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 ~~15,841,929~~15,334,091 shares of Common Stock, $0.01 par value, outstanding as of July ~~31, 2021.~~29, 2022.

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 a commercial loan production office in Ellicott City (Baltimore), Maryland and 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.

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

In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), who is responsible for regulating the London Interbank Offered Rate (“LIBOR”), announced its intention that it would no longer be necessary to 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 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 hedge the LIBOR characteristic of a future dated borrowing (i.e. Federal Home Loan Bank ~~Advance)~~Advance, Brokered Time Deposits, etc.). In 2015, the Company issued ~~$40~~$40 million in fixed to floating rate subordinated notes that currently bear a fixed rate of interest at ~~6.00%~~6.00% until April 2025, when the rate converts to a floating rate equal to three-month LIBOR plus ~~3.944%~~3.944%; the indenture under which the notes were issued includes language allowing an alternate index to be applied in the event that LIBOR becomes unavailable at the floating rate determination date. At this time, no other borrowing or deposit relationships have been identified that utilize LIBOR as an index.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial 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. ASU 2020-04 became 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 adoption of this guidance in 2020 resulted in the application of certain practical expedients, which did not have a material effect on the Company's consolidated financial ~~statements~~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 derivatives that are affected by the 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 certain practical expedients, which did not have a material effect on the Company's consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures. The ASU updates the accounting and disclosure for troubled debt restructurings. ASU 2022-02 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those years, with an option to early adopt. The Company is incurrently evaluating the ~~process~~impact the adoption of ~~determining which optional expedients to elect, if any, as well as the timing and application of those elections. At~~ this ~~time, the Company does not expect any elections to~~guidance will have ~~a significant impact~~ on its consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. The ASU expands the scope in which an entity can apply the portfolio layer method of hedge accounting, allowing for more consistent accounting for similar hedges. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.

On February 1, 2021, SDN completed the acquisition of the assets of Landmark Group (“Landmark”), an independent insurance brokerage firm. Consideration for the acquisition included common shares of Company stock and cash. As a result of the acquisition, SDN recorded goodwill of ~~$611~~$611 thousand and other intangible assets of ~~$399~~$399 thousand. The goodwill and other intangible assets are expected to be deductible for income tax purposes. The allocation of acquisition cost to the assets acquired and liabilities assumed and pro forma results of operations for this acquisition have not been presented because the effect of this acquisition was not material to the Company’s consolidated financial statements.

On August 2, 2021, SDN completed the acquisition of the assets of North Woods Capital Benefits LLC ("North Woods"), an employee benefits and ~~consulting~~human resources advisory firm. ~~The consideration for~~As a result of the acquisition, ~~deductibility~~SDN recorded goodwill of ~~acquired~~$399 thousand and other intangible assets of $263 thousand. The goodwill and other intangible assets are expected to be deductible for income tax ~~purposes,~~purposes. The allocation of acquisition cost to the assets acquired and liabilities assumed and pro forma results of operations for this acquisition have not been presented because the effect of this acquisition was not material to the Company’s consolidated financial statements.

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

(5.)INVESTMENT SECURITIES

~~(5.)~~

~~INVESTMENT SECURITIES~~

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

	Amortized			Unrealized		Unrealized		Fair
	Cost			Gains		Losses		Value		Amortized			Unrealized		Unrealized		Fair
June 30, 2021
										Cost			Gains		Losses		Value
June 30, 2022
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	6,249		$	314	$	—	$	6,563	$	24,535		$	0	$	2,345	$	22,190
Mortgage-backed securities:
Federal National Mortgage Association		514,661			10,821		2,400		523,082		575,815			2		54,832		520,985
Federal Home Loan Mortgage Corporation		301,495			1,563		3,357		299,701		430,099			1		52,524		377,576
Government National Mortgage Association		45,710			537		224		46,023		116,934			2		12,413		104,523
Collateralized mortgage obligations:
Federal National Mortgage Association		20,362			69		79		20,352		13,188			0		1,770		11,418
Federal Home Loan Mortgage Corporation		6,747			—		47		6,700		22,734			0		2,773		19,961
Privately issued		—			424		—		424		0			365		0		365
Total mortgage-backed securities		888,975			13,414		6,107		896,282		1,158,770			370		124,312		1,034,828
Total available for sale securities	$	895,224		$	13,728	$	6,107	$	902,845	$	1,183,305		$	370	$	126,657	$	1,057,018
Securities held to maturity:
U.S. Government agency and government sponsored enterprises										$	16,288		$	0	$	105	$	16,183
State and political subdivisions	$	113,437		$	3,383	$	—	$	116,820		105,978			106		5,618		100,466
Mortgage-backed securities:
Federal National Mortgage Association		9,649			509		—		10,158		8,844			4		305		8,543
Federal Home Loan Mortgage Corporation		5,099			212		—		5,311		8,077			0		986		7,091
Government National Mortgage Association		31,170			971		—		32,141		24,641			1		1,156		23,486
Collateralized mortgage obligations:
Federal National Mortgage Association		24,099			808		—		24,907		16,312			0		619		15,693
Federal Home Loan Mortgage Corporation		28,847			1,092		—		29,939		20,100			0		638		19,462
Government National Mortgage Association		6,563			205		—		6,768		4,698			0		171		4,527
Total mortgage-backed securities		105,427			3,797		—		109,224		82,672			5		3,875		78,802
Total held to maturity securities		218,864		$	7,180	$	—	$	226,044		204,938		$	111	$	9,598	$	195,451
Allowance for credit losses - securities		(6	)								(5	)
Total held to maturity securities, net	$	218,858								$	204,933
December 31, 2020
December 31, 2021
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	6,239		$	396	$	—	$	6,635
U.S. Government agencies and government sponsored enterprises										$	15,793		$	195	$	97	$	15,891
Mortgage-backed securities:
Federal National Mortgage Association		350,627			15,549		44		366,132		576,163			6,565		5,242		577,486
Federal Home Loan Mortgage Corporation		225,645			3,155		24		228,776		430,010			952		6,435		424,527
Government National Mortgage Association		22,107			830		—		22,937		122,266			298		2,082		120,482
Collateralized mortgage obligations:
Federal National Mortgage Association		3,047			97		—		3,144		15,346			26		433		14,939
Federal Home Loan Mortgage Corporation		—			—		—		—		25,257			0		477		24,780
Privately issued		—			435		—		435		0			410		0		410
Total mortgage-backed securities		601,426			20,066		68		621,424		1,169,042			8,251		14,669		1,162,624
Total available for sale securities	$	607,665		$	20,462	$	68	$	628,059	$	1,184,835		$	8,446	$	14,766	$	1,178,515

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.)INVESTMENT SECURITIES (Continued)


	Amortized			Unrealized		Unrealized		Fair
	Cost			Gains		Losses		Value
December 31, 2021 (continued)
Securities held to maturity:
State and political subdivisions	$	111,399		$	2,412	$	300	$	113,511
Mortgage-backed securities:
Federal National Mortgage Association		9,275			411		0		9,686
Federal Home Loan Mortgage Corporation		8,706			137		144		8,699
Government National Mortgage Association		27,400			706		2		28,104
Collateralized mortgage obligations:
Federal National Mortgage Association		19,485			368		3		19,850
Federal Home Loan Mortgage Corporation		23,840			565		0		24,405
Government National Mortgage Association		5,481			84		0		5,565
Total mortgage-backed securities		94,187			2,271		149		96,309
Total held to maturity securities		205,586		$	4,683	$	449	$	209,820
Allowance for credit losses - securities		(5	)
Total held to maturity securities, net	$	205,581

~~(5.)~~

~~INVESTMENT SECURITIES (Continued)~~

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

December 31, 2020 (continued)

Securities held to maturity:

State and political subdivisions

$
144,506

$
4,478

$
—

$
148,984

Mortgage-backed securities:

Federal National Mortgage Association

10,776

703

—

11,479

Federal Home Loan Mortgage Corporation

5,858

382

—

6,240

Government National Mortgage Association

37,084

1,578

—

38,662

Collateralized mortgage obligations:

Federal National Mortgage Association

29,988

1,075

—

31,063

Federal Home Loan Mortgage Corporation

35,897

1,581

—

37,478

Government National Mortgage Association

7,864

265

—

8,129

Total mortgage-backed securities

127,467

5,584

—

133,051

Total held to maturity securities

271,973

$
10,062

$
—

$
282,035

Allowance for credit losses - securities

(7
)

Total held to maturity securities, net

$
271,966

The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. For available for sale (“AFS”) debt securities, AIR totaled ~~$1.6~~$2.2 million and ~~$1.2~~$2.1 million as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021, respectively. For held to maturity (“HTM”) debt securities, AIR totaled ~~$751~~$733 thousand and ~~$905~~$696 thousand as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.

