	)
Total loans		4,003			(6,305	)			(2,302	)		8,677			(13,195	)		(4,518	)		1,380			(740	)		640			8,085			(6,050	)		2,035
Total interest income		4,001			(6,798	)			(2,797	)		7,835			(13,494	)		(5,659	)		3,121			(1,674	)		1,447			12,081			(9,947	)		2,134
Interest expense:
Deposits:
Interest-bearing demand		36			(130	)			(94	)		62			(252	)		(190	)		34			3			37			129			(121	)		8
Savings and money market		524			(482	)			42			1,089			(508	)		581			185			(489	)		(304	)		1,032			(2,206	)		(1,174	)
Time deposits		(1,047	)		(2,808	)			(3,855	)		(1,493	)		(5,286	)		(6,779	)		91			(1,300	)		(1,209	)		(846	)		(6,760	)		(7,606	)
Total interest-bearing deposits		(487	)		(3,420	)			(3,907	)		(342	)		(6,046	)		(6,388	)		310			(1,786	)		(1,476	)		315			(9,087	)		(8,772	)
Short-term borrowings		(1,280	)		(569	)			(1,849	)		(3,328	)		(1,839	)		(5,167	)		(116	)		(116	)		(232	)		(2,744	)		1,455			(1,289	)
Long-term borrowings		1			(1	)			—			3			(3	)		—			499			(57	)		442			1,495			(171	)		1,324
Total borrowings		(1,279	)		(570	)			(1,849	)		(3,325	)		(1,842	)		(5,167	)		383			(173	)		210			(1,249	)		1,284			35
Total interest expense		(1,766	)		(3,990	)			(5,756	)		(3,667	)		(7,888	)		(11,555	)		693			(1,959	)		(1,266	)		(934	)		(7,803	)		(8,737	)
Net interest income	$	5,767		$	(2,808	)		$	2,959		$	11,502		$	(5,606	)	$	5,896		$	2,428		$	285		$	2,713		$	13,015		$	(2,144	)	$	10,871

Provision for Credit Losses

The provision for credit losses for the three and nine months ended September 30, ~~2020 was~~2021 were benefits of $541 thousand and $7.1 million, respectively, compared to provisions of $4.0 million and $21.7 ~~million, respectively, compared to $1.8 million and $5.4~~ million for the corresponding periods in ~~2019.~~2020. The ~~increase was~~benefits in the third quarter and first nine months of 2021 were due to continued improvement in the national unemployment forecast, the designated loss driver for our current expected credit loss (“CECL”) model, positive trends in qualitative factors and a relatively low level of net charge-offs, resulting in releases of credit loss reserves. The provisions in the third quarter and first nine months of 2020 were driven by the adoption of the CECL standard ~~higher net charge-offs in the first quarter of 2020~~ and deterioration in the economic environment as a result of the COVID-19 pandemic, which adversely impacted our unemployment forecast, the designated loss driver for our CECL model. Although the unemployment forecast improved in the latest quarter, qualitative factors were increased to more than offset the improved unemployment forecast due to uncertainty around the long-term impact of the pandemic on the economy. The increase in net charge-offs in the first nine months of 2020 is primarily attributable to one commercial credit that was downgraded and partially charged-off during the first quarter of 2020. The borrower’s business was related to the hospitality industry and the downgrade and charge-off were precipitated by the impact of the COVID-19 ~~pandemic.~~pandemic on the economic environment. The provision for credit losses - loans varies based primarily on forecasted unemployment rates, loan growth, net charge-offs, collateral values associated with collateral dependent loans and qualitative factors.

See the “Allowance for Credit Losses - Loans” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion.

~~- 51 -~~54

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~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

Noninterest Income

The following table details the major categories of noninterest income for the periods presented (in thousands):


	Three months ended September 30,						Nine months ended September 30,					Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019		2021			2020			2021		2020
Service charges on deposits	$	1,254		$	1,925		$	3,321		$	5,361	$	1,502		$	1,254		$	4,081	$	3,321
Insurance income		1,357			1,439			3,525			3,689		1,864			1,357			4,407		3,525
ATM and debit card		1,943			1,801			5,321			4,983
Card interchange income													2,118			1,943			6,270		5,321
Investment advisory		2,443			2,269			6,940			6,812		2,969			2,443			8,627		6,940
Company owned life insurance		470			459			1,397			1,293		776			470			2,126		1,397
Investments in limited partnerships		(105	)		116			(136	)		492		694			(105	)		1,787		(136	)
Loan servicing		49			102			106			316		105			49			293		106
Income from derivative instruments, net		1,931			890			4,617			1,013		377			1,931			1,660		4,617
Net gain on sale of loans held for sale		1,581			439			2,616			1,028		600			1,397			2,468		2,261
Net gain (loss) on investment securities		554			1,608			1,449			1,721
Net gain on investment securities													—			554			71		1,449
Net gain (loss) on other assets		(55	)		(2	)		8			56		138			(55	)		286		8
Net loss on tax credit investments		(40	)		—			(120	)		—
Net (loss) gain on tax credit investments													(129	)		(40	)		62		(120	)
Other		1,019			1,315			3,151			3,950		1,069			1,019			3,094		3,151
Total noninterest income	$	12,401		$	12,361		$	32,195		$	30,714	$	12,083		$	12,217		$	35,232	$	31,840

Service charges on deposits ~~decreased $671~~increased $248 thousand, or ~~35%~~20%, to $1.5 million for the third quarter of 2021 compared to $1.3 million for the third quarter of ~~2020 compared to $1.9 million for the third quarter of 2019.~~2020. For the first nine months of ~~2020, service charges on deposits decreased $2.0 million,~~2021, insurance income increased $760 thousand, or ~~38%~~23%, to ~~$3.3~~$4.1 million compared to ~~$5.4~~$3.3 million for the first nine months of ~~2019.~~2020. The ~~decreases~~increases were primarily ~~due to~~the result of our COVID-19 relief initiatives implemented between March 23, 2020 to July 9, 2020, including temporarily waiving or eliminating ~~certain~~ fees. In addition, insufficient fund fees in the remainder of the third quarter of 2020 were lower than historic ~~levels, potentially~~levels.

Insurance income increased $507 thousand, or 37%, to $1.9 million for the third quarter of 2021 compared to $1.4 million for the third quarter of 2020. For the first nine months of 2021, insurance income increased $882 thousand, or 25%, to $4.4 million compared to $3.5 million for the first nine months of 2020. The increases were primarily due to the ~~positive~~2021 acquisitions of Landmark in February and North Woods in August as well as growth in the legacy SDN business, including the impact of ~~stimulus programs on consumer account balances. ATM access fees~~increasing insurance premiums.

Investment advisory income increased $526 thousand, or 22%, to $3.0 million for the third quarter of 2021, compared to $2.4 million for the third quarter of 2020. For the first nine months of 2021, investment advisory income increased $1.7 million, or 24%, to $8.6 million compared to $6.9 million for the first nine months of 2020. The increases were ~~not re-initiated until September 19th.~~primarily the result of an increase in assets under management driven by a combination of market gains, new customer accounts and contributions to existing accounts in 2021.

Company owned life insurance income increased $306 thousand, or 65%, to $776 thousand for the third quarter of 2021 compared to $470 thousand for the third quarter of 2020. For the first nine months of 2021, company owned life insurance income increased $729 thousand, or 52%, to $2.1 million compared to $1.4 million for the first nine months of 2020. We made additional investments in company-owned life insurance of $20.0 million in the third quarter of 2021 and $30.0 million in the fourth quarter of 2020 to take advantage of attractive tax-equivalent yields and partially offset employee benefit expenses.

Income (loss) from investments in limited partnerships ~~decreased $221~~increased $799 thousand, to income of $694 thousand for the third quarter of 2021 compared to a loss of $105 thousand for the third quarter of ~~2020 compared to income of $116 thousand for the third quarter of 2019.~~2020. For the first nine months of ~~2020,~~2021, income (loss) from investments in limited partnerships ~~decreased $628 thousand,~~increased $1.9 million, to income of $1.8 million compared to a loss of $136 ~~thousand compared to income of $492~~ thousand for the first nine months of ~~2019.~~2020. We have investments in limited partnerships, primarily small business investment companies, and account for these investments under the equity method. The income from these equity method investments fluctuates based on the maturity and performance of the underlying investments.

Income from derivative instruments, net ~~increased $1.0~~decreased $1.6 million, or 80%, to $377 thousand for the third quarter of 2021 compared to $1.9 million for the third quarter of ~~2020 compared to $890 thousand for the third quarter of 2019.~~2020. For the first nine months of ~~2020,~~2021, income from derivative instruments, net ~~increased $3.6~~decreased $3.0 million, or 64%, to ~~$4.6~~$1.7 million compared to ~~$1.0~~$4.6 million for the first nine months of ~~2019. The increases were primarily the result of an increase in~~2020. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed ~~and reflects growth and maturity~~during the quarter combined with the impact of ~~our commercial loan business.~~changes in the fair market value of borrower-facing trades.

Net gain on sale of loans held for sale ~~was $1.6~~decreased $797 thousand, or 57%, to $600 thousand for the third quarter of 2021 compared to $1.4 million for the third quarter of ~~2020 compared~~2020. The decrease was due to ~~$439 thousand for~~a lower transaction volumes in third quarter of 2021. Transaction volume and margin were at historically high levels in the third quarter of ~~2019.~~2020, driven by mortgage refinancing activity. For the first nine months of ~~2020,~~2021, net gain on sale of loans held for sale ~~was $2.6~~increased $207 thousand, or 9%, to $2.5 million compared to ~~$1.0~~$2.3 million for the first nine months of 2019. The increases were primarily due to increased residential real estate loans for sale volume and an increase in margin on these transactions. The low interest rate environment has resulted in a significant increase in mortgage refinancing activity.2020.

Net gain on investment securities was $554 thousand for the third quarter of 2020 compared to $1.6 million for the third quarter of 2019. For the first nine months of 2020, net gain on investment securities was $1.4 million compared to $1.7 million for the first nine months of 2019. The net gain in the current quarter is attributable to the management of premium risk, largely achieved through the sale of $20.0 million of fixed rate mortgage backed securities with higher expected prepayment speeds. Proceeds were reinvested in current coupon bonds, with lower anticipated prepayment behavior.

Other noninterest income decreased $296 thousand, or 23%, to $1.0 million for the third quarter of 2020 compared to $1.3 million for the third quarter of 2019. The decrease was due to the impact of stay-at-home orders for COVID-19 that reduced certain volume-based fees like merchant revenue and correspondent credit card fees. Our FHLB dividends have also declined year-over-year due to the lower level of FHLB borrowings in 2020 versus 2019. For the first nine months of 2020, other noninterest income decreased $799 thousand, or 20%, to $3.2 million compared to $4.0 million for the first nine months of 2019. The decrease was due to lower pay-by-phone fees associated with our COVID-19 consumer relief initiatives, coupled with the impact of stay-at-home orders that reduced certain volume-based fees like merchant revenue and correspondent credit card fees. Our FHLB dividends have also declined year-over-year due to the lower level of FHLB borrowings in 2020 versus 2019.

~~- 52 -~~55

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~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

Noninterest Expense

The following table details the major categories of noninterest expense for the periods presented (in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Salaries and employee benefits	$	15,085	$	14,411	$	45,173	$	41,661	$	15,798	$	15,085	$	44,782	$	45,173
Occupancy and equipment		3,263		4,650		10,407		13,562		3,834		3,263		10,502		10,407
Professional services		1,242		1,528		4,974		3,618		1,600		1,242		5,098		4,974
Computer and data processing		3,250		1,378		8,622		3,951		3,579		3,250		10,160		8,622
Supplies and postage		463		522		1,533		1,554		447		463		1,361		1,533
FDIC assessments		594		7		1,505		1,005		697		594		1,942		1,505
Advertising and promotions		955		745		2,055		2,351		474		955		1,234		2,055
Amortization of intangibles		280		309		861		948		264		280		801		861
Restructuring charges		1,362		-		1,362		-		-		1,362		-		1,362
Other		2,165		2,336		6,583		7,410		2,476		1,981		6,973		6,228
Total noninterest expense	$	28,659	$	25,886	$	83,075	$	76,060	$	29,169	$	28,475	$	82,853	$	82,720

Salaries and employee benefits expense increased by ~~$674~~$713 thousand, or 5%, to $15.8 million for the third quarter of 2021 compared to $15.1 million for the third quarter of ~~2020 compared to $14.4 million for the third quarter of 2019.~~2020. The increase was primarily due to higher incentive compensation and commissions, coupled with investments in ~~the current quarter includes $224 thousand of non-recurring severance costs incurred in connection with the previously described branch closings~~experienced personnel to support strategic initiatives including digital banking, retail community banking expansion, customer experience and ~~staff reduction announced in July 2020.~~technology. For the first nine months of ~~2020,~~2021, salaries and employee benefits expense ~~increased~~decreased by ~~$3.5 million,~~$391 thousand, or 8%1%, to ~~$45.2~~$44.8 compared to ~~$41.7~~$45.2 million for the first nine months of ~~2019.~~2020. The decrease reflects a streamlining of retail branches to better align with shifting customer needs and preferences, including the closure of seven branches in the second half of 2020, partially offset by an increase in expense in the third quarter of 2021.

Occupancy and equipment expense increased $571 thousand, or 17%, to $3.8 million for the third quarter of 2021 compared to $3.3 million for the third quarter of 2020. The increase ~~in the first nine months of 2020~~ was primarily the result of ~~incentive compensation (including producer incentives and commissions), annual merit increases, COVID-19-related incremental pay to front-line retail associates, expense~~the purchase of security equipment for multiple locations, timing of maintenance services related to the ~~departure~~outsourcing of ~~a senior officer on~~property management services in the current year and expenses related to two Five Star Bank branches opened in Buffalo in June ~~26, 2020 and higher medical expense.~~2021.

Professional services expense ~~decreased $286~~increased $358 thousand, or ~~19%~~29%, to $1.6 million for the third quarter of 2021 compared to $1.2 million for the third quarter of ~~2020 compared~~2020. The increase was primarily due to ~~$1.5~~the timing of consulting and advisory projects including financial technology and improvement initiatives.

Computer and data processing expense increased $329 thousand, or 10%, to $3.6 million for the third quarter of ~~2019. For the first nine months of 2020, professional services expense increased $1.4 million, or 37%, to $5.0 million~~2021 compared to $3.6 million for the first nine months of 2019. The decrease in the third quarter of 2020 and increase in the first nine months of 2020 were primarily due to the timing of fees for consulting and advisory projects, including the Company’s improvement initiatives. Expenses related to improvement initiatives totaled $56 thousand and $1.0 million for the three- and nine-month periods ended September 30, 2020, respectively, and $298 thousand and $511 thousand for the three- and nine-month periods ended September 30, 2019, respectively.

~~Computer and data processing expense increased $603 thousand, or 23%,~~ to $3.3 million for the third quarter of ~~2020~~2020. For the first nine months of 2021, computer and data processing expense increased $1.5 million, or 18%, to $10.2 million compared to ~~$2.6~~$8.6 million for the first nine months of 2020. The increases were primarily due to investments in technology, including costs related to the Bank’s ongoing digital banking initiatives.