For the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, credit loss expense (credit) for HTM investment securities was ~~$(1)~~less than $1 thousand ~~and $(5) thousand, respectively.~~in each period. For the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, credit loss expense (credit) for HTM investment securities was ~~$(1)~~less than $1 thousand and ~~$(6)~~$(1) thousand, respectively.

Investment securities with a total fair value of ~~$715.3~~$815.8 million and ~~$567.4~~$637.6 million at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

Sales of securities available for sale were as follows (in thousands):


	Three months ended June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Proceeds from sales	$	25,216	$	26,474	$	51,891	$	29,631	$	6,252	$	25,216	$	6,252	$	51,891
Gross realized gains		162		616		251		616		0		162		0		251
Gross realized losses		165		—		180		9		15		165		15		180

The scheduled maturities of securities available for sale and securities held to maturity at June 30, ~~2021~~2022 are shown below (in thousands). Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.


	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Debt securities available for sale:
Due in one year or less	$	4,875	$	4,922	$	5,550	$	5,535
Due from one to five years		61,273		64,618		86,194		83,372
Due after five years through ten years		162,075		168,601		152,838		141,476
Due after ten years		667,001		664,704		938,723		826,635
Total available for sale securities	$	895,224	$	902,845	$	1,183,305	$	1,057,018
Debt securities held to maturity:
Due in one year or less	$	39,335	$	39,782	$	35,543	$	35,602
Due from one to five years		75,284		78,219		45,992		45,676
Due after five years through ten years		18,793		19,459		39,273		38,008
Due after ten years		85,452		88,584		84,130		76,165
Total held to maturity securities	$	218,864	$	226,044	$	204,938	$	195,451

- 15 -

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.)INVESTMENT SECURITIES (Continued)

~~(5.)~~

~~INVESTMENT SECURITIES (Continued)~~

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):

	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
June 30, 2021
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities:
Federal National Mortgage Association		212,724		2,400		72		—		212,796		2,400
Federal Home Loan Mortgage Corporation		211,699		3,293		3,565		64		215,264		3,357
Government National Mortgage Association		32,744		224		—		—		32,744		224
Collateralized mortgage obligations:
Federal National Mortgage Association		8,855		79		—		—		8,855		79
Federal Home Loan Mortgage Corporation		6,700		47		—		—		6,700		47
Privately issued		—		—		—		—		—		—
Total mortgage-backed securities		472,722		6,043		3,637		64		476,359		6,107
Total available for sale securities		472,722		6,043		3,637		64		476,359		6,107
Total temporarily impaired securities	$	472,722	$	6,043	$	3,637	$	64	$	476,359	$	6,107
December 31, 2020
													Value		Losses		Value		Losses		Value		Losses
June 30, 2022
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	—	$	—	$	—	$	—	$	—	$	—	$	22,190	$	2,345	$	—	$	—	$	22,190	$	2,345
Mortgage-backed securities:
Federal National Mortgage Association		18,155		44		—		—		18,155		44		407,151		36,437		113,541		18,395		520,692		54,832
Federal Home Loan Mortgage Corporation		10,932		24		—		—		10,932		24		225,921		27,154		151,571		25,370		377,492		52,524
Government National Mortgage Association		—		—		—		—		—		—		73,597		8,827		30,773		3,586		104,370		12,413
Collateralized mortgage obligations:
Federal National Mortgage Association		—		—		8		—		8		—		6,206		748		5,212		1,022		11,418		1,770
Federal Home Loan Mortgage Corporation		—		—		—		—		—		—		15,749		1,911		4,212		862		19,961		2,773
Privately issued		—		—		—		—		—		—
Total mortgage-backed securities		29,087		68		8		—		29,095		68		728,624		75,077		305,309		49,235		1,033,933		124,312
Total available for sale securities		29,087		68		8		—		29,095		68		750,814		77,422		305,309		49,235		1,056,123		126,657
Total temporarily impaired securities	$	29,087	$	68	$	8	$	—	$	29,095	$	68	$	750,814	$	77,422	$	305,309	$	49,235	$	1,056,123	$	126,657
December 31, 2021
Securities available for sale:
U.S. Government agencies and government sponsored enterprises													$	9,438	$	97	$	—	$	—	$	9,438	$	97
Mortgage-backed securities:
Federal National Mortgage Association														333,489		3,597		61,249		1,645		394,738		5,242
Federal Home Loan Mortgage Corporation														283,965		3,353		110,931		3,082		394,896		6,435
Government National Mortgage Association														108,448		2,082		—		—		108,448		2,082
Collateralized mortgage obligations:
Federal National Mortgage Association														13,364		433		0		—		13,364		433
Federal Home Loan Mortgage Corporation														24,780		477		—		—		24,780		477
Total mortgage-backed securities														764,046		9,942		172,180		4,727		936,226		14,669
Total available for sale securities														773,484		10,039		172,180		4,727		945,664		14,766
Total temporarily impaired securities													$	773,484	$	10,039	$	172,180	$	4,727	$	945,664	$	14,766

The total number of available for sale securities positions in the investment portfolio in an unrealized loss position at June 30, ~~2021~~2022 was 65207 compared to 8116 at December 31, ~~2020.~~2021. At June 30, ~~2021,~~2022, the Company had positions in 355 investment securities with a fair value of ~~$3.6~~$305.3 million and a total unrealized loss of ~~$64 thousand dollars~~$49.2 million that ~~has~~had been in a continuous unrealized loss position for more than 12 months. At June 30, ~~2021,~~2022, there were a total of 62152 securities positions in the Company’s investment portfolio with a fair value of ~~$472.7~~$750.8 million and a total unrealized loss of ~~$6.0~~$77.4 million that had been in a continuous unrealized loss position for less than 12 months. At December 31, ~~2020,~~2021, the Company had a position in 128 investment ~~security~~securities with a fair value of ~~8 thousand dollars~~$172.2 million and a total unrealized loss of ~~less than 1 thousand dollars~~$4.7 million that had been in a continuous unrealized loss position for more than 12 months. At December 31, ~~2020,~~2021, there were a total of 788 securities positions in the Company’s investment portfolio with a fair value of ~~$29.1~~$773.5 million and a total unrealized loss of ~~$68 thousand~~$10.0 million 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 June 30, ~~2021~~2022 and December 31, ~~2020,~~ 2021, 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 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 June 30, ~~2021, $107.1~~2022, $98.6 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with ~~$6.0~~$7.4 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating. Additionally, ~~one~~no municipal ~~bond was~~bonds were rated below investment grade, with a BB+ Standard & Poor’s equivalent rating. The below investment grade bond represented exposure of $280 thousand, or 0.25% of the municipal bond portfolio and has been closely monitored for repayment.grade. As of December 31, ~~2020, $135.7~~2021, $105.6 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, one municipal bond was rated below investment grade, with a BB+ Standard & Poor’s equivalent rating. The below investment grade bond represented exposure of $279 thousand, or 0.19% of the municipal bond portfolio and has been closely monitored for repayment.

As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had 0 past due or nonaccrual held to maturity investment securities.

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled ~~$3.9~~$4.3 million and ~~$4.3~~$6.2 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 ~~$177.7~~$9.3 million and ~~$253.1~~$57.5 million of PPP loans (included in Commercial business above) as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 made between March 1, 2020 and January 1, 2022 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 ~~$532.4~~$532.4 million of loans with modifications related to COVID-19 during 2020, with ~~$69.1 million and $113.0 million still~~loans on deferral as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021 of $4.0 million and $46.2 million, respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, AIR for loans totaled ~~$12.9~~$13.0 million and ~~$13.6~~$12.7 million, respectively, and is included in other assets on the Company’s consolidated statements of financial condition.

~~There were~~ The Company had 0 PPP loans ~~past due~~ greater than 90 days past due and still accruing interest as of June 30, ~~2021~~2022 and $797 thousand as of December 31, ~~2020.~~ 2021 (included in Commercial business above). Repayment of PPP loans is 100% secured by guarantees from the SBA.

There were ~~$42 thousand and $231 thousand in~~0 consumer overdrafts which were past due greater than 90 days as of June 30, ~~2021~~2022 and less than $1 thousand as of December 31, ~~2020, respectively.~~2021. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

~~The Company~~Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was 0 interest income recognized on nonaccrual loans during the six months ended June 30, 2022 and 2021. Estimated interest income of $288 thousand and $461 for the six months ended June 30, 2022 and 2021, ~~and 2020.~~respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

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 six months ended June 30, ~~2021~~2022 and ~~2020.~~2021. There were 0 loans modified as a TDR within the previous 12 months that defaulted during the six months ended June 30, ~~2021~~2022 and ~~2020.~~2021. 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, 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 June 30, ~~2021~~2022 and December 31, ~~2020~~2021 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 June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (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 following tables set forth the Company’s commercial loan portfolio, categorized by internally assigned asset classification, as of the dates indicated (in thousands):

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 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.

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 influencing 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 inflation and 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.

Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and ~~other intangible assets added during~~more frequently if an event occurs or circumstances change that would more likely than not reduce the ~~period relates~~fair value of a reporting unit below its carrying amount. Based on the decrease in Company stock price in 2022, along with a reduction in the Company's outstanding shares due to share repurchases in 2021 and 2022, a goodwill impairment test was performed in the ~~acquisition~~second quarter of ~~assets~~2022. Based on its qualitative assessment, the Company concluded that it was not more likely than not that goodwill was impaired as of ~~Landmark Group, which~~June 30, 2022. Therefore no quantitative assessment was ~~completed on February 1, 2021. See Note 2 – Business Combinations for additional information.~~deemed necessary as of June 30, 2022.

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):

Amortization expense for total other intangible assets was ~~$266~~$249 thousand and ~~$537~~$503 thousand for the three and six months ended June 30, ~~2021, respectively,~~2022, and ~~$287~~$266 thousand and ~~$581~~$537 thousand for the three and six months ended June 30, ~~2020, respectively.~~ 2021. As of June 30, ~~2021,~~2022, the estimated amortization expense of other intangible assets for the remainder of ~~2021~~2022 and each of the next five years is as follows (in thousands):

A summary of other assets as of the dates indicated are as follows (in thousands):

Activity in accumulated other comprehensive income (loss), net of tax, for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021 was as follows (in thousands):

The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss) income ~~(loss)~~ for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021 (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 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 ~~2021~~2022 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 June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the allowance for credit losses for unfunded commitments totaled ~~$2.1~~$2.2 million and ~~$3.1~~$1.8 million, respectively, and was included in other liabilities on the Company's consolidated statements of financial condition. ~~For the three months ended June 30, 2021 and 2020,~~The credit loss expense (benefit) ~~expense~~ for unfunded commitments was $(764) thousand and $5 thousand, respectively. For the six months ended June 30, 2021 and 2020, credit loss (benefit) expense for unfunded commitments was $(1.0) million and $498 thousand, respectively.as follows (in thousands):

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, ~~2020~~2021 as filed with the SEC on March ~~15, 2021~~10, 2022 and as disclosed in Part II, Item 1 of this Quarterly Report on Form 10-Q, ~~we are~~the Company is party to an action filed against usit 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 usthe Company for the purchase of vehicles that wethe Company 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~~The Company disputes and ~~believe we have~~believes it has meritorious defenses against these claims and plan to vigorously defend ~~ourselves.~~itself.

~~In February 2020, we agreed to engage in mediation with the plaintiffs and the mediation commenced in May 2021.~~ On ~~October 19, 2020,~~September 30, 2021, the Court granted plaintiffs’ motion for ~~judgment~~class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). There are approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes. The Company is currently awaiting a ruling from the Superior Court of Pennsylvania on its motion seeking permission to appeal the denial of its motion to dismiss the action for lack of standing. On February 8, 2022, plaintiffs filed a motion for partial summary judgement for most of the relief they seek. The Company filed a cross motion for summary judgement seeking the dismissal of a portion of the class and sought an offset in the form of recoupment which reduces any liability that may be imposed against the Company by the amounts that the borrowers owe to the Bank for failing to repay their motor vehicle loans. At this time, the briefing on the ~~pleadings dismissing our affirmative defense against one named~~motions for partial summary judgment is complete. Although the Court has indicated a hearing would be held on these motions, it has not been scheduled and the Company has no indication of when or if such a hearing will in fact be held. In addition, on April 25, 2022, the Pennsylvania Supreme Court declared unconstitutional a statute on which the Court may have based jurisdiction in this case. Therefore, on June 27, 2022, the Company has filed a motion for reconsideration of the Court's June 5, 2018 decision overruling the Company's preliminary objections based on lack of personal jurisdiction as to the New York ~~plaintiff~~plaintiffs. Plaintiffs have responded to that ~~his claim was time-barred under New York law, applying~~motion claiming an alternative basis for jurisdiction. Discovery is now ongoing and through a ~~six-year~~ ~~statute of limitations rather than~~Case Management Order dated February 10, 2022, it must be completed by October 3, 2022. Based on the ~~three years limitation period we had argued. The plaintiff’s motion for class certification was argued on June 16, 2021~~current schedule, pre-trial motions must be submitted by November 21, 2022, and the ~~motion remains pending.~~case must be ready for trial on March 6, 2023. The Company has not accrued a contingent liability for this matter at this time because, given its defenses, it is unable to conclude whether a liability is probable to occur nor is it able to currently reasonably estimate the amount of potential loss.

If ~~we settle~~the Company settles these claims or the action is not resolved in ~~our~~its favor, wethe Company may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by ~~our~~its existing insurance policies. WeThe Company can provide no assurances that ~~our~~its insurer will insure the legal costs, settlements or judgments ~~we incur~~it incurs in excess of ~~our~~its deductible. If ~~we are~~the Company is unsuccessful in defending ~~ourselves~~itself from these claims or if ~~our~~its insurer does not insure usthe Company against legal costs ~~we incur~~it incurs in excess of ~~our~~its deductible, the result may materially adversely affect ~~our~~the Company's 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 23 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~~management believes 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 six months ended June 30, 2020. There were 0 liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2020.

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 June 30, ~~2021~~2022 (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 six months ended June 30, ~~2021~~2022 and ~~2020.~~2021.

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.

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, ~~2020.~~2021. 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, ~~2020~~2021 (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:

•

~~Acquisitions may disrupt our business and dilute shareholder value;~~

•

We make certain assumptions and estimates in preparing our financial statements that may prove to be incorrect, which could significantly impact our results of operations, cash flows and financial condition, and we are subject to new or changing accounting rules and interpretations, and the failure by us to correctly interpret or apply these evolving rules and interpretations could have a material adverse effect;

•

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

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Table of Contents

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

•

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

•

We may be unable to successfully implement our growth strategies, including the integration and successful management of newly-acquired businesses;

•

Acquisitions may disrupt our business and dilute shareholder value;

•

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;

•

Negative public opinion could damage our reputation and impact business operations and revenues;

•

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;

•

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, and 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.