Advertising and promotions expense decreased $481 thousand, or 50%, to $474 thousand for the third quarter of 2021 compared to $1.0 million for the third quarter of ~~2019.~~2020. For the first nine months of ~~2020, computer~~2021, advertising and ~~data processing~~promotions expense ~~increased $1.2 million,~~decreased $821 thousand, or ~~16%~~40%, to ~~$8.6~~$1.2 million compared to ~~$7.4~~$2.1 million for the first nine months of ~~2019.~~2020. The ~~increases in computer and data processing expense~~decreases were ~~primarily due to costs~~ related to the ~~Bank’s new online~~ongoing evolution of our long-term marketing strategy and ~~mobile platform, Five Star Bank Digital Banking, launched~~a temporary reduction in ~~the second quarter of 2020.~~external advertising expense.

FDIC assessments increased $587 thousand to $594 thousand for the third quarter of 2020 compared to $7 thousand for the third quarter of 2019. For the first nine months of 2020, FDIC assessments increased $500 thousand, or 50%, to $1.5 million compared to $1.0 million for the first nine months of 2019. In 2018, the FDIC minimum reserve ratio was exceeded, resulting in credits used to offset expense in 2019 and the first quarter of 2020.

Advertising and promotions expense increased $210 thousand, or 28%, to $955 thousand for the third quarter of 2020 compared to $745 thousand for the third quarter of 2019. For the first nine months of 2020, advertising and promotions expense decreased $296 thousand, or 13%, to $2.1 million compared to $2.4 million for the first nine months of 2019. Advertising and promotions expense was reduced in March 2020 when the COVID-19 pandemic impacted operations in Western New York. Higher expense in the third quarter of 2020 is attributable to promotional costs for Five Star Bank Digital Banking. The advertising campaign started after the last wave of customers was transitioned to the new platform in mid-June and ended in late August.

Restructuring charges of $1.4 million for the third quarter of 2020 represents non-recurring real estate related charges related to the ~~previously described branch closings~~closure of bank branches and ~~staff reduction announced~~a staffing reduction.

Other expense increased $495 thousand, or 25%, to $2.5 million for the third quarter of 2021 compared to $2.0 million for the third quarter of 2020. For the first nine months of 2021, other expense increased $745 thousand, or 12%, to $7.0 million compared to $6.2 million for the first nine months of 2020. The increases were primarily due to lower education, travel and business development expenses as a result of the stay-at home orders implemented in ~~July 2020.~~the second quarter of 2020 in response to the COVID-19 pandemic and the timing of charitable contributions in the third quarter of 2021.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Our efficiency ratio for the first nine months of ~~2020~~2021 was ~~61.89%~~55.41% compared with ~~60.09%~~61.79% for the first nine months of ~~2019.~~2020. The ~~higher~~lower efficiency ratio ~~is a result~~was primarily the result of ~~the higher noninterest expenses~~an increase in net interest income, associated with ~~our improvement initiatives~~increases in average interest-earning assets and ~~COVID-related impacts~~deferred fee amortization on PPP loans and a decrease in interest expense as well as an increase in noninterest income ~~and noninterest expenses.~~compared to the prior year period. The efficiency ratio is calculated by dividing total noninterest expense by net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains on investment securities. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease indicates a more efficient allocation of resources. The efficiency ratio, a banking industry financial measure, is not required by GAAP. However, the efficiency ratio is used by management in its assessment of financial performance specifically as it relates to noninterest expense control. Management also believes such information is useful to investors in evaluating Company performance.

~~- 53 -~~

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Income Taxes

For the nine months ended September 30, ~~2020,~~2021, we recorded income tax expense of ~~$5.7~~$15.3 million, versus ~~$10.2~~$5.7 million for the same period in the prior year. In the first nine months of ~~2020, the Company~~2021, we recognized tax credit investments resulting in a ~~$606 thousand~~ reduction in income tax expense of $1.2 million, and a ~~$120~~net gain recorded in noninterest income of $62 thousand. In the first nine months of 2020, we recognized tax credit investments resulting in a reduction in income tax expense of $606 thousand, and a net loss recorded in noninterest ~~income.~~income of $120 thousand. For the ~~three months ended September 30, 2020,~~third quarter of 2021, we recorded income tax expense of ~~$2.9~~$4.6 million, versus ~~$4.3~~$2.9 million for the same period in the prior ~~year. As~~year, primarily driven by our higher pre-tax earnings.

During the three months ended June 30, 2021, New York State enacted legislation that temporarily increases the corporate tax rate from 6.5% to 7.25% for taxable years beginning in 2021 through 2023 for taxpayers with New York State income over $5.0 million. This rate change did not result in a ~~result of the Tax Cuts and Jobs Act, the Company estimated~~material impact to our tax ~~benefits and recorded a provisional amount in and~~provision for the ~~year~~three and nine months ended ~~December 31, 2017. In the third quarter of 2019 an adjustment was made to the provisional amount resulting in incremental expense of approximately $600 thousand.~~September 30, 2021.

~~The~~Our effective tax rates for the first nine months of 2021 and 2020 were 20.8% and ~~2019 were~~ 18.9% ~~and 22.3%~~, respectively. ~~The~~Our effective tax rates for the third quarter of 2021 and 2020 were 21.0% and ~~2019 were~~ 19.3% ~~and 25.0%~~, respectively. The increase in effective tax rates is the result of higher pre-tax earnings in comparison to the prior year. Effective tax rates are typically impacted by items of income and expense that are not subject to federal or state taxation. Our effective tax rates reflect the impact of these items, which include, but are not limited to, interest income from tax-exempt securities, earnings on Company owned life insurance and the impact of tax credit investments. In addition, our effective tax rate for ~~2020~~2021 and ~~2019~~2020 reflects the New York State tax benefit generated by our real estate investment trust.

ANALYSIS OF FINANCIAL CONDITION

INVESTING ACTIVITIES

Investment Securities

The following table summarizes the composition of our investment securities portfolio as of the dates indicated (in thousands):


	Investment Securities Portfolio Composition									Investment Securities Portfolio Composition
	September 30, 2020					December 31, 2019				September 30, 2021					December 31, 2020
	Amortized			Fair		Amortized		Fair		Amortized			Fair		Amortized			Fair
	Cost			Value		Cost		Value		Cost			Value		Cost			Value
Securities available for sale:
U.S. Government agency and government-sponsored enterprise securities	$	6,234		$	6,655	$	26,440	$	26,877	$	6,253		$	6,531	$	6,239		$	6,635
Mortgage-backed securities:
Agency mortgage-backed securities		489,384			508,881		389,412		390,422		1,092,723			1,090,999		601,426			620,989
Non-Agency mortgage-backed securities		—			435		—		618		—			420		—			435
Total available for sale securities		495,618			515,971		415,852		417,917		1,098,976			1,097,950		607,665			628,059
Securities held to maturity:
State and political subdivisions		151,611			156,663		192,215		196,018		116,812			119,513		144,506			148,984
Mortgage-backed securities		139,343			145,215		166,785		167,241		101,328			104,651		127,467			133,051
Total held to maturity securities		290,954			301,878		359,000		363,259		218,140			224,164		271,973			282,035
Allowance for credit losses - securities		(8	)								(5	)				(7	)
Total held to maturity securities, net		290,946									218,135					271,966
Total investment securities	$	786,564		$	817,849	$	774,852	$	781,176	$	1,317,111		$	1,322,114	$	879,631		$	910,094

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

The available for sale (“AFS”) investment securities portfolio increased ~~$98.1~~$469.9 million from ~~$417.9~~$628.1 million at December 31, ~~2019~~2020 to ~~$516.0~~$1.10 billion at September 30, 2021. The increase from year-end 2020 was primarily due to the deployment of excess liquidity into cash flowing agency backed securities. The AFS portfolio had a net unrealized loss of $1.0 million at September 30, ~~2020. The AFS portfolio had~~2021 and a net unrealized ~~gains~~gain of $20.4 million ~~and $2.1 million~~ at ~~September 30, 2020 and~~ December 31, ~~2019,~~2020, respectively. The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change.

~~- 54 -~~

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Security Yields and Maturities Schedule

The following table sets forth certain information regarding the amortized cost (“Cost”), weighted average yields (“Yield”) and contractual maturities of our debt securities portfolio as of September 30, ~~2020.~~2021. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Actual maturities may differ from the contractual maturities presented because borrowers may have the right to call or prepay certain investments. No tax-equivalent adjustments were made to the weighted average yields (dollars in thousands).


	Due in one year or less					Due from one to five years					Due after five years through ten years					Due after ten years					Total					Due in one year or less					Due from one to five years					Due after five years through ten years					Due after ten years					Total
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
Available for sale debt securities:
U.S. Government agencies and government-sponsored enterprises	$	—		—	%	$	6,234		2.43	%	$	—		—	%	$	—		—	%	$	6,234		2.43	%	$	—		—	%	$	6,253		2.42	%	$	—		—	%	$	—		—	%	$	6,253		2.42	%
Mortgage-backed securities		1		6.04			30,291		2.45			162,953		2.36			296,139		1.76			489,384		2.00			4,863		2.03			56,549		2.42			175,663		1.91			855,648		1.49			1,092,723		1.61
		1		—			36,525		2.45			162,953		2.36			296,139		1.76			495,618		2.01			4,863		2.03			62,802		2.42			175,663		1.91			855,648		1.49			1,098,976		1.62
Held to maturity debt securities:
State and political subdivisions		48,688		2.27			99,947		1.93			2,976		2.02			—		—			151,611		2.04			36,191		2.04			70,429		1.89			5,005		1.62			5,187		1.92			116,812		1.93
Mortgage-backed securities		—		—			2,345		2.30			16,100		2.14			120,898		2.40			139,343		2.37			—		—			2,278		2.28			15,843		2.23			83,207		2.45			101,328		2.41
		48,688		2.27			102,292		1.94			19,076		2.12			120,898		2.40			290,954		2.20			36,191		2.04			72,707		1.90			20,848		2.23			88,394		2.45			218,140		2.17
Total investment securities	$	48,689		2.27	%	$	138,817		2.07	%	$	182,029		2.33	%	$	417,037		1.94	%	$	786,572		2.08	%	$	41,054		2.04	%	$	135,509		2.14	%	$	196,511		1.93	%	$	944,042		1.58	%	$	1,317,116		1.71	%

Impairment Assessment

For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. For the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

LENDING ACTIVITIES

The following table summarizes the composition of our loan portfolio, excluding loans held for sale and including net unearned income and net deferred fees and costs, as of the dates indicated (in thousands).


	Loan Portfolio Composition										Loan Portfolio Composition
	September 30, 2020					December 31, 2019					September 30, 2021					December 31, 2020
	Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total
Commercial business	$	818,135		22.9	%	$	572,040		17.8	%	$	686,191		18.8	%	$	794,148		22.1	%
Commercial mortgage		1,202,046		33.7			1,106,283		34.3			1,348,550		36.9			1,253,901		34.9
Total commercial		2,020,181		56.6			1,678,323		52.1			2,034,741		55.7			2,048,049		57.0
Residential real estate loans		596,902		16.7			572,350		17.8			584,091		16.0			599,800		16.7
Residential real estate lines		94,017		2.6			104,118		3.2			79,196		2.2			89,805		2.5
Consumer indirect		840,579		23.6			850,052		26.4			940,537		25.7			840,421		23.4
Other consumer		16,860		0.5			16,144		0.5			15,334		0.4			17,063		0.4
Total consumer		1,548,358		43.4			1,542,664		47.9			1,619,158		44.3			1,547,089		43.0
Total loans		3,568,539		100.0	%		3,220,987		100.0	%		3,653,899		100.0	%		3,595,138		100.0	%
Less: Allowance for credit losses		49,395					30,482
Less: Allowance for credit losses - loans												45,444					52,420
Total loans, net	$	3,519,144				$	3,190,505				$	3,608,455				$	3,542,718

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Total loans increased ~~$347.6~~$58.8 million to ~~$3.57~~$3.65 billion at September 30, ~~2020~~2021 from ~~$3.22~~$3.60 billion at December 31, ~~2019.~~2020. The increase in loans was primarily attributable to ~~PPP loans in~~ our commercial business portfolio. PPP loans of approximately $2 million and $269 million were funded in the third and second quarters of 2020, respectively. The loans carry a 1% interest rate and the Company recorded net PPP loan origination fees of approximately $7.4 million that are amortized over a 24-month period.organic growth initiatives.

Commercial loans ~~increased $341.9~~decreased $13.3 million during the nine months ended September 30, ~~2020~~2021 and represented ~~56.6%~~55.7% of total loans as of September 30, ~~2020.~~2021. The ~~increase~~decrease was due to a decrease of $131.3 million in PPP loans, net of deferred fees, from $248.0 million at December 31, 2020 to $116.7 million at September 30, 2021. The decrease in commercial loans was partially offset by an increase in commercial mortgage loans and commercial business loans, excluding PPP loans, of $94.7 million and $23.3 million, respectively, primarily ~~attributable to PPP loans. At September 30, 2020, the PPP loan balance was $264.1 million, net~~as a result of ~~deferred fees.~~our continued commercial business development efforts.

The consumer indirect portfolio totaled ~~$840.6~~$940.5 million and represented ~~23.6%~~25.7% of total loans as of September 30, ~~2020.~~2021. During the first nine months of ~~2020,~~2021, we originated ~~$230.0~~$376.6 million in indirect auto loans with a mix of approximately ~~32%~~26% new auto and ~~68%~~74% used auto. During the first nine months of ~~2019,~~2020, we originated ~~$234.6~~$135.6 million in indirect auto loans with a mix of approximately ~~34%~~30% new auto and ~~66%~~70% used auto. Our origination volumes and mix of new and used vehicles financed fluctuate depending on general market conditions. Growth in the consumer indirect portfolio in the current year has been the result of pent-up consumer demand for automobiles with the Company well-positioned to take advantage of the market opportunity given our deep history and experience in this line of business.

Loans Held for Sale and Loan Servicing Rights

Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled ~~$7.1~~$5.9 million and ~~$4.2~~$4.3 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

We sell certain qualifying newly originated or refinanced residential real estate loans on the secondary market. Residential real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to ~~$220.7~~$265.2 million and ~~$189.8~~$241.7 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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Allowance for Credit Losses - Loans

The following table summarizes the activity in the allowance for credit losses - loans for the periods indicated (in thousands).


	Loan Loss Analysis												Loan Loss Analysis
	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019			2021			2020			2021			2020
Allowance for credit losses - loans, beginning of period, prior to adoption of ASC 326							$	30,482		$	33,914											$	30,482
Impact of adopting ASC 326								9,594			—												9,594
Allowance for credit losses - loans, beginning of period, after adoption of ASC 326		46,316			34,434			40,076			33,914		$	46,365		$	46,316		$	52,420			40,076
Charge-offs:
Commercial business		15			112			8,281			380			218			15			396			8,281
Commercial mortgage		640			2,994			1,712			2,997			—			640			203			1,712
Residential real estate loans		—			54			100			172			36			—			103			100
Residential real estate lines		—			8			—			10			60			—			130			—
Consumer indirect		1,388			2,420			7,366			8,102			1,395			1,388			4,965			7,366
Other consumer		160			315			499			867			250			160			755			499
Total charge-offs		2,203			5,903			17,958			12,528			1,959			2,203			6,552			17,958
Recoveries:
Commercial business		103			102			1,644			333			168			103			785			1,644
Commercial mortgage		37			—			37			17			—			37			7			37
Residential real estate loans		7			14			25			31			15			7			79			25
Residential real estate lines		—			1			3			6			—			—			—			3
Consumer indirect		1,503			1,103			4,550			4,205			1,130			1,503			4,383			4,550
Other consumer		65			73			282			299			59			65			218			282
Total recoveries		1,715			1,293			6,541			4,891			1,372			1,715			5,472			6,541
Net charge-offs		488			4,610			11,417			7,637			587			488			1,080			11,417
Provision for credit losses - loans		3,567			1,844			20,736			5,391
Provision (benefit) for credit losses - loans														(334	)		3,567			(5,896	)		20,736
Allowance for credit losses - loans, end of period	$	49,395		$	31,668		$	49,395		$	31,668		$	45,444		$	49,395		$	45,444		$	49,395

Net loan charge-offs to average loans (annualized)		0.06	%		0.58	%		0.45	%		0.33	%		0.06	%		0.06	%		0.04	%		0.45	%
Allowance for credit losses - loans to total loans		1.38	%		1.00	%		1.38	%		1.00	%		1.24	%		1.38	%		1.24	%		1.38	%
Allowance for credit losses - loans to non-performing loans		453	%		324	%		453	%		324	%		681	%		453	%		681	%		453	%

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

The Company adopted CECL effective January 1, 2020, which resulted in an increase to the allowance for credit losses - loans of $9.6 million and established a reserve for unfunded commitments of $2.1 million, for a total pre-tax cumulative effect adjustment of $11.7 million.