•

~~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;~~

•

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 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 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 operating 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~~The Bank also has a commercial loan production office in Ellicott City (Baltimore), Maryland, and 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.

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

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 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 these branches 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 ~~2021~~2022 Second Quarter Results

Net income ~~increased $9.1~~decreased $4.6 million to $15.6 million for the second quarter of 2022 compared to $20.2 million for the second quarter of ~~2021 compared to $11.1 million for the second quarter of 2020.~~2021. Net income available to common shareholders for the second quarter of ~~2021~~2022 was ~~$19.8~~$15.3 million, or ~~$1.25~~$0.99 per diluted share, compared with ~~$10.8~~$19.8 million, or ~~$0.67~~$1.25 per diluted share, for the second quarter of ~~last year.~~2021. Return on average common equity was ~~17.34%~~14.64% and return on average assets was ~~1.52%~~1.12% for the second quarter of ~~2021~~2022 compared to ~~10.11%~~17.34% and ~~0.97%~~1.52%, respectively, for the second quarter of ~~2020.~~2021.

~~Net income for both periods was significantly impacted by the benefit (provision) for credit losses.~~ The ~~increase~~decrease in net income for the second quarter of ~~2021 was driven by~~2022 reflected a ~~$4.6 million benefit~~$563 thousand provision for credit losses as compared to a ~~provision~~benefit of ~~$3.7~~$4.6 million in the second quarter of ~~2020. Continued improvement~~2021. Loan loss provision returned to a more normalized level in 2022, excluding a $2.0 million commercial loan recovery recognized in the ~~national unemployment forecast, positive trends in~~second quarter, due to the impact of qualitative factors reflecting economic uncertainty associated with higher interest rates and global political unrest, partially offset by lower net charge-offs, ~~resulted~~national unemployment trends and a reduction in overall specific reserve levels. Also contributing to the decrease in net income was a ~~release~~$5.9 million increase in noninterest expense, including $1.3 million of ~~credit loss reserves and~~restructuring charges related to the ~~corresponding benefit for credit losses~~current period fair value adjustments on five locations closed in ~~the quarter.~~2020.

Net interest income totaled $41.6 million in the second quarter of 2022, an increase of $3.9 million compared to $37.7 million in the second quarter of ~~2021, up from $34.2 million in~~2021. Average interest-earning assets for the second quarter of ~~2020. The increase was primarily the result of an increase in interest-earning assets, the positive impact of PPP loan forgiveness in~~2022 were $273.8 million higher than the second quarter of 2021 ~~and a decrease in interest expense. The decrease in interest expense was primarily~~ due to a ~~favorable shift~~$359.2 million increase in ~~deposit categories, with a lower allocation of time deposits, coupled with a lower interest-bearing cost of funds. Average Federal Reserve interest-earning cash,~~ average investment securities, and a $103.5 million increase in average loans, ~~were up $157.1~~partially offset by a $188.9 million ~~$290.3 million and $251.8 million, respectively,~~decrease in the ~~second quarter~~average balance of ~~2021 compared to the same quarter in 2020.~~Federal Reserve interest-earning cash.

The provision for credit losses - loans was ~~a $3.9 million benefit~~$446 thousand in the second quarter of ~~2021~~2022 compared to a ~~provision~~benefit of ~~$3.7~~$3.9 million in the second quarter of ~~2020.~~2021. Net recoveries during the recent quarter were ~~$394 thousand~~$1.0 million compared to ~~net charge-offs of $786~~$394 thousand in the second quarter of ~~2020.~~2021. During the second quarter of 2022, we recovered $2.0 million in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the fourth quarter of 2021. Net ~~charge-offs (recoveries)~~recoveries expressed as an annualized percentage of average loans outstanding ~~were (0.04)%~~was 0.11% during the second quarter of ~~2021~~2022 compared ~~with 0.09% in~~to 0.04% during the second quarter of ~~2020.~~2021. 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 ~~change in the~~ provision (benefit) for credit losses - loans and ~~the decrease in~~ net charge-offs.

Noninterest income totaled $11.4 million in the second quarter of 2022, compared to $10.2 million in the second quarter of ~~2021, compared to $9.7 million in the second quarter of 2020.~~2021. The increase in noninterest income for the second quarter of 2022 was primarily due to increases in ~~service charges on deposits, investment advisory~~ income ~~insurance income, income from investments in limited partnerships and card interchange income, partially offset by decreases in income (loss)~~ from derivative instruments, net and net gain (loss) on investment securities. Service charges on deposits was $807 thousand higher than the second quarter of 2020, primarily due to our COVID-19 relief initiatives of temporarily waiving or eliminating fees during the second quarter of 2020. Investment advisory income was $635 thousand higher than the second quarter of 2020, due to an increase in assets under management, driven by a combination of market gains, new customer accounts and contributions to existing accounts. Insurance income was $328 thousand higher than the second quarter of 2020 primarily due to the Landmark Group acquisition in 2021. Income from investments in limited partnerships of $238 thousand was recognized in the second quarter of 2021 as compared to a loss of $244 thousand in the second quarter of 2020. Card interchange income of $1.1 million was recognized in the second quarter of 2021 as compared to $819 thousand in the second quarter of 2020. Income (loss) from derivative instruments, net was $2.5 million lower than the second quarter of 2020.net. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed during the quarter combined with the impact of changes in the fair market value of borrower-facing trades. ~~A lower level~~

Table of interest swap transactions was executed during the quarter and fair market values were negatively impacted by the second quarter decrease in longer-term rates. Net gain (loss) on investment securities was a loss of $3 thousandContents

MANAGEMENT'S DISCUSSION AND ANALYSIS

Noninterest expense totaled $32.9 million in the second quarter of ~~2021~~2022, compared to ~~a net gain of $674 thousand in the second quarter of 2020.~~

~~Noninterest expense totaled~~ $26.9 million in the second quarter of ~~2021, compared to $26.6 million in the second quarter of 2020.~~2021. The increase in noninterest expense was primarily the result of increases in salaries and employee benefits expense, computer and data processing expense, ~~partially offset by a decrease~~restructuring charges, occupancy and equipment expense, and other expenses. The increase in salaries and employee benefits ~~expense.~~was primarily the result of investments in personnel, higher stock-based compensation expense, annual merit increases, along with wage pressures driven by the current competitive labor market. Computer and data processing expense increased ~~primarily due to increased investments~~as a result of our strategic investment in technology, including ~~costs related to the Bank’s online~~digital banking initiatives, a customer relationship management solution across all business lines, and ~~mobile platform, Five Star Bank Digital~~ Banking ~~launched in~~as a Service initiatives. In the second quarter of 2022, restructuring charges of $1.3 million were recognized in connection with the write-down of real estate assets to fair market value based upon existing purchase offers and current market conditions for five locations that were closed in the second half of 2020. The ~~decrease~~increase in ~~salaries~~occupancy and ~~employee benefits~~equipment expense ~~reflects~~was due to the ~~2020 streamlining~~purchase of ~~retail branches~~laptop computers to ~~better align with shifting customer needs~~support our flexible work model and ~~preferences,~~repairs and maintenance in the branch network. The increase in other expense was due to a number of factors, including inflation and the ~~decision~~outsourcing of certain functions previously handled internally. The increases are also partly attributable to ~~close~~the impacts of the pandemic receding as we began to see a ~~total of seven branches.~~return to normal activities in areas such as training, conferences, travel and entertainment.

The regulatory Common Equity Tier 1 Ratio and Total Risk-Based Capital Ratio were ~~10.38%~~10.29%, and ~~13.54%~~12.75%, respectively, at June 30, ~~2021.~~2022. 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.