The allowance for credit losses for Pooled Loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information. Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics such as changes in: underwriting standards, delinquency level, regulatory environment, economic condition, Company management and the status of portfolio administration including the Company’s Loan Review function. The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans, troubled debt restructurings (“TDRs”), and other loans deemed appropriate by management,. collectively referred to as collateral dependent loans. See Note 6, Loans, of the notes to consolidated financial statements for further details on collateral dependent loans.

Assessing the adequacy of the allowance for credit losses - loans involves substantial uncertainties and is based upon management’s evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing a variety of factors, including the risk profile of our loan products and customers.

The adequacy of the allowance for credit losses - loans is subject to ongoing management review. While management evaluates currently available information in establishing the allowance for credit losses - loans, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their

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examination process, periodically review a financial institution’s allowance for credit losses - loans. Such agencies may require the financial institution to increase the allowance based on their judgments about information available to them at the time of their examination.

Net charge-offs of ~~$488~~$587 thousand in the third quarter of ~~2020~~2021 represented 0.06% of average loans on an annualized basis compared to ~~$4.6 million,~~net charge-offs of $488 thousand, or ~~0.58%~~0.06%, in the third quarter of 2019. The decrease from the prior year period is primarily attributable to the third quarter 2019 $3.0 million partial charge-off of a $5.6 million loan that had been classified as non-performing in the second quarter of 2019.2020. For the nine months ended September 30, ~~2020,~~2021, net charge-offs of ~~$11.4~~$1.0 million ~~represented 0.45%~~represented 0.04% of average loans, compared to ~~$7.6~~$11.4 million or ~~0.33%~~0.45% of average loans for the same period in ~~2019.~~2020. The ~~increase~~decrease in net charge-offs in the nine months ended September 30, ~~2020~~2021 was primarily due to an $8.2 million partial charge-off of an $11.9 million commercial loan downgraded in the first quarter of 2020. The borrower’s business was related to the hospitality industry and the downgrade and charge-off were precipitated by the impact of the COVID-19 pandemic. The allowance for credit losses - loans was ~~$49.4~~$45.4 million at September 30, ~~2020,~~2021, compared with ~~$30.5~~$52.4 million at December 31, ~~2019.~~2020. The ratio of the allowance for credit losses ~~-loans~~- loans to total loans was ~~1.33%~~1.24% and ~~0.95%~~1.46% at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The ratio of allowance for credit losses - loans to non-performing loans was ~~453%~~681% at September 30, ~~2020,~~2021, compared with ~~353%~~551% at December 31, ~~2019.~~2020.

Non-Performing Assets and Potential Problem Loans

The table below summarizes our non-performing assets at the dates indicated (in thousands).


	Non-Performing Assets						Non-Performing Assets
	September 30, 2020			December 31, 2019			September 30, 2021			December 31, 2020
Nonaccrual loans:
Commercial business	$	2,628		$	1,177		$	1,046		$	1,975
Commercial mortgage		3,372			3,146			874			2,906
Residential real estate loans		3,305			2,484			2,457			2,587
Residential real estate lines		207			102			192			323
Consumer indirect		1,244			1,725			2,104			1,495
Other consumer		6			—			2			—
Total nonaccrual loans		10,762			8,634			6,675			9,286
Accruing loans 90 days or more delinquent		141			6			1			231
Total non-performing loans		10,903			8,640			6,676			9,517
Foreclosed assets		2,999			468			-			2,966
Total non-performing assets	$	13,902		$	9,108		$	6,676		$	12,483
Non-performing loans to total loans		0.31	%		0.27	%		0.18	%		0.26	%
Non-performing assets to total assets		0.28	%		0.21	%		0.12	%		0.25	%

Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at September 30, ~~2020~~2021 were ~~$13.9~~$6.7 million, ~~an increase~~a decrease of ~~$4.8~~$5.8 million from the ~~$9.1~~$12.5 million balance at December 31, ~~2019.~~2020. The primary component of non-performing assets is non-performing loans, which were ~~$10.9~~$6.7 million or ~~0.31%~~0.12% of total loans at September 30, ~~2020,~~2021, compared with ~~$8.6~~$9.5 million or ~~0.27%~~0.26% of total loans at December 31, 2019. The increase in non-performing assets in the nine months ended September 30, 2020 is primarily due to an $11.9 million commercial loan downgraded, with $8.2 million charged-off, in the first quarter of 2020. In the third quarter of 2020, this commercial loan was recategorized as a foreclosed asset. The borrower’s business was related to the hospitality industry and the downgrade and charge-off were precipitated by the impact of the COVID-19 pandemic.

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Approximately ~~$1.8~~$2.2 million, or ~~16.6%~~33%, of the ~~$10.9~~$6.7 million in non-performing loans as of September 30, ~~2020~~2021 were current with respect to payment of principal and interest but were classified as non-accruing because repayment in full of principal and/or interest was uncertain. ~~Included~~We had no TDRs included in nonaccrual loans ~~are TDRs of $254 thousand and $297 thousand~~ at September 30, ~~2020~~2021 and $200 thousand at December 31, ~~2019, respectively.~~2020. There were no TDRs accruing interest as of September 30, ~~2020~~2021 and ~~one TDR of $550 thousand was accruing interest as of~~ December 31, ~~2019.~~2020.

Foreclosed assets consist of real property formerly pledged as collateral for loans, which we have acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. ~~Foreclosed~~We had no properties representing foreclosed asset holdings ~~represented three~~at September 30, 2021 and two properties totaling $3.0 million at ~~September 30, 2020 and three properties totaling $468 thousand at~~ December 31, ~~2019.~~2020. The ~~increase~~decrease in ~~foreclosed~~foreclosed assets during the first nine months of 2021 was primarily the result of the sale of an asset on which foreclosure occurred in the ~~nine months ended September 30, 2020 is primarily due~~third quarter of 2020. The borrower’s business was related to ~~one commercial credit that was partially charged off during~~the hospitality industry and the downgrade and partial charge-off in the first quarter of 2020 ~~and foreclosure occurred in~~were precipitated by the ~~third quarter.~~impact of the COVID-19 pandemic.

Potential problem loans are loans that are currently performing, but information known about possible credit problems of the borrowers causes us to have concern as to the ability of such borrowers to comply with the present loan payment terms and may result in disclosure of such loans as nonperforming at some time in the future. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and/or personal or government guarantees. We consider loans classified as substandard, which continue to accrue interest, to be potential problem loans. We identified ~~$19.1~~$30.9 million and ~~$14.6~~$17.9 million in loans that continued to accrue interest which were classified as substandard as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

FUNDING ACTIVITIES

Deposits

The following table summarizes the composition of our deposits at the dates indicated (dollars in thousands):


	Deposit Composition										Deposit Composition
	September 30, 2020					December 31, 2019					September 30, 2021					December 31, 2020
	Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total
Noninterest-bearing demand	$	1,013,176		25.3	%	$	707,752		19.9	%	$	1,144,852		23.1	%	$	1,018,549		23.8	%
Interest-bearing demand		786,059		18.2			627,842		17.7			893,976		18.0			731,885		17.1
Savings and money market		1,724,463		34.3			1,039,892		29.2			2,015,855		40.4			1,642,340		38.4
Time deposits < $250,000		660,300		17.6			893,177		25.1			737,299		14.8			684,885		16.0
Time deposits of $250,000 or more		180,930		4.6			287,012		8.1			182,981		3.7			200,708		4.7
Total deposits	$	4,364,928		100.0	%	$	3,555,675		100.0	%	$	4,974,963		100.0	%	$	4,278,367		100.0	%

We offer a variety of deposit products designed to attract and retain customers, with the primary focus on building and expanding long-term relationships. At September 30, ~~2020,~~2021, total deposits were ~~$4.36~~$4.97 billion, representing an increase of ~~$809.3~~$696.6 million from December 31, ~~2019.~~2020. The increase was ~~driven by~~due to growth in ~~nonpublic deposits~~public, non-public demand and ~~the~~ reciprocal ~~and brokered deposits portfolios.~~deposits. Time deposits were approximately 19% and ~~33%~~21% of total deposits at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Nonpublic deposits, the largest component of our funding sources, totaled ~~$2.50~~$2.73 billion and ~~$2.16~~$2.55 billion at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, and represented ~~57%~~55% and ~~61%~~60% of total deposits as of the end of each period, respectively. ~~The increase in nonpublic deposits was in part attributable to PPP loan proceeds received by customers.~~ We have managed this segment of funding through a strategy of competitive pricing that minimizes the number of customer relationships that have only a single service high cost deposit account.

As an additional source of funding, we offer a variety of public (municipal) deposit products to the towns, villages, counties and school districts within our market. Public deposits generally range from 20% to 30% of our total deposits. There is a high degree of seasonality in this component of funding, because the level of deposits varies with the seasonal cash flows for these public customers. We maintain the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits. Total public deposits were ~~$989.4 million~~$1.19 billion and ~~$860.7~~$834.9 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, and represented ~~23%~~24% and ~~24%~~20% of total deposits as of the end of each period, respectively. The increase in public deposits during ~~2020~~2021 was due largely to seasonality.

We also participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Prior to the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) enacted on May 14, 2018, all reciprocal deposits were considered brokered deposits for regulatory reporting purposes. With the enactment of EGRRCPA, reciprocal deposits, subject to certain restrictions, are no longer required to be reported as brokered deposits. Reciprocal deposits totaled ~~$243.9~~$806.5 million ~~and $337.2 million, respectively,~~ at September 30, ~~2020,~~2021, compared to ~~$157.9~~$612.3 million ~~and $172.0 million, respectively,~~ at December 31, ~~2019.~~2020. Reciprocal deposits represented ~~13%~~16% and 9%14% of total deposits as of the end of each period, respectively.

Brokered deposits totaled ~~$294.9~~$254.8 million and ~~$208.8~~$279.6 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, and represented 7%5% and 6%7% of total deposits as of the end of each period, respectively.

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Borrowings

The Company classifies borrowings as short-term or long-term in accordance with the original terms of the applicable agreement. Outstanding borrowings consisted of the following as of the dates indicated (in thousands):


	September 30,		December 31,		September 30,		December 31,
	2020		2019		2021		2020
Short-term borrowings - FHLB	$	5,300	$	275,500	$	—	$	5,300
Long-term borrowings - Subordinated notes, net		39,258		39,273		73,834		73,623
Total borrowings	$	44,558	$	314,773	$	73,834	$	78,923

Short-term Borrowings

Short-term Federal Home Loan Bank (“FHLB”) borrowings have original maturities of less than one year and include overnight borrowings which we typically utilize to address short term funding needs as they arise. ~~Short-term~~We had no short-term FHLB borrowings at September 30, ~~2020 consisted of $5.3 million in short-term borrowings. The maximum~~2021 and no amount of short-term FHLB borrowings outstanding at any month-end during the nine months ended September 30, ~~2020 was $198.9 million.~~2021. Short-term FHLB borrowings at December 31, ~~2019~~2020 consisted of ~~$10.0 million in overnight borrowings and $265.5~~$5.3 million in short-term borrowings. The ~~lower level of~~decline in short-term borrowings at September 30, ~~2020, is attributable~~2021, was the result of the Company’s decision to ~~growth in~~utilize brokered deposits ~~which were utilized~~ as a cost-effective alternative to FHLB borrowings. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public ~~deposits, which reached a seasonal high point during the third quarter.~~deposits.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements. We had approximately ~~$218.6~~$206.1 million of immediate credit capacity with the FHLB as of September 30, ~~2020.~~2021. We had approximately ~~$538.8~~$601.8 million in secured borrowing capacity at the Federal Reserve Bank (“FRB”) discount window, none of which was outstanding at September 30, ~~2020.~~2021. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans. We had approximately $130.0 million and $145.0 million of credit available under unsecured federal funds purchased lines with various banks as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020, respectively. Additionally, we had approximately ~~$174.6~~$454.9 million of unencumbered liquid securities available for pledging.

The Parent has a revolving line of credit with a commercial bank allowing borrowings up to $20.0 million in total as an additional source of working capital. At September 30, ~~2020,~~2021, no amounts have been drawn on the line of credit.

Long-term Borrowings

On October 7, 2020, we completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes to qualified institutional buyers and accredited institutional investors that were subsequently exchanged for subordinated notes with substantially the same terms (the “2020 Notes”) registered under the Securities Act of 1933, as amended. The 2020 Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 4.265%, payable quarterly until maturity. The 2020 Notes are redeemable by us, in whole or in part, on any interest payment date on or after October 15, 2025, and we may redeem the Notes in whole at any time upon certain other specified events. We used the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.

On April 15, 2015, we issued $40.0 million of ~~Subordinated Notes~~subordinated notes (the “2015 Notes”) in a registered public offering. The ~~Subordinated~~2015 Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to the April 15, 2030 maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month London Interbank Offered Rate ~~(LIBOR)~~(“LIBOR”) plus 3.944%, payable quarterly. After the discontinuance of LIBOR, the interest rate will be determined by an alternate method as reasonably selected by the Company. The ~~Subordinated~~2015 Notes are redeemable by us at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. Proceeds, net of debt issuance costs of $1.1 million, were $38.9 million. The ~~Subordinated~~2015 Notes qualify as Tier 2 capital for regulatory purposes.

On October 7, 2020, the Company completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2030 to qualified institutional buyers and accredited institutional investors. The Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 4.265% basis points, payable quarterly until maturity. The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after October 15, 2025, and to redeem the Notes in whole at any time upon certain other specified events. The Company intends to use the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity

We continue to actively monitor our liquidity profile and funding concentrations in accordance with our Board approved Liquidity Policy. While funding pressures have not occurred, management is actively monitoring customer activity by way of commercial and consumer line of credit utilization, as well as deposit flows. As of September 30, ~~2020,~~2021, all structural liquidity ratios and early warning indicators remain in compliance, with what we believe are ample funding sources available in the event of a stress scenario.

The objective of maintaining adequate liquidity is to assure that we meet our financial obligations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of matured borrowings, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. We achieve liquidity by maintaining a strong base of both core customer funds and maturing short-term assets; we also rely on our ability to sell or pledge securities and lines-of-credit and our overall ability to access to the financial and capital markets.