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

~~Buffalo Branch Openings~~

~~Two new Five Star Bank branches opened~~On June 13, 2022, we announced a stock repurchase program for up to 766,447 shares of our common stock, or approximately 5% of our then outstanding common shares. Shares may be repurchased in ~~the City of Buffalo~~open market transactions and pursuant to any trading plan adopted in ~~June of 2021, consistent~~accordance with the Company’s long-term strategy to expand in the urban markets of Buffalo and Rochester. The branches are in vibrant commercial corridors at 451 Elmwood Avenue and 2222 Seneca Street, extending the reach of Five Star Bank’s distribution system in both northern and southern directions from the existing downtown branch.

~~The Company used green and energy efficient materials during the construction of these two new branches. Materials sourced~~Rule 10b5-1 for the ~~Elmwood Avenue~~Securities Exchange Act of 1934. The timing and ~~Seneca Street branches received certifications from Cradle~~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 us to ~~Cradle, Declare, Forest Stewardship Council, Green Square~~purchase any shares and ~~GreenGuard. Additionally, materials with a high percentage of recycled content were used when possible.~~it may be extended, modified, or discontinued at any time. No shares have been repurchased to-date under this 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 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 provided that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 made between March 1, 2020 and January 1, 2022 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. 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 was authorized for first-time borrowers and for second draws for certain borrowers who 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, a borrower with a federally backed mortgage loan that was experiencing financial hardship due to COVID-19 was able to request a forbearance until December 31, 2021.

•

~~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. 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, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance through September 30, 2021.~~

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.

•

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. ATM access fees were reinitiated on September 19, 2020.

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

~~As part of the first round of PPP~~

•

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

We helped more than ~~1,700~~2,900 customers obtain more than ~~$270~~$378 million in loans ~~as of December 31, 2020. Of those loans, we~~through the PPP. We have helped customers complete the forgiveness process for approximately ~~$183~~$369 million of these PPP loans.

We had $532.4 million of loans ~~in the first six months of 2021. Also,~~with modifications related to COVID-19 during ~~the first six months of 2021, we have helped customers obtain approximately $107~~2020, with $4.0 million ~~of new PPP loans under the second round of the PPP. Additionally,~~and $46.2 million still on deferral as of June 30, 2022 and December 31, 2021, respectively. We have provided payment deferrals for approximately ~~3% of our commercial~~6,600 borrowers, the majority being consumer indirect loan ~~and mortgage customers, 1% of our residential real estate loans and lines customers and less~~customers. Less than 1% of our ~~indirect loans~~loan customers have active payment deferrals ~~in accordance with~~as of June 30, 2022 as the ~~previously noted loan modifications under the CARES Act or agencies guidelines.~~majority of customers whose loans were subject to COVID-19 related deferrals have returned to making regular payments.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Net interest income is our primary source of revenue, comprising ~~77%~~79% and 78% of revenue during the three and six months ended June 30, ~~2021.~~2022, respectively. 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~~interest-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~~interest-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.

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 June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Interest income per consolidated statements of income	$	40,952	$	39,759	$	82,225	$	81,412	$	45,276	$	40,952	$	87,627	$	82,225
Adjustment to fully taxable equivalent basis		169		233		353		479		147		169		293		353
Interest income adjusted to a fully taxable equivalent basis		41,121		39,992		82,578		81,891		45,423		41,121		87,920		82,578
Interest expense per consolidated statements of income		3,220		5,578		6,636		14,107		3,679		3,220		6,472		6,636
Net interest income on a taxable equivalent basis	$	37,901	$	34,414	$	75,942	$	67,784	$	41,744	$	37,901	$	81,448	$	75,942

Analysis of Net Interest Income for the Three Months Ended June 30, ~~2021~~2022 and ~~2020~~2021

Net interest income on a taxable equivalent basis for the three months ended June 30, ~~2021,~~2022, was ~~$37.9~~$41.7 million, an increase of approximately ~~$3.5~~$3.8 million versus the comparable quarter last year of ~~$34.4~~$37.9 million. The increase in net interest income was primarily due to ~~increases~~an increase in ~~average loans and~~ average investment securities of ~~$251.8~~$359.2 million, or 7%34%, and ~~$290.3~~an increase in average loans of $103.5 million, or ~~38%~~3%, ~~respectively, compared to~~as well as the ~~second quarter~~impact of ~~2020, deferred fee amortization of $1.3 million~~the interest rate increases in 2022 having a positive impact on PPP loans, which included accelerated amortization of fees on PPP loans paid-off through the forgiveness process during the second quarter of 2021, and a decrease in interest expense of $2.4 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.yields. Average PPP loans, net of deferred fees were ~~$232.0~~$21.6 million for the three months ended June 30, ~~2021~~2022 compared to ~~$176.7~~$40.3 million for the three months ended June 30, ~~2020.~~2021. Revenue related to PPP loans was $262 thousand lower in the second quarter of 2022 than the second quarter of 2021. PPP loan balances are significantly lower in 2022 as a result of loan forgiveness.

Our net interest margin for the second quarter of ~~2021~~2022 was ~~3.06%~~3.19%, ~~17-basis~~13-basis points ~~lower~~higher than ~~3.23%~~3.06% for the same period in ~~2020.~~2021. This comparable period ~~decrease~~improvement was ~~a function~~primarily due to the impact of ~~an eight-basis point lower contribution from net free funds~~the interest rate increases that have occurred in 2022 and a ~~nine-basis point~~ decrease in the level of Federal Reserve interest ~~rate spread. The lower interest rate spread was a result of a 45-basis point decrease~~earning cash in comparison to the ~~yield on average interest-earning assets and a 36-basis point decrease in the cost of average interest-bearing liabilities.~~prior year.

For the second quarter of ~~2021,~~2022, the average yield on average interest earning assets of ~~3.31%~~3.47% was ~~45-basis~~16-basis points ~~lower~~higher than the second quarter of ~~2020~~2021 of ~~3.76%.~~3.31% due to the increase in market interest rates. Loan yields ~~decreased 16-basis~~increased 15-basis points during the second quarter of ~~2021~~2022 to 4.13% from 3.98% ~~from 4.14%.~~for the same period in 2021. The average yield on investment securities ~~decreased 72-basis~~increased 5-basis points during the second quarter of ~~2021~~2022 to 1.82% from 1.77% ~~from 2.49%.~~for the same period in 2021. Overall, a favorable volume variance increased interest income by ~~$4.0~~$2.8 million during the second quarter of ~~2021, while~~2022, and the interest earning asset rate changes ~~decreased~~increased interest income by ~~$2.9~~$1.5 million which collectively drove a ~~$1.1~~$4.3 million increase in interest income.