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Liquidity for the Bank is managed through the monitoring of anticipated changes in loans, the investment portfolio, deposits and wholesale funds. The strength of the Bank’s liquidity position is a result of its base of core customer deposits. These core deposits are supplemented by wholesale funding sources that include credit lines with other banking institutions, the FHLB, the FRB and ~~the FRB.~~brokered deposit relationships. The primary source of our non-deposit short-term borrowings is FHLB advances, of which we had ~~$5.3 million~~$0 outstanding at September 30, ~~2020.~~ 2021 due to the excess liquidity position sustained as a result of continued growth and seasonal inflows of public deposits. In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately ~~$902.4~~$937.9 million from various funding sources which include the FHLB, the FRB and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position.

The Parent’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of non-bank subsidiaries, repurchases of our stock, and acquisitions. The Parent obtains funding to meet obligations from dividends received from the Bank, net taxes collected from subsidiaries included in the federal consolidated tax return, and the issuance of debt and equity securities. In addition, the Parent maintains a revolving line of credit with a commercial bank for an aggregate amount of up to $20.0 million, all of which was available at September 30, ~~2020.~~2021. The line of credit has a one-year term and matures in May ~~2021.~~2022. Funds drawn would be used for general corporate purposes and backup liquidity.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Cash and cash equivalents were ~~$282.1~~$288.4 million as of September 30, ~~2020,~~2021, up ~~$169.1~~$194.5 million from ~~$112.9~~$93.9 million as of ~~December~~December 31, ~~2019.~~2020. Net cash provided by operating activities totaled ~~$20.3~~$39.5 million and the principal source of operating activity cash flow was net income adjusted for noncash income and expense items. Net cash used in investing activities totaled ~~$376.6~~$516.4 million, which included outflows of ~~$361.9~~$59.8 million for net loan originations, and ~~$12.3~~$430.2 million from net investment securities transactions. Net cash provided by financing activities of ~~$525.4~~$516.4 million was attributed to a ~~$809.3~~$696.6 million increase in deposits, partially offset by a ~~$270.2~~$5.3 million decrease in short-term borrowings, $6.0 million in common stock repurchases and ~~by $13.4~~$13.8 million in dividend payments. The increase in the period end cash balance was due to growth in public, non-public demand and reciprocal deposits.

Capital Management

We actively manage capital, commensurate with our risk profile, to enhance shareholder value. We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory “well-capitalized” thresholds. Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.

Banks and financial holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material impact on our consolidated financial statements. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Shareholders’ equity was ~~$456.4~~$494.0 million at September 30, ~~2020,~~2021, an increase of ~~$17.5~~$25.7 million from ~~$438.9~~$468.4 million at December 31, ~~2019.~~2020. Net income for the nine months ended September 30, ~~2020~~2021 increased shareholders’ equity by ~~$24.5~~$58.1 million, offset by ~~an $8.7 million cumulative effect adjustment from the adoption of ASC 326 and~~ common and preferred stock dividends declared of ~~$13.6~~$13.9 million. Accumulated other comprehensive loss included in shareholders’ equity ~~decreased $14.3~~increased $14.2 million during the first nine months of ~~2020~~2021 due ~~primarily~~primarily to ~~higher~~lower net unrealized gains on securities available for sale.

The FRB and FDIC have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies. ~~The final rules implementing~~As of September 30, 2021, the Company’s capital levels remained characterized as “well-capitalized” under the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015 and was fully phased-in on January 1, 2019. As of September 30, 2020, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.banks.

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~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table reflects the ratios and their components (dollars in thousands):


	September 30,			December 31,			September 30,			December 31,
	2020			2019			2021			2020
Common shareholders’ equity	$	439,033		$	421,619		$	476,721		$	451,035
Add: CECL transitional amount		11,286			—			10,005			12,061
Less: Goodwill and other intangible assets		71,135			71,987			72,052			71,235
Net unrealized gain (loss) on investment securities ⁽¹⁾		14,651			873
Net unrealized gain on investment securities (1)								(1,057	)		14,743
Hedging derivative instruments		(692	)		(518	)		827			(316	)
Net periodic pension and postretirement benefits plan adjustments		(14,168	)		(14,868	)		(11,886	)		(12,299	)
Other		—			—			—			—
Common Equity Tier 1 (“CET1”) Capital		379,393			364,145			426,790			389,733
Plus: Preferred stock		17,328			17,328			17,292			17,328
Less: Other		—			—			—			—
Tier 1 Capital		396,721			381,473			444,082			407,061
Plus: Qualifying allowance for credit losses		38,186			30,482			34,341			40,509
Subordinated Notes		39,258			39,273			73,834			73,623
Total regulatory capital	$	474,165		$	451,228		$	552,257		$	521,193
Adjusted average total assets (for leverage capital purposes)	$	4,713,549		$	4,237,596		$	5,310,329		$	4,933,597
Total risk-weighted assets	$	3,723,091		$	3,533,281		$	4,167,165		$	3,844,380
Regulatory Capital Ratios
Tier 1 Leverage (Tier 1 capital to adjusted average assets)		8.42	%		9.00	%		8.36	%		8.25	%
CET1 Capital (CET1 capital to total risk-weighted assets)		10.19			10.31			10.24			10.14
Tier 1 Capital (Tier 1 capital to total risk-weighted assets)		10.66			10.80			10.66			10.59
Total Risk-Based Capital (Total regulatory capital to total risk-weighted assets)		12.74			12.77			13.25			13.56

(1) Includes unrealized gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category.

⁽¹⁾

~~Includes unrealized gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category.~~

We have elected to apply the 2020 CECL transition provision related to the impact of the CECL accounting standard on regulatory capital, as provided by the US banking agencies’ March 2020 interim final rule. Under the 2020 CECL transition provision, the regulatory capital impact of the Day 1 adjustment to the allowance for credit losses (after-tax) upon the January 1, 2020 CECL adoption date has been deferred, and will phase in to regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, we are allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020, and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020, and December 31, 2021, will also phase in to regulatory capital at 25% per year commencing January 1, 2022.

~~BCBS~~Basel III Capital Rules

~~The BCBS~~Under the Basel III Capital Rules, ~~include a new common equity~~the current minimum capital ratios, including an additional capital conservation buffer applicable to the Company and the Bank, are:



7.0% CET1 to risk-weighted assets;



8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted ~~assets minimum ratio of 4.5%, increase the minimum~~assets; and



10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets ratio from 4.0% to 6.0%, require a minimum total capital to risk-weighted assets ratio of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer is also established above the regulatory minimum capital requirements, effectively increasing the minimum required risk-weighted asset ratios. This capital conservation buffer was fully phased-in as of January 1, 2019 at 2.5% of risk-weighted assets.

Banking institutions with a capital conservation buffer below the minimum level will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The ~~BCBS~~Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank. Strict eligibility criteria for regulatory capital instruments were also implemented under the ~~final rules. The final rules also revised the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.~~Basel III Capital Rules.

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~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table presents actual and required capital ratios as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 for the Company and the Bank under the ~~BCBS~~Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of those dates based on the phase-in provisions of the BCBS Capital Rules and the minimum required capital levels as of January 1, 2019 when the BCBS Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, ~~as amended to reflect the changes~~ under the ~~BCBS~~Basel III Capital Rules (in thousands):

											Required to be
						Minimum Capital					Considered Well															Required to be
	Actual					Required – Basel III					Capitalized										Minimum Capital					Considered Well
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Actual					Required – Basel III					Capitalized
September 30, 2020
																Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2021
Tier 1 leverage:
Company	$	396,721		8.42	%	$	188,542		4.00	%	$	235,677		5.00	%	$	444,082		8.36	%	$	212,413		4.00	%	$	265,516		5.00	%
Bank		422,605		8.98			188,265		4.00			235,332		5.00			483,083		9.11			212,080		4.00			265,100		5.00
CET1 capital:
Company		379,393		10.19			260,616		7.00			242,001		6.50			426,790		10.24			291,702		7.00			270,866		6.50
Bank		422,605		11.38			259,959		7.00			241,391		6.50			483,083		11.62			290,965		7.00			270,182		6.50
Tier 1 capital:
Company		396,721		10.66			316,463		8.50			297,847		8.00			444,082		10.66			354,209		8.50			333,373		8.00
Bank		422,605		11.38			315,665		8.50			297,096		8.00			483,083		11.62			353,315		8.50			332,532		8.00
Total capital:
Company		474,165		12.74			390,925		10.50			372,309		10.00			552,257		13.25			437,552		10.50			416,717		10.00
Bank		460,791		12.41			389,939		10.50			371,370		10.00			517,423		12.45			436,448		10.50			415,665		10.00
December 31, 2019
December 31, 2020
Tier 1 leverage:
Company	$	381,473		9.00	%	$	169,504		4.00	%	$	211,880		5.00	%	$	407,061		8.25	%	$	197,344		4.00	%	$	246,680		5.00	%
Bank		409,031		9.67			169,189		4.00			211,486		5.00			441,929		8.97			197,064		4.00			246,330		5.00
CET1 capital:
Company		364,145		10.31			247,330		7.00			229,663		6.50			389,733		10.14			269,107		7.00			249,885		6.50
Bank		409,031		11.61			246,674		7.00			229,055		6.50			441,929		11.52			268,483		7.00			249,306		6.50
Tier 1 capital:
Company		381,473		10.80			300,329		8.50			282,663		8.00			407,061		10.59			326,772		8.50			307,550		8.00
Bank		409,031		11.61			299,533		8.50			281,914		8.00			441,929		11.52			326,015		8.50			306,838		8.00
Total capital:
Company		451,228		12.77			370,995		10.50			353,328		10.00			521,193		13.56			403,660		10.50			384,438		10.00
Bank		439,514		12.47			370,011		10.50			352,392		10.00			482,439		12.58			402,725		10.50			383,547		10.00

Dividend Restrictions

In the ordinary course of business, the Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to the potential impact on earnings or capital arising from movements in interest rates. The Bank’s market risk management framework has been developed to control both short-term and long-term exposure within Board approved policy limits and is monitored by the Asset-Liability Management Committee and Board of Directors. Quantitative and qualitative disclosures about market risk were presented at December 31, ~~2019~~2020 in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, as filed with the Securities and Exchange Commission on March ~~4, 2020.~~15, 2021. The following is an update of the discussion provided therein.

Portfolio Composition

There was no material change in the composition of assets, deposit liabilities or borrowings from December 31, ~~2019~~2020 to September 30, ~~2020,~~2021, aside from asset growth due to ~~the PPP program, remixing of the wholesale funding base~~an increased liquidity position. The increased liquidity position resulted from continued deposit growth and drove investment security purchases and an ~~increase~~excess Federal Reserve ~~Bank excess~~interest earning cash ~~position resulting from deposit growth.~~balance at quarter end. See the section titled “Analysis of Financial Condition” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of asset, deposit and borrowing activity during the period.

Net Interest Income at Risk

A primary tool used to manage interest rate risk is “rate shock” simulation to measure the rate sensitivity. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on net interest income as well as economic value of equity.

Net interest income at risk is measured by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of different magnitudes over a period of 12 months. The following table sets forth the estimated changes to net interest income over the 12-month period ending September 30, ~~2021~~2022 assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):


	Changes in Interest Rate												Changes in Interest Rate
	-100 bp			+100 bp			+200 bp			+300 bp			-100 bp			+100 bp			+200 bp			+300 bp
Estimated change in net interest income	$	921		$	1,788		$	4,077		$	6,756		$	(2,792	)	$	2,104		$	4,649		$	7,063
% Change		0.66	%		1.28	%		2.92	%		4.84	%		-1.90	%		1.43	%		3.16	%		4.81	%

In the rising rate ~~environments,~~scenarios, the model results indicate ~~increases in~~that net interest income is modeled to increase compared to the flat rate scenario over a one-year timeframe. This is a result of assumed commercial loan products and investment security cash flow repricing at a higher frequency than underlying borrowing and deposit costs. As intermediate and longer-term assets continue to mature and are replaced at higher yields, net interest income improves over longer term timeframes. Model results in the declining rate ~~environments also~~scenario indicate ~~increases~~decreases in net interest income due to ~~floating rate loans, tied~~assets having the ability to ~~Prime, no longer repricing downwards due to Prime rate being floored,~~reprice downward, while ~~interest rate sensitive~~deposit and borrowing liabilities ~~still have slight sensitivity to downward movement in rates.~~reach modeled floors.

In addition to the changes in interest rate scenarios listed above, other scenarios are typically modeled to measure interest rate risk. These scenarios vary depending on the economic and interest rate environment.

The simulation referenced above is based on our assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. While this simulation is a useful measure as to net interest income at risk due to a change in interest rates, it is not a forecast of future results, does not measure the effect of changing interest rates on noninterest income and is based on many assumptions that, if changed, could cause a different outcome.

Economic Value of Equity At Risk

The economic (or “fair”) value of financial instruments on our balance sheet will also vary under the interest rate scenarios previously discussed. This variance is measured by simulating changes in our economic value of equity (“EVE”), which is calculated by subtracting the estimated fair value of liabilities from the estimated fair value of assets. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at current replacement rates for each account type, while fair values of non-financial assets and liabilities are assumed to equal book value and do not vary with interest rate fluctuations. An economic value simulation is a static measure for balance sheet accounts at a given point in time, but this measurement can change substantially over time as the characteristics of our balance sheet evolve and as interest rate and yield curve assumptions are updated.

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The amount of change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including the stated interest rate or spread relative to current market rates or spreads, the likelihood of prepayment, whether the rate is fixed or floating, and the maturity date of the instrument. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical data (back-testing).

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The analysis that follows presents the estimated EVE resulting from market interest rates prevailing at a given quarter-end (“Pre-Shock Scenario”), and under other interest rate scenarios (each a “Rate Shock Scenario”) represented by immediate, permanent, parallel shifts in interest rates from those observed at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 (dollars in thousands). The analysis additionally presents a measurement of the interest rate sensitivity at September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock Scenario. An increase in the EVE amount is considered favorable, while a decline is considered unfavorable. The following table sets forth the estimated changes to EVE assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):


	September 30, 2020							December 31, 2019								September 30, 2021								December 31, 2020
Rate Shock Scenario:	EVE		Change		Percentage Change			EVE		Change			Percentage Change			EVE		Change			Percentage Change			EVE		Change			Percentage Change
Pre-Shock Scenario	$	545,804						$	632,832							$	717,562							$	583,156
- 100 Basis Points		549,695	$	3,891		0.71	%		676,362	$	43,530			6.88	%		712,612	$	(4,950	)		-0.69	%		574,345	$	(8,811	)		-1.51	%
+100 Basis Points		565,710		19,906		3.65			627,409		(5,423	)		(0.86	)		737,651		20,089			2.80			617,768		34,612			5.94
+ 200 Basis Points		587,022		41,218		7.55			614,927		(17,905	)		(2.83	)		753,000		35,438			4.94			638,224		55,068			9.44
+ 300 Basis Points		604,760		58,956		10.80			600,636		(32,196	)		(5.09	)		760,238		42,676			5.95			651,518		68,362			11.72

The ~~decrease~~increase in the Pre-Shock Scenario EVE at September 30, ~~2020~~2021 compared to December 31, ~~2019~~2020 is athe result of ~~a 15% increase~~growth in ~~non-public deposits.~~investments. The slight decrease in the -100 basis point Rate Shock Scenario to EVE is ~~reflective~~a result of the ~~assumption that deposit pricing is nearly floored and has~~continued growth in deposits over the ~~inability to reprice to a lower level. This is~~last three quarters, compounded bywith the ~~assumption that the discount curve on the~~growth of fixed rate ~~portfolio is nearly floored, resulting~~long-term assets not receiving the full benefit in ~~less premium on the portfolio~~value appreciation typically observed in ~~a falling~~down rate environment. The overall level of change is in line with expectations due to the Federal Open Market Committee action to reduce the Federal Funds target rate by 150 basis points within the period and programs introduced to help small businesses with loans.scenarios.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, ~~2020,~~2021, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, ~~2020~~2021 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

From time to time we are a party to or otherwise involved in legal proceedings arising out of the normal course of business. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense and settlement costs, unfavorable awards, diversion of management resources and other factors.

We are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs ~~seek~~sought class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs ~~seek~~sought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed. The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. We dispute and believe we have meritorious defenses against these claims and plan to vigorously defend ourselves.

~~In February 2020, we agreed to engage in mediation with the plaintiffs but mediation has not yet commenced.~~ On ~~October 19, 2020,~~September 30, 2021, the Court granted plaintiffs’ motion for ~~judgment on the pleadings dismissing our affirmative defense against one named~~class certification and certified four different classes (two classes of New York ~~plaintiff that his claim was time-barred under~~consumers and two classes of Pennsylvania consumers). We estimate there may be approximately 5,200 members in the New York ~~law, applying~~classes and 300 members in the Pennsylvania classes. We filed a ~~six-year statute of limitations rather than~~motion seeking permission to appeal the ~~three years limitation period we had argued. Under the current scheduling order, briefing on any~~ class certification ~~request~~ruling to the Superior Court of Pennsylvania and a stay of proceedings pending any such appeal. We also filed a motion to dismiss the action for lack of standing. We have not accrued a contingent liability for this matter at this time because, given our defenses, we are unable to conclude whether a liability is ~~scheduled~~reasonably probable to occur ~~in November 2020.~~nor are we able to currently reasonably estimate the amount of potential loss.

If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will insure the legal costs, settlements or ~~judgements~~judgments we incur in excess of our deductible. If we are unsuccessful in defending ourselves from these claims or if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially adversely affect our business, results of operations and financial condition.

~~ITEM 1A. Risk Factors~~

~~Except as stated below, there have been no material changes from the risk factors previously disclosed in Part I – Item 1A of the Company’s Form 10-K for the year ended December 31, 2019.~~

The ongoing novel coronavirus (“COVID-19”) pandemic, and governmental and individual efforts to contain the pandemic, have had a significant negative impact on the U.S. and global economy which has and will continue to adversely affect our business, financial condition and results of operations.

In response to the COVID-19 pandemic and resulting economic downturn, the Federal Reserve reduced the target federal funds rate to a range of 0.00% to 0.25% and has stated that it intends to keep the rate near 0.00% until signs of higher inflation and a tighter labor market emerge. This lower rate reduces the rate of interest we earn on loans and pay on borrowings and interest-bearing deposits, and can affect the value of financial instruments we hold. In an environment with lower interest rates, we will not be able to earn as much on our interest-earning assets, which will likely reduce net interest margin. In addition, our ability to earn interest and receive dividend income from investment securities will be reduced. If interest rates remain low for an extended period of time, our results of operations could be materially adversely affected.

The U.S. economy generally and our customers and employees in particular have been directly impacted by governmental orders reducing travel and in-person interactions. Executive orders from the Governor of the State of New York may impact our ability to keep our bank branch locations open. We expect we and our customers will continue to be impacted by social distancing efforts for the duration of the COVID-19 pandemic. A significant proportion of our employees are working remotely, which may slow response times to customers’ inquiries or preclude providing the level of service our employees are typically able to offer in person. Our reputation and results of operations may be impacted if our competitors are better able to adjust to the restrictions on in-person interactions and remote work. Furthermore, as our employees continue to work from home, our operational risk, including data security risk, is higher than it would otherwise be, as cybercriminal activity has increased in an attempt to profit from the disruption to typical operations. The cybersecurity-related risks we face include more phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, and unauthorized dissemination, misuse or destruction of confidential or valuable information.

While we have experienced higher loan origination volume due to the Paycheck Protection Program (“PPP”) under the CARES Act, there can be no assurance that the borrowers under the CARES Act programs will be able to pay the interest, and principal payments, if applicable, when they are due. If the borrower of a PPP loan fails to qualify for loan forgiveness under the program, we will have to hold the loan at an unfavorable interest rate as compared to a loan we may otherwise have extended to our customer. Even though those loans are guaranteed by the U.S. Small Business Association (the “SBA”), we may not be able to collect from the SBA as quickly as those payments come due, and our cash flow and earnings may be reduced accordingly. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced the PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from us. Originations for consumer indirect lending, which currently constitutes 23.6% of our total loans, have declined since the outbreak of the COVID-19 pandemic. If this trend continues, our financial condition and results of operations could be materially adversely affected.

~~- 65 -~~69

Table of Contents

Our loan customers will likely be impacted by the overall decline in the U.S. economy, which may cause them to make late or reduced payments on their loans or default on their loans with us. In particular, our commercial mortgage customers may be experiencing higher rates of tenants not paying rent due to the COVID-19 pandemic. As a lender, we are exposed to the risk that customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. The collateral securing our indirect loan portfolio in particular may not be sufficient to cover the full value of an outstanding loan because the collateral, namely automobiles, are depreciating assets. Our credit risk has increased since the start of the COVID-19 pandemic and related decline in the U.S. economy. In the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from taking certain remediation actions, including foreclosure. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral, and we provide an allowance for estimated loan losses based on a number of factors. We believe that the allowance for loan losses is adequate. However, if our assumptions or judgments are wrong, the allowance for loan losses may not be sufficient to cover the actual credit losses. We may have to increase the allowance in the future in response to the COVID-19 pandemic and resulting changes to the U.S. economy. The actual amount of future provisions for credit losses may vary from the amount of past provisions. The longer the economic results of the COVID-19 pandemic negatively impact our customers, the more likely our credit quality is to decline and the more likely our customers will be to default on their loans with us. Continued economic disruption and fear of the spread of COVID-19 could result in business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates and reduced profitability and ability for property owners to make mortgage payments. If a significant proportion of our customers are unable to repay their loans and the collateral securing repayment is insufficient to cover our losses, we may have to increase our allowance for credit losses - loans, the quality of our loan portfolio will decline, our net income will decrease and our results of operations will be materially adversely impacted. In addition, our capital and leverage ratios may be adversely impacted.

~~At September 30, 2020, we held $151.6 million in debt securities that are issued by state and local government agencies, or municipal bonds,~~ that are backed by the credit and taxing power of the issuing jurisdiction. As these state and local governments experience the impacts of the pandemic and stay at home orders, they are earning less sales tax revenue while incurring higher than expected costs as a result of the COVID-19 pandemic. The impact of the COVID-19 pandemic may cause the credit rating of the municipal bonds we hold to be downgraded, which could in turn cause us to incur credit losses. If these bond issuers are unable to repay us when the bonds mature, we could lose our investment and our results of operations and cash flows could be materially adversely impacted.

The market volatility related to the COVID-19 pandemic has driven market values of publicly traded securities downward. Because the majority of our investment advisory revenue is from fees based on a percentage of assets under management, our investment advisory revenues and profitability have fallen and will continue to fluctuate with the overall market conditions.

The spread of COVID-19 has led to an economic recession and continues to cause severe disruptions in the U.S. economy. Should the COVID-19 pandemic continue for an extended period of time, our business, financial condition, results of operations and cash flows may likewise be materially adversely impacted for an extended period of time.

~~The value of our goodwill and other intangible assets may decline in the future.~~

As of September 30, 2020, we had $66.1 million of goodwill and $8.0 million of other intangible assets. Although we did not record any impairment to our goodwill for the first nine months of 2020, significant and sustained declines in our stock price and market capitalization, significant declines in our expected future cash flows, significant adverse changes in the business climate and slower growth rates, any or all of which could be materially impacted by the ongoing COVID-19 pandemic, may necessitate our taking charges in the future related to the impairment of our goodwill. If the recent capital markets downturn resulting from the COVID-19 pandemic continues for an extended period of time, or the capital markets continue to experience increased volatility, we may record an impairment to our goodwill in subsequent fiscal periods. Future regulatory actions could also have a material impact on assessments of goodwill for impairment. If the fair value of our net assets improves at a faster rate than the market value of our reporting units, or if we were to experience increases in book values of a reporting unit in excess of the increase in fair value of equity, we may also have to take charges related to the impairment of our goodwill. If we were to conclude that a future write-down of our goodwill is necessary, we would record the appropriate charge, which could have a material adverse effect on our results of operations.

Identifiable intangible assets other than goodwill consist of core deposit intangibles and other intangible assets (primarily customer relationships). Adverse events or circumstances could impact the recoverability of these intangible assets including loss of core deposits, significant losses of customer accounts and/or balances, increased competition or adverse changes in the economy, such as those related to the ongoing COVID-19 pandemic. To the extent these intangible assets are deemed unrecoverable, a non-cash impairment charge would be recorded which could have a material adverse effect on our results of operations.

~~For further discussion, see Note 7, Goodwill and Other Intangible Assets, to the Consolidated Financial Statements (Unaudited) included in Item 1 of this Quarterly Report on Form 10-Q.~~

~~- 66 -~~

~~Table of Contents~~

ITEM 6. Exhibits

(a)The following is a list of all exhibits filed or incorporated by reference as part of this Report:

~~(a)~~Exhibit

Number

~~The following is a list of all exhibits filed or incorporated by reference as part of this Report:~~

~~Exhibit~~ ~~Number~~	Description	~~Description~~	Location

~~4.1~~31.1		~~Subordinated Indenture, dated as of October 7, 2020, between Financial Institutions, Inc. and Wilmington Trust, National Association, as Trustee~~	~~Incorporated by reference to Exhibit 4.1 of the Form 8-K, dated October 7, 2020~~

~~4.2~~		~~Form of 4.375% Fixed-to-Floating Rate Subordinated Note due October 15, 2030 (included in Exhibit 4.1)~~	~~Incorporated by reference to Exhibit 4.2 of the Form 8-K, dated October 7, 2020~~

~~10.1~~		Subordinated Note Purchase Agreement, dated as of October 7, 2020, by and among Financial Institutions, Inc. and the Purchasers*	~~Filed Herewith~~

~~10.2~~		~~Registration Rights Agreement, dated as of October 7, 2020, by and among Financial Institutions, Inc. and the Purchasers~~	~~Filed Herewith~~

~~31.1~~		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Principal Executive Officer	Filed Herewith

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Principal Financial Officer	Filed Herewith

32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed Herewith

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.

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

~~- 67 -~~70

Table of Contents

SIGNATURES

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

FINANCIAL INSTITUTIONS, INC.


/s/ Martin K. Birmingham		, November ~~6, 2020~~8, 2021
Martin K. Birmingham
President and Chief Executive Officer
(Principal Executive Officer)


/s/ ~~Justin K. Bigham~~W. Jack Plants II		, November ~~6, 2020~~8, 2021
~~Justin K. Bigham~~W. Jack Plants II
~~Executive~~Senior Vice President and Chief Financial Officer and Treasurer
(Principal Financial Officer)


/s/ Sonia M. Dumbleton		, November ~~6, 2020~~8, 2021
Sonia M. Dumbleton
Senior Vice President and Controller
(Principal Accounting Officer)

~~- 68 -~~


New York		16-0816610
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

220 LIBERTY STREET, WARSAW, New York		14569
(Address of principal executive offices)		(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	FISI	Nasdaq Global Select Market


		PAGE
PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Statements of Financial Condition (Unaudited) - at September 30, ~~2020~~2021 and December 31, ~~2019~~2020	3

	Consolidated Statements of Income (Unaudited) - Three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	4

	Consolidated Statements of Comprehensive Income (Unaudited) - Three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	5

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	6

	Consolidated Statements of Cash Flows (Unaudited) - Nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	8

	Notes to Consolidated Financial Statements (Unaudited)	9

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4244

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	6367

ITEM 4.	Controls and Procedures	6468

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	6569

ITEM ~~1A.~~6.	~~Risk Factors~~	65

~~ITEM 6.~~	Exhibits	6770

	Signatures	6871


(Dollars in thousands, except share and per share data)	September 30, 2020			December 31, 2019			September 30, 2021			December 31, 2020
ASSETS
Cash and due from banks	$	282,070		$	112,947		$	288,426		$	93,878
Securities available for sale, at fair value		515,971			417,917			1,097,950			628,059
Securities held to maturity, at amortized cost (net of allowance for credit losses of $8 and $0, respectively) (fair value of $301,878 and $363,259, respectively)		290,946			359,000
Securities held to maturity, at amortized cost (net of allowance for credit losses of $5 and $7, respectively) (fair value of $224,164 and $282,035, respectively)								218,135			271,966
Loans held for sale		7,076			4,224			5,916			4,305
Loans (net of allowance for credit losses of $49,395 and $30,482, respectively)		3,519,144			3,190,505
Loans (net of allowance for credit losses of $45,444 and $52,420, respectively)								3,608,455			3,542,718
Company owned life insurance		70,347			68,942			123,034			100,895
Premises and equipment, net		40,568			41,424			40,605			40,610
Goodwill and other intangible assets, net		74,062			74,923			74,659			73,789
Other assets		159,017			114,296			166,013			156,086
Total assets	$	4,959,201		$	4,384,178		$	5,623,193		$	4,912,306
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	1,013,176		$	707,752		$	1,144,852		$	1,018,549
Interest-bearing demand		786,059			627,842			893,976			731,885
Savings and money market		1,724,463			1,039,892			2,015,855			1,642,340
Time deposits		841,230			1,180,189			920,280			885,593
Total deposits		4,364,928			3,555,675			4,974,963			4,278,367
Short-term borrowings		5,300			275,500			—			5,300
Long-term borrowings, net of issuance costs of $742 and $727, respectively		39,258			39,273
Long-term borrowings, net of issuance costs of $1,166 and $1,377, respectively								73,834			73,623
Other liabilities		93,354			74,783			80,383			86,653
Total liabilities		4,502,840			3,945,231			5,129,180			4,443,943
Shareholders’ equity:
Series A 3% preferred stock, $100 par value; 1,533 shares authorized; 1,435 shares issued		143			143
Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized; 171,847 shares issued		17,185			17,185
Series A 3% preferred stock, $100 par value; 1,533 shares authorized; 1,435 shares issued								143			143
Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized; 171,486 and 171,847 shares issued, respectively								17,149			17,185
Total preferred equity		17,328			17,328			17,292			17,328
Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares issued		161			161
Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares issued								161			161
Additional paid-in capital		124,812			124,582			125,785			125,118
Retained earnings		315,585			313,364			369,019			324,850
Accumulated other comprehensive loss		(209	)		(14,513	)
Treasury stock, at cost – 61,971 and 96,657 shares, respectively		(1,316	)		(1,975	)
Accumulated other comprehensive (loss) income								(12,116	)		2,128
Treasury stock, at cost – 257,475 and 57,630 shares, respectively								(6,128	)		(1,222	)
Total shareholders’ equity		456,361			438,947			494,013			468,363
Total liabilities and shareholders’ equity	$	4,959,201		$	4,384,178		$	5,623,193		$	4,912,306