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

Average interest-earning assets were $5.25 billion for the second quarter of 2022 compared to $4.97 billion for the second quarter of 2021, ~~compared to $4.27 billion for the second quarter of 2020,~~ an increase of ~~$699.2~~$273.8 million, or ~~16%~~6%, from the comparable quarter last year, with average ~~loans~~securities up ~~$251.8~~$359.2 million from ~~$3.41~~$1.06 billion to ~~$3.67~~$1.42 billion and average ~~securities~~loans up ~~$290.3~~$103.5 million from ~~$766.6 million to $1.06 billion. The growth in average loans reflected increases in most loan categories. Commercial loans, in particular, were up $202.1 million from $1.89~~$3.67 billion to $2.09 billion, or 11%, from the second quarter of 2020. The average balances of PPP loans net of deferred fees, which are included in commercial loans, were $232.0 million and $176.7 million in the second quarter of 2021 and 2020, respectively. Residential real estate lines were down $16.6 million, or 17%, primarily due to consumer behavior, partially offset by an increase of $14.3 million, or 2%, in residential real estate loans. Consumer indirect loans increased by $51.9 million, or 6%, and other consumer loans increased by $201 thousand, or 1%. Loans comprised 73.7%$3.77 billion. Securities represented 27.0% of average interest-earning assets during the second quarter of ~~2021~~2022 compared to ~~79.9%~~21.3% during the second quarter of 2020. 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 3.98% for the second quarter of 2021, a decrease of 16-basis points compared to 4.14% for the comparable quarter in 2020. An increase in the volume of average loans resulted in a $2.6 million increase in interest income, partially offset by a $1.4 million decrease due to the unfavorable rate variance. Securities represented 21.3% of average interest-earning assets during the second quarter of 2021 compared to 17.9% during the second quarter of 2020.2021. The increase in investment securities is due to the redeployment of excess liquidity intended to benefit interest ~~income.~~income with the intent of reducing net interest margin compression relative to interest earned on federal funds sold and interest-earning deposits. Loans comprised 71.9% of average interest-earning assets during the second quarter of 2022 compared to 73.7% during the second quarter of 2021. Loans generally have significantly higher yields compared to other interest-earning assets and, as such, have a more positive effect on the net interest margin. The ~~unfavorable~~average yield on average loans was 4.13% for the second quarter of 2022, an increase of 15-basis points compared to 3.98% for the comparable quarter in 2021 due to the impact of the interest rate ~~variance~~increases that have occurred in 2022. An increase in the volume of average loans resulted in a ~~$1.5~~$1.3 million ~~decrease~~increase in interest income ~~from investment securities, partially offset by~~and a ~~$1.4~~$1.2 million increase due to ~~an increase in~~ the ~~average volume.~~favorable rate variance.

The average cost of average interest-bearing liabilities of 0.37% in the second quarter of 2022 compared to 0.35% in the second quarter of 2021, ~~compared to 0.71% in~~was 2-basis points higher and the ~~second quarter of 2020, was 36-basis points lower and the~~average cost of average interest-bearing deposits ~~decreased 38-basis~~increased one basis points from ~~0.62%~~0.24% to ~~0.24%~~0.25%.

Average ~~short-term borrowings decreased $110.3 million from $110.3 million to $0 in~~interest-bearing liabilities were $3.95 billion for the second quarter of ~~2021~~2022, 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$3.71 billion for the second quarter of 2021, ~~decreased 56-basis points~~an increase of $236.0 million, or 6%. On average, interest-bearing deposits grew $141.5 million from ~~6.29% to 5.73% compared to the same quarter of 2020. Overall, interest-bearing liability rate and volume changes resulted in $2.4 million of lower interest expense.~~

~~Average interest-bearing liabilities of $3.71~~$3.64 billion infor the second quarter of 2021 ~~were $532.8 million, or 17%, higher than~~to $3.78 billion for the second quarter of 2020. On average, interest-bearing deposits grew $608.6 million from $3.03 billion to $3.64 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up $179.3 million from $912.2 million to $1.09 billion.current quarter. The increase in average deposits was primarily due ~~an increase in reciprocal deposit programs and~~ to growth in non-public, ~~demand.~~public, and brokered deposits, partially offset by a decline in reciprocal deposits. 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 ~~$2.5 million decrease~~$458 thousand increase in interest expense during the second quarter of ~~2021,~~2022, primarily due to the overall ~~lower interest~~higher rate market conditions. Average borrowings decreased $75.9 million from $149.6 million to $73.7 million compared to the second quarter of 2020. Overall, short and long-term borrowing rate and volume changes resulted in $154 thousand of higher interest expense during the second quarter of 2021.

Analysis of Net Interest Income for the Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021

Net interest income on a taxable equivalent basis for the six months ended June 30, ~~2021,~~2022, was ~~$75.9~~$81.4 million, an increase of ~~$8.2~~$5.5 million versus the comparable ~~period~~quarter last year of ~~$67.8~~$75.9 million. The increase in net interest income was primarily due ~~primarily~~ to ~~deferred fee amortization of $4.2 million on PPP loans, which included accelerated amortization of fees on PPP loans paid-off through the forgiveness process, increases~~an increase in ~~average loans and~~ average investment securities of ~~$334.9~~$431.9 million, or ~~10%, and $212.9 million, or 28%, respectively,~~43.8% compared to the ~~first~~ six months ~~of 2020,~~ended June 30, 2021, an $86.7 million increase in average loans, and a decrease in interest expense of ~~$7.5 million.~~$164 thousand. The decrease in interest expense was primarily ~~due to a favorable shift in deposit categories, with a lower allocation~~the result of continued repricing of time deposits ~~coupled with a~~at lower ~~interest-bearing cost of funds.~~rates throughout 2021 and into 2022. Average PPP loans, net of deferred fees were $30.9 million for the six months ended June 30, 2022 compared to $240.2 million for the six months ended June 30, ~~2021 compared~~2021. Revenue related to ~~$88.3~~PPP loans was $3.8 million lower in the first six months of 2022 than the first six months of 2021. PPP loan balances are significantly lower in 2022 as a result of loan forgiveness and repayment process.

Our net interest margin for the six months ended June 30, ~~2020.~~

~~The net interest margin for the first six months of 2021~~2022 was ~~3.17%~~3.15%, ~~ten-basis~~two basis points lower than ~~3.27%~~3.17% for the same period in ~~2020.~~2021. This comparable period decrease was a ~~function~~combination of a ~~13-basis~~one basis point ~~lower contribution from net free funds, partially offset by a three-basis point increase~~decrease in the interest rate ~~spread.~~spread and a one basis point decrease in the contribution of interest-free funds. The ~~higher~~lower interest rate spread was a result of a ~~50-basis~~five basis point decrease in the average yield on average interest-earning assets and a ~~53-basis~~four basis point decrease in the average cost of average interest-bearing liabilities.

For the ~~first~~ six months ~~of 2021,~~ended June 30, 2022, the average yield on average interest earning assets of ~~3.45%~~3.40% was ~~50-basis~~five basis points lower than the ~~first~~ six months ended June 30, 2021 of ~~2020 of 3.95%~~3.45%. ~~Loan yields decreased 32-basis points during~~The average loan yield remained consistent at 4.05% for the ~~first~~ six months ~~of 2021 to 4.05% from 4.37%.~~ended June 30, 2022 and 2021. The average yield on investment securities decreased ~~65-basis~~five basis points during the ~~first~~ six months ~~of 2021~~ended June 30, 2022, to 1.78% from 1.83% ~~from 2.48%.~~for the comparable six month period last year. Overall, ~~a favorable~~ volume ~~variance~~variances in average interest-earning assets and average interest-bearing liabilities increased net interest income by ~~$9.1~~$4.9 million during the ~~first~~ six months ~~of 2021,~~ended June 30, 2022, while the ~~earning asset~~interest-bearing deposit rate changes decreased interest ~~income~~expense by ~~$8.4 million,~~$617 thousand which, ~~collectively~~along with other rate/yield variances, drove a ~~$687~~$568 thousand increase in net interest income.