(Dollars in thousands)	Three months ended September 30,					Nine months ended September 30,						Three months ended September 30,						Nine months ended September 30,
	2020			2019		2020			2019			2021			2020			2021			2020
Net income	$	12,273		$	12,833	$	24,532		$	35,755		$	17,175		$	12,273		$	58,085		$	24,532
Other comprehensive income (loss), net of tax:
Securities available for sale and transferred securities		(69	)		1,121		13,778			11,863			(6,400	)		(69	)		(15,800	)		13,778
Hedging derivative instruments		123			43		(174	)		(317	)		80			123			1,143			(174	)
Pension and post-retirement obligations		233			262		700			784			138			233			413			700
Total other comprehensive income, net of tax		287			1,426		14,304			12,330
Total other comprehensive income (loss), net of tax													(6,182	)		287			(14,244	)		14,304
Comprehensive income	$	12,560		$	14,259	$	38,836		$	48,085		$	10,993		$	12,560		$	43,841		$	38,836


Large accelerated filer	☐	Accelerated filer	☑

~~Non-accelerated filer~~	☐	~~Smaller reporting company~~	☐
Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐


(In thousands, except per share amounts)	Three months ended September 30,						Nine months ended September 30,					Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019		2021			2020			2021			2020
Interest income:
Interest and fees on loans	$	35,602		$	37,904		$	107,659		$	112,177	$	36,242		$	35,602		$	109,694		$	107,659
Interest and dividends on investment securities		4,086			4,449			13,206			14,147		4,918			4,086			13,603			13,206
Other interest income		31			106			266			297		67			31			155			266
Total interest income		39,719			42,459			121,131			126,621		41,227			39,719			123,452			121,131
Interest expense:
Deposits		3,370			7,277			15,066			21,454		1,894			3,370			6,294			15,066
Short-term borrowings		232			2,081			1,408			6,575		0			232			119			1,408
Long-term borrowings		618			618			1,853			1,853		1,060			618			3,177			1,853
Total interest expense		4,220			9,976			18,327			29,882		2,954			4,220			9,590			18,327
Net interest income		35,499			32,483			102,804			96,739		38,273			35,499			113,862			102,804
Provision for credit losses		4,028			1,844			21,689			5,391
Net interest income after provision for credit losses		31,471			30,639			81,115			91,348
(Benefit) provision for credit losses													(541	)		4,028			(7,144	)		21,689
Net interest income after (benefit) provision for credit losses													38,814			31,471			121,006			81,115
Noninterest income:
Service charges on deposits		1,254			1,925			3,321			5,361		1,502			1,254			4,081			3,321
Insurance income		1,357			1,439			3,525			3,689		1,864			1,357			4,407			3,525
ATM and debit card		1,943			1,801			5,321			4,983
Card interchange income													2,118			1,943			6,270			5,321
Investment advisory		2,443			2,269			6,940			6,812		2,969			2,443			8,627			6,940
Company owned life insurance		470			459			1,397			1,293		776			470			2,126			1,397
Investments in limited partnerships		(105	)		116			(136	)		492		694			(105	)		1,787			(136	)
Loan servicing		49			102			106			316		105			49			293			106
Income from derivative instruments, net		1,931			890			4,617			1,013		377			1,931			1,660			4,617
Net gain on sale of loans held for sale		1,581			439			2,616			1,028		600			1,397			2,468			2,261
Net gain on investment securities		554			1,608			1,449			1,721		0			554			71			1,449
Net (loss) gain on other assets		(55	)		(2	)		8			56
Loss on tax credit investments		(40	)		—			(120	)		—
Net gain (loss) on other assets													138			(55	)		286			8
Net (loss) gain on tax credit investments													(129	)		(40	)		62			(120	)
Other		1,019			1,315			3,151			3,950		1,069			1,019			3,094			3,151
Total noninterest income		12,401			12,361			32,195			30,714		12,083			12,217			35,232			31,840
Noninterest expense:
Salaries and employee benefits		15,085			14,411			45,173			41,661		15,798			15,085			44,782			45,173
Occupancy and equipment		3,263			4,650			10,407			10,106		3,834			3,263			10,502			10,407
Professional services		1,242			1,528			4,974			3,618		1,600			1,242			5,098			4,974
Computer and data processing		3,250			1,378			8,622			7,407		3,579			3,250			10,160		��	8,622
Supplies and postage		463			522			1,533			1,554		447			463			1,361			1,533
FDIC assessments		594			7			1,505			1,005		697			594			1,942			1,505
Advertising and promotions		955			745			2,055			2,351		474			955			1,234			2,055
Amortization of intangibles		280			309			861			948		264			280			801			861
Restructuring charges		1,362			—			1,362			—		0			1,362			0			1,362
Other		2,165			2,336			6,583			7,410		2,476			1,981			6,973			6,228
Total noninterest expense		28,659			25,886			83,075			76,060		29,169			28,475			82,853			82,720
Income before income taxes		15,213			17,114			30,235			46,002		21,728			15,213			73,385			30,235
Income tax expense		2,940			4,281			5,703			10,247		4,553			2,940			15,300			5,703
Net income	$	12,273		$	12,833		$	24,532		$	35,755	$	17,175		$	12,273		$	58,085		$	24,532
Preferred stock dividends		365			365			1,096			1,096		364			365			1,095			1,096
Net income available to common shareholders	$	11,908		$	12,468		$	23,436		$	34,659	$	16,811		$	11,908		$	56,990		$	23,436
Earnings per common share (Note 3):
Earnings per common share (Note 4):
Basic	$	0.74		$	0.78		$	1.46		$	2.17	$	1.06		$	0.74		$	3.60		$	1.46
Diluted	$	0.74		$	0.78		$	1.46		$	2.16	$	1.05		$	0.74		$	3.58		$	1.46
Cash dividends declared per common share	$	0.26		$	0.25		$	0.78		$	0.75	$	0.27		$	0.26		$	0.81		$	0.78


(Dollars in thousands, except per share data)	Preferred Equity		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity			Preferred Equity			Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity
Balance at December 31, 2019	$	17,328	$	161	$	124,582		$	313,364		$	(14,513	)	$	(1,975	)	$	438,947
Cumulative-effect adjustment		—		—		—			(8,719	)		—			—			(8,719	)
Balance at January 1, 2020	$	17,328	$	161	$	124,582		$	304,645		$	(14,513	)	$	(1,975	)	$	430,228
Balance at December 31, 2020																				$	17,328		$	161	$	125,118		$	324,850		$	2,128		$	(1,222	)	$	468,363
Comprehensive income:
Net income																					—			—		—			20,710			—			—			20,710
Other comprehensive loss, net of tax																					—			—		—			—			(12,700	)		—			(12,700	)
Common stock issued																					—			—		3			—			—			298			301
Purchases of common stock for treasury																					—			—		—			—			—			(5,963	)		(5,963	)
Purchases of 8.48% preferred stock																					(6	)		—		—			—			—			—			(6	)
Share-based compensation plans:
Share-based compensation																					—			—		216			—			—			—			216
Restricted stock units released																					—			—		(446	)		—			—			446			—
Cash dividends declared:
Series A 3% Preferred-$0.75 per share																					—			—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share																					—			—		—			(364	)		—			—			(364	)
Common-$0.27 per share																					—			—		—			(4,272	)		—			—			(4,272	)
Balance at March 31, 2021																				$	17,322		$	161	$	124,891		$	340,923		$	(10,572	)	$	(6,441	)	$	466,284
Comprehensive income:
Net income		—		—		—			1,127			—			—			1,127			—			—		—			20,200			—			—			20,200
Other comprehensive income, net of tax		—		—		—			—			12,431			—			12,431			—			—		—			—			4,638			—			4,638
Purchases of common stock for treasury																					—			—		—			—			—			(1	)		(1	)
Purchases of 8.48% preferred stock																					(30	)		—		(7	)		—			—			—			(37	)
Share-based compensation plans:
Share-based compensation																					—			—		562			—			—			—			562
Restricted stock awards issued																					—			—		(223	)		—			—			223			—
Stock awards																					—			—		30			—			—			88			118
Cash dividends declared:
Series A 3% Preferred-$0.75 per share																					—			—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share																					—			—		—			(365	)		—			—			(365	)
Common-$0.27 per share																					—			—		—			(4,272	)		—			—			(4,272	)
Balance at June 30, 2021																				$	17,292		$	161	$	125,253		$	356,485		$	(5,934	)	$	(6,131	)	$	487,126
Comprehensive income:
Net income																					—			—		—			17,175			—			—			17,175
Other comprehensive loss, net of tax																					—			—		—			—			(6,182	)		—			(6,182	)
Purchases of common stock for treasury		—		—		—			—			—			(196	)		(196	)		—			—		—			—			—			(3	)		(3	)
Share-based compensation plans:
Share-based compensation		—		—		332			—			—			—			332			—			—		538			—			—			—			538
Restricted stock units released		—		—		(469	)		—			—			469			—			—			—		(6	)		—			—			6			—
Cash dividends declared:
Series A 3% Preferred-$0.75 per share		—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share		—		—		—			(364	)		—			—			(364	)
Common-$0.26 per share		—		—		—			(4,164	)		—			—			(4,164	)
Balance at March 31, 2020	$	17,328	$	161	$	124,445		$	301,243		$	(2,082	)	$	(1,702	)	$	439,393
Comprehensive income:
Net income		—		—		—			11,132			—			—			11,132
Other comprehensive income, net of tax		—		—		—			—			1,586			—			1,586
Share-based compensation plans:
Share-based compensation		—		—		369			—			—			—			369
Restricted stock awards issued		—		—		(272	)		—			—			272			—
Stock awards		—		—		(19	)		—			—			114			95
Cash dividends declared:
Series A 3% Preferred-$0.75 per share		—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share		—		—		—			(365	)		—			—			(365	)
Common-$0.26 per share		—		—		—			(4,164	)		—			—			(4,164	)
Balance at June 30, 2020	$	17,328	$	161	$	124,523		$	307,845		$	(496	)	$	(1,316	)	$	448,045
Comprehensive income:
Net income		—		—		—			12,273			—			—			12,273
Other comprehensive income, net of tax		—		—		—			—			287			—			287
Share-based compensation plans:
Share-based compensation		—		—		289			—			—			—			289
Cash dividends declared:
Series A 3% Preferred-$0.75 per share		—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share		—		—		—			(364	)		—			—			(364	)
Common-$0.26 per share		—		—		—			(4,168	)		—			—			(4,168	)
Balance at September 30, 2020	$	17,328	$	161	$	124,812		$	315,585		$	(209	)	$	(1,316	)	$	456,361
Series A 3% Preferred-$0.75 per share																					—			—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share																					—			—		—			(363	)		—			—			(363	)
Common-$0.27 per share																					—			—		—			(4,277	)		—			—			(4,277	)
Balance at September 30, 2021																				$	17,292		$	161	$	125,785		$	369,019		$	(12,116	)	$	(6,128	)	$	494,013


	2021		2020
Supplemental information:
Cash paid for interest	$	12,100	$	23,533
Cash paid for income taxes		10,800		5,656
Noncash investing and financing activities:
Real estate and other assets acquired in settlement of loans		—		2,966
Accrued and declared unpaid dividends		4,641		4,534
Common stock issued for acquisition		301		—
Assets acquired and liabilities assumed in business combinations:
Fair value of assets acquired		712		—


		Three months ended September 30,				Nine months ended September 30,
	Income Statement Location	2021		2020		2021		2020

Severance costs	Salaries and employee benefits	$	—	$	224	$	—	$	224
Lease termination costs	Restructuring charges		—		454		—		454
Valuation adjustments	Restructuring charges		—		908		—		908
Total		$	—	$	1,586	$	—	$	1,586

	Amortized			Unrealized		Unrealized		Fair
	Cost			Gains		Losses		Value		Amortized			Unrealized		Unrealized		Fair
September 30, 2020
										Cost			Gains		Losses		Value
September 30, 2021
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	6,234		$	421	$	—	$	6,655	$	6,253		$	278	$	—	$	6,531
Mortgage-backed securities:
Federal National Mortgage Association		303,740			15,923		66		319,597		575,861			8,847		4,973		579,735
Federal Home Loan Mortgage Corporation		139,875			2,684		140		142,419		390,062			1,257		6,195		385,124
Government National Mortgage Association		23,300			851		—		24,151		92,793			468		935		92,326
Collateralized mortgage obligations:
Federal National Mortgage Association		18,104			229		—		18,333		17,689			67		132		17,624
Federal Home Loan Mortgage Corporation		4,365			16		—		4,381		16,318			—		128		16,190
Privately issued		—			435		—		435		—			420		—		420
Total mortgage-backed securities		489,384			20,138		206		509,316		1,092,723			11,059		12,363		1,091,419
Total available for sale securities	$	495,618		$	20,559	$	206	$	515,971	$	1,098,976		$	11,337	$	12,363	$	1,097,950
Securities held to maturity:
State and political subdivisions	$	151,611		$	5,052	$	—	$	156,663	$	116,812		$	2,897	$	196	$	119,513
Mortgage-backed securities:
Federal National Mortgage Association		11,576			725		—		12,301		9,535			539		—		10,074
Federal Home Loan Mortgage Corporation		6,183			365		—		6,548		8,835			203		132		8,906
Government National Mortgage Association		39,631			1,402		—		41,033		29,172			1,009		—		30,181
Collateralized mortgage obligations:
Federal National Mortgage Association		33,396			1,236		—		34,632		21,668			644		—		22,312
Federal Home Loan Mortgage Corporation		39,905			1,835		—		41,740		26,125			894		—		27,019
Government National Mortgage Association		8,652			309		—		8,961		5,993			166		—		6,159
Total mortgage-backed securities		139,343			5,872		—		145,215		101,328			3,455		132		104,651
Total held to maturity securities		290,954		$	10,924	$	—	$	301,878		218,140		$	6,352	$	328	$	224,164
Allowance for credit losses - securities		(8	)								(5	)
Total held to maturity securities, net	$	290,946								$	218,135
December 31, 2019
December 31, 2020
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	26,440		$	437	$	—	$	26,877	$	6,239		$	396	$	—	$	6,635
Mortgage-backed securities:
Federal National Mortgage Association		293,873			2,263		1,380		294,756		350,627			15,549		44		366,132
Federal Home Loan Mortgage Corporation		52,733			318		172		52,879		225,645			3,155		24		228,776
Government National Mortgage Association		14,065			60		4		14,121		22,107			830		—		22,937
Collateralized mortgage obligations:
Federal National Mortgage Association		23,834			—		57		23,777		3,047			97		—		3,144
Federal Home Loan Mortgage Corporation		4,907			—		18		4,889		—			—		—		—
Privately issued		—			618		—		618		—			435		—		435
Total mortgage-backed securities		389,412			3,259		1,631		391,040		601,426			20,066		68		621,424
Total available for sale securities	$	415,852		$	3,696	$	1,631	$	417,917	$	607,665		$	20,462	$	68	$	628,059

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Less than 12 months				12 months or longer				Total
	Value		Losses		Value		Losses		Value		Losses		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2020
													Value		Losses		Value		Losses		Value		Losses
September 30, 2021
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities:
Federal National Mortgage Association		40,103		66		—		—		40,103		66		328,931		4,650		9,173		323		338,104		4,973
Federal Home Loan Mortgage Corporation		43,075		140		—		—		43,075		140		335,977		5,977		7,676		218		343,653		6,195
Government National Mortgage Association		—		—		—		—		—		—		79,351		935		—		—		79,351		935
Collateralized mortgage obligations:
Federal National Mortgage Association		—		—		8		—		8		—		7,818		132		—		—		7,818		132
Federal Home Loan Mortgage Corporation		—		—		—		—		—		—		16,190		128		—		—		16,190		128
Privately issued														—		—		—		—		—		—
Total mortgage-backed securities		83,178		206		8		—		83,186		206		768,267		11,822		16,849		541		785,116		12,363
Total available for sale securities		83,178		206		8		—		83,186		206		768,267		11,822		16,849		541		785,116		12,363
Total temporarily impaired securities	$	83,178	$	206	$	8	$	—	$	83,186	$	206	$	768,267	$	11,822	$	16,849	$	541	$	785,116	$	12,363
December 31, 2019
December 31, 2020
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities:
Federal National Mortgage Association		104,634		1,277		7,196		103		111,830		1,380		18,155		44		—		—		18,155		44
Federal Home Loan Mortgage Corporation		10,347		11		9,409		161		19,756		172		10,932		24		—		—		10,932		24
Government National Mortgage Association		533		4		—		—		533		4		—		—		—		—		—		—
Collateralized mortgage obligations:
Federal National Mortgage Association		8,803		57		8		—		8,811		57		—		—		8		—		8		—
Federal Home Loan Mortgage Corporation		4,889		18		—		—		4,889		18		—		—		—		—		—		—
Privately issued														—		—		—		—		—		—
Total mortgage-backed securities		129,206		1,367		16,613		264		145,819		1,631		29,087		68		8		—		29,095		68
Total available for sale securities		129,206		1,367		16,613		264		145,819		1,631		29,087		68		8		—		29,095		68
Securities held to maturity:
State and political subdivisions		—		—		—		—		—		—
Mortgage-backed securities:
Federal National Mortgage Association		2,388		6		—		—		2,388		6
Federal Home Loan Mortgage Corporation		2,967		19		2,598		28		5,565		47
Government National Mortgage Association		11,155		61		5,625		67		16,780		128
Collateralized mortgage obligations:
Federal National Mortgage Association		9,120		40		13,486		216		22,606		256
Federal Home Loan Mortgage Corporation		15,127		30		7,988		73		23,115		103
Government National Mortgage Association		8,760		72		892		11		9,652		83
Total mortgage-backed securities		49,517		228		30,589		395		80,106		623
Total held to maturity securities		49,517		228		30,589		395		80,106		623
Total temporarily impaired securities	$	178,723	$	1,595	$	47,202	$	659	$	225,925	$	2,254	$	29,087	$	68	$	8	$	—	$	29,095	$	68

	Principal Amount Outstanding		Net Deferred Loan (Fees) Costs			Loans, Net
September 30, 2020
									Principal Amount Outstanding		Net Deferred Loan (Fees) Costs			Loans, Net
September 30, 2021
Commercial business	$	823,611	$	(5,476	)	$	818,135		$	689,819	$	(3,628	)	$	686,191
Commercial mortgage		1,204,353		(2,307	)		1,202,046			1,350,932		(2,382	)		1,348,550
Residential real estate loans		583,963		12,939			596,902			570,435		13,656			584,091
Residential real estate lines		90,899		3,118			94,017			76,214		2,982			79,196
Consumer indirect		813,345		27,234			840,579			907,185		33,352			940,537
Other consumer		16,703		157			16,860			15,206		128			15,334
Total	$	3,532,874	$	35,665			3,568,539		$	3,609,791	$	44,108			3,653,899
Allowance for credit losses - loans							(49,395	)							(45,444	)
Total loans, net						$	3,519,144							$	3,608,455
December 31, 2019
December 31, 2020
Commercial business	$	571,222	$	818		$	572,040		$	798,409	$	(4,261	)	$	794,148
Commercial mortgage		1,108,315		(2,032	)		1,106,283			1,256,525		(2,624	)		1,253,901
Residential real estate loans		560,717		11,633			572,350			586,537		13,263			599,800
Residential real estate lines		101,048		3,070			104,118			86,708		3,097			89,805
Consumer indirect		822,179		27,873			850,052			812,816		27,605			840,421
Other consumer		15,984		160			16,144			16,913		150			17,063
Total	$	3,179,465	$	41,522			3,220,987		$	3,557,908	$	37,230			3,595,138
Allowance for credit losses - loans							(30,482	)							(52,420	)
Total loans, net						$	3,190,505							$	3,542,718

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Nonaccrual		Current		Total Loans		Nonaccrual with no allowance
September 30, 2020
																	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Nonaccrual		Current		Total Loans		Nonaccrual with no allowance
September 30, 2021
Commercial business	$	139	$	2	$	—	$	141	$	2,628	$	820,842	$	823,611	$	894	$	11,489	$	—	$	—	$	11,489	$	1,046	$	677,284	$	689,819	$	498
Commercial mortgage		—		—		—		—		3,372		1,200,981		1,204,353		3,175		272		—		—		272		874		1,349,786		1,350,932		344
Residential real estate loans		389		35		—		424		3,305		580,234		583,963		3,305		543		80		—		623		2,457		567,355		570,435		2,457
Residential real estate lines		288		—		—		288		207		90,404		90,899		207		55		24		—		79		192		75,943		76,214		192
Consumer indirect		3,520		566		—		4,086		1,244		808,015		813,345		1,244		4,499		899		—		5,398		2,104		899,683		907,185		2,104
Other consumer		126		20		141		287		6		16,410		16,703		6		85		0		1		86		2		15,118		15,206		2
Total loans, gross	$	4,462	$	623	$	141	$	5,226	$	10,762	$	3,516,886	$	3,532,874	$	8,831	$	16,943	$	1,003	$	1	$	17,947	$	6,675	$	3,585,169	$	3,609,791	$	5,597
December 31, 2019
December 31, 2020
Commercial business	$	361	$	—	$	—	$	361	$	1,177	$	569,684	$	571,222			$	264	$	87	$	—	$	351	$	1,975	$	796,083	$	798,409	$	1,502
Commercial mortgage		531		—		—		531		3,146		1,104,638		1,108,315				822		26		—		848		2,906		1,252,771		1,256,525		2,709
Residential real estate loans		929		114		—		1,043		2,484		557,190		560,717				984		60		—		1,044		2,587		582,906		586,537		2,587
Residential real estate lines		231		37		—		268		102		100,678		101,048				40		15		—		55		323		86,330		86,708		323
Consumer indirect		3,729		1,019		—		4,748		1,725		815,706		822,179				3,966		1,348		—		5,314		1,495		806,007		812,816		1,495
Other consumer		116		8		6		130		—		15,854		15,984				133		18		231		382		—		16,531		16,913		—
Total loans, gross	$	5,897	$	1,178	$	6	$	7,081	$	8,634	$	3,163,750	$	3,179,465			$	6,209	$	1,554	$	231	$	7,994	$	9,286	$	3,540,628	$	3,557,908	$	8,616


	Collateral type
	Business assets		Real property		Total		Specific Reserve
September 30, 2021
Commercial business	$	596	$	1,062	$	1,658	$	1,370
Commercial mortgage		—		64,216		64,216		9,950
Total	$	596	$	65,278	$	65,874	$	11,320

December 31, 2020
Commercial business	$	2,379	$	—	$	2,379	$	1,383
Commercial mortgage		—		36,625		36,625		8,187
Total	$	2,379	$	36,625	$	39,004	$	9,570

	Term Loans Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total		Term Loans Amortized Cost Basis by Origination Year
September 30, 2020
																			2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
September 30, 2021
Commercial Business
Uncriticized	$	356,882	$	111,373	$	90,038	$	32,169	$	12,489	$	19,063	$	183,654	$	0	$	805,668	$	111,558	$	109,269	$	78,305	$	49,811	$	16,289	$	13,906	$	296,861	$	0	$	675,999
Special mention		709		108		3		802		40		3		2,088		0		3,753		164		41		153		23		360		1,034		1,745		0		3,520
Substandard		223		486		1,321		757		239		929		4,759		0		8,714		0		215		160		722		696		283		4,596		0		6,672
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total	$	357,814	$	111,967	$	91,362	$	33,728	$	12,768	$	19,995	$	190,501	$	0	$	818,135	$	111,722	$	109,525	$	78,618	$	50,556	$	17,345	$	15,223	$	303,202	$	0	$	686,191
Commercial Mortgage
Uncriticized	$	213,341	$	278,617	$	186,224	$	189,627	$	96,571	$	199,397	$	430	$	0	$	1,164,207	$	208,019	$	343,976	$	181,132	$	143,005	$	142,828	$	172,277	$	3,736	$	0	$	1,194,973
Special mention		0		2,091		17,133		454		329		1,449		0		0		21,456		11,742		3,041		49,691		9,622		13,624		39,755		0		0		127,475
Substandard		189		2,448		1,910		1,615		3		10,019		199		0		16,383		1,001		389		2,938		11,610		300		9,864		0		0		26,102
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total	$	213,530	$	283,156	$	205,267	$	191,696	$	96,903	$	210,865	$	629	$	0	$	1,202,046	$	220,762	$	347,406	$	233,761	$	164,237	$	156,752	$	221,896	$	3,736	$	0	$	1,348,550

	Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended September 30, 2020
																						Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended September 30, 2021
Beginning balance	$	12,399		$	15,666		$	5,769		$	939		$	11,222		$	321		$	46,316		$	11,005		$	21,662		$	2,299		$	395		$	10,748		$	256		$	46,365
Charge-offs		(15	)		(640	)		0			0			(1,388	)		(160	)		(2,203	)		(218	)		0			(36	)		(60	)		(1,395	)		(250	)		(1,959	)
Recoveries		103			37			7			0			1,503			65			1,715			168			0			15			0			1,130			59			1,372
Provision (credit)		507			1,417			(1,224	)		(121	)		2,833			155			3,567			889			(2,210	)		(302	)		10			1,096			183			(334	)
Ending balance	$	12,994		$	16,480		$	4,552		$	818		$	14,170		$	381		$	49,395		$	11,844		$	19,452		$	1,976		$	345		$	11,579		$	248		$	45,444
Nine months ended September 30, 2020
Beginning balance, prior to adoption of ASC 326	$	11,358		$	5,681		$	1,059		$	118		$	11,852		$	414		$	30,482
Impact of adopting ASC 326		(246	)		7,310			3,290			607			(1,234	)		(133	)		9,594
Beginning balance, after adoption of ASC 326		11,112			12,991			4,349			725			10,618			281			40,076
Nine months ended September 30, 2021
Beginning balance																						$	13,580		$	21,763		$	3,924		$	674		$	12,165		$	314		$	52,420
Charge-offs		(8,281	)		(1,712	)		(100	)		0			(7,366	)		(499	)		(17,958	)		(396	)		(203	)		(103	)		(130	)		(4,965	)		(755	)		(6,552	)
Recoveries		1,644			37			25			3			4,550			282			6,541			785			7			79			0			4,383			218			5,472
Provision		8,519			5,164			278			90			6,368			317			20,736
Provision (credit)																							(2,125	)		(2,115	)		(1,924	)		(199	)		(4	)		471			(5,896	)
Ending balance	$	12,994		$	16,480		$	4,552		$	818		$	14,170		$	381		$	49,395		$	11,844		$	19,452		$	1,976		$	345		$	11,579		$	248		$	45,444


Twelve months ended September 30,
2022	$	2,380
2023		2,048
2024		1,508
2025		1,416
2026		1,338
Thereafter		30,217
Total future minimum operating lease payments		38,907
Amounts representing interest		(14,695	)
Present value of net future minimum operating lease payments	$	24,212

Twelve months ended September 30,
2021	$	2,570
2022		2,039
2023		1,731
2024		1,332
2025		1,208
Thereafter		25,085
Total future minimum operating lease payments		33,965
Amounts representing interest		(12,018	)
Present value of net future minimum operating lease payments	$	21,947


	Banking		All Other (1)		Total
Balance, December 31, 2020	$	48,536	$	17,526	$	66,062
Acquisitions		—		1,009		1,009
Balance, September 30, 2021	$	48,536	$	18,535	$	67,071

	Banking		Non-Banking		Total
Balance, December 31, 2019	$	48,536	$	17,526	$	66,062
No activity during the period		—		—		—
Balance, September 30, 2020	$	48,536	$	17,526	$	66,062


2021 (remainder of year)	$	260
2022		985
2023		910
2024		838
2025		766
2026		694

2020 (remainder of year)	$	273
2021		1,014
2022		923
2023		852
2024		783
2025		714


					Asset derivatives					Liability derivatives
	Gross notional amount				Balance	Fair value				Balance	Fair value
	Sept. 30, 2021		Dec. 31, 2020		sheet line item	Sept. 30, 2021		Dec. 31, 2020		sheet line item	Sept. 30, 2021		Dec. 31, 2020
Derivatives designated as hedging instruments
Cash flow hedges	$	50,000	$	50,000	Other assets	$	1,112	$	—	Other liabilities	$	—	$	311
Total derivatives	$	50,000	$	50,000		$	1,112	$	—		$	—	$	311
Derivatives not designated as hedging instruments
Cash flow hedges	$	—	$	100,000	Other assets	$	—	$	—	Other liabilities	$	—	$	—
Interest rate swaps (1)		726,910		631,907	Other assets		14,653		19,626	Other liabilities		14,658		19,837
Credit contracts		109,552		113,434	Other assets		0		23	Other liabilities		1		86
Mortgage banking		26,748		28,225	Other assets		374		471	Other liabilities		5		1
Total derivatives	$	863,210	$	873,566		$	15,027	$	20,120		$	14,664	$	19,924


		Gain (loss) recognized in income					Gain (loss) recognized in income					Gain (loss) recognized in income				Gain (loss) recognized in income
	Line item of gain (loss)	Three months ended September 30,					Nine months ended September 30,				Line item of gain (loss)	Three months ended September 30,				Nine months ended September 30,
Undesignated derivatives	recognized in income	2020		2019			2020		2019		recognized in income	2021		2020		2021			2020
Cash flow hedges	Income from derivative instruments, net	$	—	$	—		$	—	$	—	Income from derivative instruments, net	$	—	$	—	$	—		$	—
Interest rate swaps	Income from derivative instruments, net		1,310		854			3,715		838	Income from derivative instruments, net		248		1,310		1,687			3,715
Credit contracts	Income from derivative instruments, net		13		48			136		54	Income from derivative instruments, net		38		13		74			136
Mortgage banking	Income from derivative instruments, net		608		(12	)		766		121	Income from derivative instruments, net		91		608		(101	)		766
Total undesignated		$	1,931	$	890		$	4,617	$	1,013		$	377	$	1,931	$	1,660		$	4,617


	Outstanding			Treasury			Issued
2021
Shares at December 31, 2020		16,041,926			57,630			16,099,556
Shares issued for Landmark Group acquisition		12,831			(12,831	)		—
Restricted stock units released		18,819			(18,819	)		—
Treasury stock purchases		(244,677	)		244,677			—
Shares at March 31, 2021		15,828,899			270,657			16,099,556
Restricted stock awards issued		9,350			(9,350	)		—
Stock awards		3,680			(3,680	)		—
Shares at June 30, 2021		15,841,929			257,627			16,099,556
Restricted stock units released		250			(250	)
Treasury stock purchases		(98	)		98			—
Shares at September 30, 2021		15,842,081			257,475			16,099,556
2020
Shares at December 31, 2019		16,002,899			96,657			16,099,556
Restricted stock units released		22,921			(22,921	)		—
Treasury stock purchases		(6,436	)		6,436			—
Shares at March 31, 2020		16,019,384			80,172			16,099,556
Restricted stock awards issued		12,798			(12,798	)		—
Stock awards		5,403			(5,403	)		—
Shares at June 30, 2020		16,037,585			61,971			16,099,556
No activity during the period		—			—			—
Shares at September 30, 2020		16,037,585			61,971			16,099,556