~~- 49 -~~

~~Table of Contents~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Average interest-earning assets were $5.21 billion for the six months ended June 30, 2022 compared to $4.82 billion for the ~~first~~ six months ofended June 30, 2021, ~~compared to $4.16 billion for the first six months of 2020,~~ an increase of ~~$658.6~~$384.6 million, or ~~16%~~8.0%, from the comparable six month period last year, with average ~~loans~~securities up ~~$334.9~~$431.9 million from ~~$3.31 billion~~$986.1 million to ~~$3.65~~$1.42 billion and average ~~securities~~loans up ~~$212.9~~$86.7 million from ~~$773.3 million to $986.1 million. The growth in average loans reflected increases in most loan categories. Commercial loans, in particular, were up $306.9 million from $1.78~~$3.65 billion to $2.09 billion, or 17%, from the first six months of 2020. The average balances of PPP loans net of deferred fees, which are included in commercial loans, were $240.2 million and $88.3 million in the first six months of 2021 and 2020, respectively. Residential real estate loans were up $19.3 million, or 3%, partially offset by a decrease of $15.8 million, or 16%, in residential real estate lines. Consumer indirect loans increased by $24.1 million, or 3%, and other consumer loans increased by $450 thousand, or 3%. Loans$3.74 billion. Securities represented ~~75.7%~~27.7% of average interest-earning assets during the ~~first~~ six months ~~of 2021~~ended June 30, 2022 compared to ~~79.6%~~20.4% during the ~~first~~ six months ended June 30, 2021. The increase in investment securities was due to the redeployment of ~~2020.~~excess liquidity intended to benefit interest income with the intent of reducing net interest margin compression versus federal funds sold and interest-earning deposits. Loans comprised 71.8% of average interest-earning assets during the six months ended June 30, 2022 compared to 75.7% during the six months ended June 30, 2021. Loans generally have significantly higher yields compared to ~~securities and federal funds sold and interest-bearing deposits~~other interest-earning assets and, as such, have a more positive effect on the net interest margin. ~~The yield on average loans was 4.05% for the first six months of 2021, a decrease of 32-basis points compared to 4.37% for first six months of 2020.~~ An increase in the volume of average loans resulted in a ~~$6.9~~$2.1 million increase in interest income, which was partially offset by a $5.5 million decrease due to the unfavorable rate variance. Securities represented 20.4% of average interest-earning assets during first six months of 2021 compared to 18.6% during the first six months of 2020. The increase in investment securities is due to the redeployment of excess liquidity intended to benefit interest income. The unfavorable rate variance resulted in a $2.6 million$407 thousand decrease in interest income ~~from investment securities, partially offset by a $2.1 million increase~~ due to ~~an increase~~changes in ~~the average volume.~~interest rates.

The average cost of average interest-bearing liabilities ofwas 0.33% in the six months ended June 30, 2022 compared to 0.37% in the ~~first~~ six months ofended June 30, 2021 ~~compared to 0.90% in~~and the ~~first six months of 2020 was 53-basis points lower and the~~average cost of average interest-bearing deposits decreased ~~54-basis~~three basis points from ~~0.79%~~0.25% to ~~0.25%~~0.22%. ~~Average short-term borrowings decreased $139.5 million from $140.0 million to $585 thousand in the first six months~~

Table of 2021 compared to the same period 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 first six months of 2021 decreased 54-basis points from 6.29% to 5.75% in the first six months of 2021 compared to the same period of 2020. Overall, interest-bearing liability rate and volume decreases resulted in $7.5 million of lower interest expense.Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

Average interest-bearing liabilities of ~~$3.58~~$3.92 billion in the ~~first~~ six months ~~of 2021~~ended June 30, 2022 were ~~$425.7~~$339.3 million, or ~~14%~~9.5%, higher than the ~~first~~ six months ~~of 2020.~~ended June 30, 2021. On average, interest-bearing deposits grew ~~$530.8~~$279.9 million from ~~$2.98~~$3.51 billion to ~~$3.51~~$3.79 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up ~~$251.1~~$22.6 million from ~~$817.1 million~~$1.07 billion to ~~$1.07~~$1.09 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 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 ~~$7.3 million of lower~~a $164 thousand decrease in interest expense during the ~~first~~ six months ~~of 2021,~~ended June 30, 2022, primarily due to the ~~overall lower~~lag in the re-pricing of time deposits, which resulted in higher interest expense in the prior year than current year despite the recent interest rate market conditions. Average borrowings decreased $105.1 million from $179.3 million to $74.3 million compared to the first six months of 2020. Overall, short and long-term borrowing rate and volume changes resultedincreases experienced in ~~$175 thousand of lower interest expense during the first six months of 2021.~~2022.

~~- 50 -~~

~~Table of Contents~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

The following tables ~~sets~~set 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~~(dollars in thousands). Average balances were derived from daily balances.


	Three months ended June 30,																Three months ended June 30,
	2021								2020								2022								2021
	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	$	249,312		$	61		0.10	%	$	92,214		$	24		0.10	%	$	60,429		$	109		0.72	%	$	249,312		$	61		0.10	%
Investment securities ⁽¹⁾:
Taxable		925,649			3,863		1.67			585,970			3,662		2.50			1,307,507			5,746		1.76			925,649			3,863		1.67
Tax-exempt ⁽²⁾		131,249			804		2.45			180,666			1,109		2.46			108,558			694		2.56			131,249			804		2.45
Total investment securities		1,056,898			4,667		1.77			766,636			4,771		2.49			1,416,065			6,440		1.82			1,056,898			4,667		1.77
Loans:
Commercial business		791,412			7,006		3.55			757,588			6,537		3.47			626,574			6,568		4.20			791,412			7,006		3.55
Commercial mortgage		1,302,136			12,914		3.98			1,133,832			12,185		4.32			1,429,910			15,020		4.21			1,302,136			12,914		3.98
Residential real estate loans		595,925			5,088		3.42			581,651			5,333		3.67			576,990			4,821		3.34			595,925			5,088		3.42
Residential real estate lines		82,926			711		3.44			99,543			922		3.72			76,730			671		3.51			82,926			711		3.44
Consumer indirect		878,884			10,282		4.69			827,030			9,799		4.77			1,045,720			11,422		4.38			878,884			10,282		4.69
Other consumer		15,356			392		10.23			15,155			421		11.19			14,183			372		10.49			15,356			392		10.23
Total loans		3,666,639			36,393		3.98			3,414,799			35,197		4.14
Total loans (3)																		3,770,107			38,874		4.13			3,666,639			36,393		3.98
Total interest-earning assets		4,972,849			41,121		3.31			4,273,649			39,992		3.76			5,246,601			45,423		3.47			4,972,849			41,121		3.31
Less: Allowance for credit losses		(52,048	)							(44,585	)							(42,292	)							(52,048	)
Other noninterest-earning assets		419,944								395,296								393,908								419,944
Total assets	$	5,340,745							$	4,624,360							$	5,598,217							$	5,340,745
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	842,832		$	301		0.14	%	$	712,300			242		0.14	%	$	938,995			292		0.12	%	$	842,832			301		0.14	%
Savings and money market		1,856,659			862		0.19			1,329,632			1,041		0.31			1,882,998			1,098		0.23			1,856,659			862		0.19
Time deposits		935,885			1,002		0.43			984,832			3,394		1.39			954,862			976		0.41			935,885			1,002		0.43
Total interest-bearing deposits		3,635,376			2,165		0.24			3,026,764			4,677		0.62			3,776,855			2,366		0.25			3,635,376			2,165		0.24
Short-term borrowings		—			—		—			110,272			284		1.03			94,242			252		1.07			—			—		—
Long-term borrowings		73,709			1,055		5.73			39,297			617		6.29			74,019			1,061		5.73			73,709			1,055		5.73
Total borrowings		73,709			1,055		5.73			149,569			901		2.41			168,261			1,313		3.13			73,709			1,055		5.73
Total interest-bearing liabilities		3,709,085			3,220		0.35			3,176,333			5,578		0.71			3,945,116			3,679		0.37			3,709,085			3,220		0.35
Noninterest-bearing demand deposits		1,091,490								912,238								1,098,084								1,091,490
Other noninterest-bearing liabilities		63,984								90,350								119,093								63,984
Shareholders’ equity		476,186								445,439								435,924								476,186
Total liabilities and shareholders’ equity	$	5,340,745							$	4,624,360							$	5,598,217							$	5,340,745
Net interest income (tax-equivalent)				$	37,901							$	34,414							$	41,744							$	37,901
Interest rate spread							2.96	%							3.05	%							3.10	%							2.96	%
Net earning assets	$	1,263,764							$	1,097,316							$	1,301,485							$	1,263,764
Net interest margin (tax-equivalent)							3.06	%							3.23	%							3.19	%							3.06	%
Ratio of average interest-earning assets to average interest-bearing liabilities							134.07	%							134.55	%							132.99	%							134.07	%