	Pre-tax Amount			Tax Effect			Net-of-tax Amount
Three months ended September 30, 2020
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	374		$	96		$	278
Reclassification adjustment for net gains included in net income ⁽¹⁾		(467	)		(120	)		(347	)
Total securities available for sale and transferred securities		(93	)		(24	)		(69	)
Hedging derivative instruments:
Change in unrealized gain/loss during the period		165			42			123
Pension and post-retirement obligations:
Amortization of prior service credit included in income		(8	)		(2	)		(6	)
Amortization of net actuarial loss included in income		321			82			239
Total pension and post-retirement obligations		313			80			233
Other comprehensive income	$	385		$	98		$	287
Nine months ended September 30, 2020
										Pre-tax Amount			Tax Effect			Net-of-tax Amount
Three months ended September 30, 2021
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	19,737		$	5,057		$	14,680		$	(8,647	)	$	(2,216	)	$	(6,431	)
Reclassification adjustment for net gains included in net income ⁽¹⁾		(1,213	)		(311	)		(902	)		42			11			31
Total securities available for sale and transferred securities		18,524			4,746			13,778			(8,605	)		(2,205	)		(6,400	)
Hedging derivative instruments:
Change in unrealized gain/loss during the period		(234	)		(60	)		(174	)		108			28			80
Pension and post-retirement obligations:
Amortization of prior service credit included in income		(26	)		(7	)		(19	)		(1	)		(1	)		0
Amortization of net actuarial loss included in income		967			248			719			186			48			138
Total pension and post-retirement obligations		941			241			700			185			47			138
Other comprehensive loss	$	19,231		$	4,927		$	14,304		$	(8,312	)	$	(2,130	)	$	(6,182	)
Nine months ended September 30, 2021
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period										$	(21,348	)	$	(5,470	)	$	(15,878	)
Reclassification adjustment for net gains included in net income (1)											105			27			78
Total securities available for sale and transferred securities											(21,243	)		(5,443	)		(15,800	)
Hedging derivative instruments:
Change in unrealized gain/loss during the period											1,537			394			1,143
Pension and post-retirement obligations:
Amortization of prior service credit included in income											(2	)		(1	)		(1	)
Amortization of net actuarial loss included in income											557			143			414
Total pension and post-retirement obligations											555			142			413
Other comprehensive loss										$	(19,151	)	$	(4,907	)	$	(14,244	)


													Hedging Derivative Instruments			Securities Available for Sale and Transferred Securities			Pension and Post- retirement Obligations			Accumulated Other Comprehensive Income (Loss)
Three months ended September 30, 2021
Balance at beginning of period													$	747		$	5,343		$	(12,024	)	$	(5,934	)
Other comprehensive income (loss) before reclassifications														80			(6,431	)		—			(6,351	)
Amounts reclassified from accumulated other comprehensive income (loss)														—			31			138			169
Net current period other comprehensive income (loss)														80			(6,400	)		138			(6,182	)
Balance at end of period													$	827		$	(1,057	)	$	(11,886	)	$	(12,116	)
Nine months ended September 30, 2021
Balance at beginning of period													$	(316	)	$	14,743		$	(12,299	)	$	2,128
Other comprehensive income (loss) before reclassifications														1,143			(15,878	)		—			(14,735	)
Amounts reclassified from accumulated other comprehensive income (loss)														—			78			413			491
Net current period other comprehensive income (loss)														1,143			(15,800	)		413			(14,244	)
Balance at end of period													$	827		$	(1,057	)	$	(11,886	)	$	(12,116	)
	Hedging Derivative Instruments			Securities Available for Sale and Transferred Securities			Pension and Post- retirement Obligations			Accumulated Other Comprehensive Income (Loss)
Three months ended September 30, 2020
Balance at beginning of period	$	(815	)	$	14,720		$	(14,401	)	$	(496	)	$	(815	)	$	14,720		$	(14,401	)	$	(496	)
Other comprehensive income before reclassifications		123			278			—			401			123			278			—			401
Amounts reclassified from accumulated other comprehensive (loss) income		—			(347	)		233			(114	)		—			(347	)		233			(114	)
Net current period other comprehensive income (loss)		123			(69	)		233			287			123			(69	)		233			287
Balance at end of period	$	(692	)	$	14,651		$	(14,168	)	$	(209	)	$	(692	)	$	14,651		$	(14,168	)	$	(209	)
Nine months ended September 30, 2020
Balance at beginning of period	$	(518	)	$	873		$	(14,868	)	$	(14,513	)	$	(518	)	$	873		$	(14,868	)		(14,513	)
Other comprehensive (loss) income before reclassifications		(174	)		14,680			—			14,506			(174	)		14,680			—			14,506
Amounts reclassified from accumulated other comprehensive (loss) income		—			(902	)		700			(202	)		—			(902	)		700			(202	)
Net current period other comprehensive income (loss)		(174	)		13,778			700			14,304			(174	)		13,778			700			14,304
Balance at end of period	$	(692	)	$	14,651		$	(14,168	)	$	(209	)	$	(692	)	$	14,651		$	(14,168	)	$	(209	)

Three months ended September 30, 2019
Balance at beginning of period	$	(636	)	$	2,292		$	(14,816	)	$	(13,160	)
Other comprehensive income before reclassifications		43			2,237			—			2,280
Amounts reclassified from accumulated other comprehensive (loss) income		—			(1,116	)		262			(854	)
Net current period other comprehensive income		43			1,121			262			1,426
Balance at end of period	$	(593	)	$	3,413		$	(14,554	)	$	(11,734	)
Nine months ended September 30, 2019
Balance at beginning of period	$	(276	)	$	(7,769	)	$	(13,236	)		(21,281	)
Reclassification of income tax effects to retained earnings		—			(681	)		(2,102	)		(2,783	)
Other comprehensive (loss) income before reclassifications		(317	)		12,880			—			12,563
Amounts reclassified from accumulated other comprehensive income (loss)		—			(1,017	)		784			(233	)
Net current period other comprehensive (loss) income		(317	)		11,863			784			12,330
Balance at end of period	$	(593	)	$	3,413		$	(14,554	)	$	(11,734	)


Details About Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)						Affected Line Item in the Consolidated Statement of Income	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)						Affected Line Item in the Consolidated Statement of Income
	Three months ended							Three months ended
	September 30,							September 30,
	2020			2019				2021			2020
Realized gain on sale of investment securities	$	554		$	1,608		Net gain on investment securities
Realized gain (loss) on sale of investment securities								$	0		$	554		Net gain on investment securities
Amortization of unrealized holding losses on investment securities transferred from available for sale to held to maturity		(87	)		(116	)	Interest income		(42	)		(87	)	Interest income
		467			1,492		Total before tax		(42	)		467		Total before tax
		(120	)		(376	)	Income tax expense		11			(120	)	Income tax expense
		347			1,116		Net of tax		(31	)		347		Net of tax
Amortization of pension and post-retirement items:
Prior service credit ⁽¹⁾		8			16		Salaries and employee benefits		1			8		Salaries and employee benefits
Net actuarial losses ⁽¹⁾		(321	)		(366	)	Salaries and employee benefits		(186	)		(321	)	Salaries and employee benefits
		(313	)		(350	)	Total before tax		(185	)		(313	)	Total before tax
		80			88		Income tax benefit		47			80		Income tax benefit
		(233	)		(262	)	Net of tax		(138	)		(233	)	Net of tax
Total reclassified for the period	$	114		$	854			$	(169	)	$	114

	Nine months ended							Nine months ended
	September 30,							September 30,
	2020			2019				2021			2020
Realized gain on sale of investment securities	$	1,449		$	1,721		Net gain on investment securities	$	71		$	1,449		Net gain on investment securities
Amortization of unrealized holding losses on investment securities transferred from available for sale to held to maturity		(236	)		(361	)	Interest income		(176	)		(236	)	Interest income
		1,213			1,360		Total before tax		(105	)		1,213		Total before tax
		(311	)		(343	)	Income tax (expense) benefit		27			(311	)	Income tax expense
		902			1,017		Net of tax		(78	)		902		Net of tax
Amortization of pension and post-retirement items:
Prior service credit ⁽¹⁾		26			49		Salaries and employee benefits		2			26		Salaries and employee benefits
Net actuarial losses ⁽¹⁾		(967	)		(1,098	)	Salaries and employee benefits		(557	)		(967	)	Salaries and employee benefits
		(941	)		(1,049	)	Total before tax		(555	)		(941	)	Total before tax
		241			265		Income tax benefit		142			241		Income tax benefit
		(700	)		(784	)	Net of tax		(413	)		(700	)	Net of tax
Total reclassified for the period	$	202		$	233			$	(491	)	$	202


	Number of Underlying Shares		Weighted Average Per Share Grant Date Fair Value		Number of Underlying Shares		Weighted Average Per Share Grant Date Fair Value
RSUs		57,306	$	25.67		59,998	$	27.50
PSUs		23,302		25.63		22,178		27.58


	Number of Shares			Weighted Average Market Price at Grant Date		Number of Shares			Weighted Average Market Price at Grant Date
Outstanding at beginning of year		151,808		$	27.80		168,513		$	25.65
Granted		93,406			24.55		91,526			27.99
Vested		(33,433	)		28.88		(30,138	)		26.67
Forfeited		(39,406	)		27.99		(27,901	)		26.66
Outstanding at end of period		172,375		$	25.78		202,000		$	26.42

	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
September 30, 2020
											Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
September 30, 2021
Measured on a recurring basis:
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	—	$	6,655		$	—	$	6,655		$	—	$	6,531		$	—	$	6,531
Mortgage-backed securities		—		509,316			—		509,316			—		1,091,419			—		1,091,419
Other liabilities:
Other assets:
Hedging derivative instruments		—		(647	)		—		(647	)		—		1,112			—		1,112
Fair value adjusted through comprehensive income	$	—	$	515,324		$	—	$	515,324		$	—	$	1,099,062		$	—	$	1,099,062
Other assets:
Derivative instruments - cash flow hedges	$	—	$	—		$	—	$	—
Derivative instruments - interest rate swaps		—		23,079			—		23,079			—		14,653			—		14,653
Derivative instruments - credit contracts		—		29			—		29			—		0			—		0
Derivative instruments - mortgage banking		—		891			—		891			—		374			—		374
Other liabilities:
Derivative instruments - interest rate swaps		—		(23,498	)		—		(23,498	)		—		(14,658	)		—		(14,658	)
Derivative instruments - credit contracts		—		(47	)		—		(47	)		—		(1	)		—		(1	)
Derivative instruments - mortgage banking		—		(13	)		—		(13	)		—		(5	)		—		(5	)
Fair value adjusted through net income	$	—	$	441		$	—	$	441		$	—	$	363		$	—	$	363
Measured on a nonrecurring basis:
Loans:
Loans held for sale	$	—	$	7,076		$	—	$	7,076		$	—	$	5,916		$	—	$	5,916
Collateral dependent loans		—		—			17,913		17,913			—		—			54,554		54,554
Other assets:
Long-lived assets held for sale												—		4,341			—		4,341
Loan servicing rights		—		—			1,175		1,175			—		—			1,484		1,484
Other real estate owned		—		—			2,999		2,999
Total	$	—	$	7,076		$	22,087	$	29,163		$	—	$	10,257		$	56,038	$	66,295


	Level in	September 30, 2020				December 31, 2019				Level in	September 30, 2021				December 31, 2020
	Fair Value			Estimated				Estimated		Fair Value			Estimated				Estimated
	Measurement	Carrying		Fair		Carrying		Fair		Measurement	Carrying		Fair		Carrying		Fair
	Hierarchy	Amount		Value		Amount		Value		Hierarchy	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	282,070	$	282,070	$	112,947	$	112,947	Level 1	$	288,426	$	288,426	$	93,878	$	93,878
Securities available for sale	Level 2		515,971		515,971		417,917		417,917	Level 2		1,097,950		1,097,950		628,059		628,059
Securities held to maturity, net	Level 2		290,946		301,878		359,000		363,259	Level 2		218,135		224,164		271,973		282,035
Loans held for sale	Level 2		7,076		7,076		4,224		4,224	Level 2		5,916		5,916		4,305		4,305
Loans	Level 2		3,501,231		3,536,646		3,186,875		3,201,814
Loans ⁽¹⁾	Level 3		17,913		17,913		3,630		3,630	Level 2		3,553,901		3,597,936		3,513,284		3,549,770
Loans (1)										Level 3		54,554		54,554		29,434		29,434
Long-lived assets held for sale										Level 2		4,341		4,341		—		—
Accrued interest receivable	Level 1		16,230		16,230		11,308		11,308	Level 1		15,742		15,742		15,635		15,635
FHLB and FRB stock	Level 2		8,619		8,619		20,637		20,637
Derivative instruments – cash flow hedges	Level 2		—		—		—		—	Level 2		1,112		1,112		—		—
Derivative instruments – interest rate products	Level 2		23,079		23,079		6,419		6,419	Level 2		14,653		14,653		19,626		19,626
Derivative instruments – credit contracts	Level 2		29		29		13		13	Level 2		0		0		23		23
Derivative instruments – mortgage banking	Level 2		891		891		119		119	Level 2		374		374		471		471
FHLB and FRB stock										Level 2		9,368		9,368		8,619		8,619
Financial liabilities:
Non-maturity deposits	Level 1		3,523,698		3,523,698		2,375,486		2,375,486	Level 1		4,054,683		4,054,683		3,392,774		3,392,774
Time deposits	Level 2		841,230		843,191		1,180,189		1,179,991	Level 2		920,280		920,221		885,593		887,113
Short-term borrowings	Level 1		5,300		5,300		275,500		275,500	Level 1		—		—		5,300		5,300
Long-term borrowings	Level 2		39,258		45,224		39,273		41,083	Level 2		73,834		79,275		73,623		83,953
Accrued interest payable	Level 1		5,737		5,737		10,942		10,942	Level 1		3,226		3,226		4,381		4,381
Derivative instruments – cash flow hedges	Level 2		647		647		—		—	Level 2		—		—		311		311
Derivative instruments – interest rate products	Level 2		23,498		23,498		6,720		6,720	Level 2		14,658		14,658		19,837		19,837
Derivative instruments – credit contracts	Level 2		47		47		18		18	Level 2		1		1		86		86
Derivative instruments – mortgage banking	Level 2		13		13		7		7	Level 2		5		5		1		1


	Banking		All Other		Consolidated Totals
September 30, 2021
Goodwill	$	48,536	$	18,535	$	67,071
Other intangible assets, net		6		7,582		7,588
Total assets		5,583,776		39,417		5,623,193
December 31, 2020
Goodwill	$	48,536	$	17,526	$	66,062
Other intangible assets, net		28		7,699		7,727
Total assets		4,875,673		36,633		4,912,306

	Banking		Non- Banking		Holding Company and Other			Consolidated Totals
September 30, 2020
Goodwill	$	48,536	$	17,526	$	—		$	66,062
Other intangible assets, net		41		7,959		—			8,000
Total assets		4,922,251		37,420		(470	)		4,959,201
December 31, 2019
Goodwill	$	48,536	$	17,526	$	—		$	66,062
Other intangible assets, net		98		8,763		—			8,861
Total assets		4,346,615		36,733		830			4,384,178