⁽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%.~~

~~- 51 -~~50

Table of Contents

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

Six months ended
June 30,

2021

2020

Average
Balance

Interest

Average
Rate

Average
Balance

Interest

Average
Rate

Interest-earning assets:

Federal funds sold and interest-earning deposits

$
186,526

$
88

0.10
%

$
75,761

$
235

0.62
%
Investment securities (1):

Taxable

849,428

7,359

1.73

587,576

7,319

2.49

Tax-exempt (2)

136,698

1,679

2.46

185,689

2,280

2.46

Total investment securities

986,126

9,038

1.83

773,265

9,599

2.48

Loans:

Commercial business

795,119

15,419

3.91

664,237

13,051

3.95

Commercial mortgage

1,293,262

25,159

3.92

1,117,247

25,499

4.59

Residential real estate loans

599,376

10,348

3.45

580,029

10,781

3.72

Residential real estate lines

85,290

1,456

3.44

101,111

2,105

4.19

Consumer indirect

860,978

20,270

4.75

836,915

19,718

4.74

Other consumer

15,760

800

10.24

15,310

903

11.87

Total loans

3,649,785

73,452

4.05

3,314,849

72,057

4.37

Total interest-earning assets

4,822,437

82,578

3.45

4,163,875

81,891

3.95

Less: Allowance for loan losses

(53,018
)

(42,600
)

Other noninterest-earning assets

424,360

378,968

Total assets

$
5,193,779

$
4,500,243

Interest-bearing liabilities:

Deposits:

Interest-bearing demand

$
817,058

$
557

0.14
%

$
689,917

$
586

0.17
%
Savings and money market

1,790,983

1,752

0.20

1,236,630

2,622

0.43

Time deposits

900,103

2,091

0.47

1,050,784

8,488

1.62

Total interest-bearing deposits

3,508,144

4,400

0.25

2,977,331

11,696

0.79

Short-term borrowings

585

119

41.07

140,049

1,176

1.69

Long-term borrowings

73,673

2,117

5.75

39,288

1,235

6.29

Total borrowings

74,258

2,236

6.02

179,337

2,411

2.70

Total interest-bearing liabilities

3,582,402

6,636

0.37

3,156,668

14,107

0.90

Noninterest-bearing demand deposits

1,068,240

817,106

Other noninterest-bearing liabilities

70,705

83,141

Shareholders’ equity

472,432

443,328

Total liabilities and shareholders’ equity

$
5,193,779

$
4,500,243

Net interest income (tax-equivalent)

$
75,942

$
67,784

Interest rate spread

3.08
%

3.05
%
Net earning assets

$
1,240,035

$
1,007,207

Net interest margin (tax-equivalent)

3.17
%

3.27
%
Ratio of average interest-earning assets to average
interest-bearing liabilities

134.61
%

131.91
%

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

~~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%.~~

~~- 52 -~~(2) The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.

(3) Loans include net unearned income, net deferred loan fees and costs and non-accruing loans. Net deferred loan fees (costs) included in interest income were as follows (in thousands):


	Three months ended June 30,
	2022			2021
Commercial business	$	737		$	1,531
Commercial mortgage		607			440
Residential real estate loans		(459	)		(556	)
Residential real estate lines		(81	)		(99	)
Consumer indirect		(591	)		(408	)
Other consumer		4			(1	)
Total	$	217		$	907

Table of Contents

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


	Six months ended June 30,
	2022								2021
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	52,538		$	127		0.49	%	$	186,526		$	88		0.10	%
Investment securities (1):
Taxable		1,308,310			11,233		1.72			849,428			7,359		1.73
Tax-exempt (2)		109,686			1,389		2.53			136,698			1,679		2.46
Total investment securities		1,417,996			12,622		1.78			986,126			9,038		1.83
Loans:
Commercial business		627,241			12,572		4.04			795,119			15,419		3.91
Commercial mortgage		1,430,916			28,557		4.02			1,293,262			25,159		3.92
Residential real estate loans		578,994			9,642		3.33			599,376			10,348		3.45
Residential real estate lines		77,167			1,350		3.53			85,290			1,456		3.44
Consumer indirect		1,007,791			22,297		4.46			860,978			20,270		4.75
Other consumer		14,356			753		10.57			15,760			800		10.24
Total loans (3)		3,736,465			75,171		4.05			3,649,785			73,452		4.05
Total interest-earning assets		5,206,999			87,920		3.40			4,822,437			82,578		3.45
Less: Allowance for credit losses		(41,548	)							(53,018	)
Other noninterest-earning assets		413,920								424,360
Total assets		5,579,371							$	5,193,779
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	931,253		$	575		0.12	%	$	817,058		$	557		0.14	%
Savings and money market		1,915,344			1,884		0.20			1,790,983			1,752		0.20
Time deposits		941,448			1,612		0.35			900,103			2,091		0.47
Total interest-bearing deposits		3,788,045			4,071		0.22			3,508,144			4,400		0.25
Short-term borrowings		59,649			280		0.95			585			119		41.07
Long-term borrowings		73,980			2,121		5.73			73,673			2,117		5.75
Total borrowings		133,629			2,401		3.62			74,258			2,236		6.02
Total interest-bearing liabilities		3,921,674			6,472		0.33			3,582,402			6,636		0.37
Noninterest-bearing demand deposits		1,090,835								1,068,240
Other noninterest-bearing liabilities		103,128								70,705
Shareholders’ equity		463,734								472,432
Total liabilities and shareholders’ equity	$	5,579,371							$	5,193,779
Net interest income (tax-equivalent)				$	81,448							$	75,942
Interest rate spread							3.07	%							3.08	%
Net earning assets	$	1,285,325							$	1,240,035
Net interest margin (tax-equivalent)							3.15	%							3.17	%
Ratio of average interest-earning assets to average interest-bearing liabilities							132.77	%							134.61	%

(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%.

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

(3) Loans include net unearned income, net deferred loan fees and costs and non-accruing loans. Net deferred loan fees (costs) included in interest income were as follows (in thousands):


	Six months ended June 30,
	2022			2021
Commercial business	$	1,706		$	4,447
Commercial mortgage		983			694
Residential real estate loans		(963	)		(1,070	)
Residential real estate lines		(154	)		(202	)
Consumer indirect		(1,016	)		(732	)
Other consumer		9			(1	)
Total	$	565		$	3,136

Table of Contents

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):. No out-of-period adjustments were included in the rate/volume analysis.


	Three months ended June 30, 2021 vs. 2020									Six months ended June 30, 2021 vs. 2020									Three months ended June 30, 2022 vs. 2021									Six months ended June 30, 2022 vs. 2021
Increase (decrease) in:	Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total
Interest income:
Federal funds sold and interest-earning deposits	$	38		$	(1	)	$	37		$	159		$	(306	)	$	(147	)	$	(77	)	$	125		$	48		$	(102	)	$	141		$	39
Investment securities:
Taxable		1,675			(1,474	)		201			2,672			(2,632	)		40			1,668			215			1,883			3,941			(67	)		3,874
Tax-exempt		(303	)		(2	)		(305	)		(602	)		1			(601	)		(144	)		34			(110	)		(341	)		51			(290	)
Total investment securities		1,372			(1,476	)		(104	)		2,070			(2,631	)		(561	)		1,524			249			1,773			3,600			(16	)		3,584
Loans:
Commercial business		296			173			469			2,540			(172	)		2,368			(1,602	)		1,164			(438	)		(3,350	)		503			(2,847	)
Commercial mortgage		1,717			(988	)		729			3,711			(4,051	)		(340	)		1,314			792			2,106			2,734			664			3,398
Residential real estate loans		129			(374	)		(245	)		352			(785	)		(433	)		(160	)		(107	)		(267	)		(346	)		(360	)		(706	)
Residential real estate lines		(146	)		(65	)		(211	)		(302	)		(347	)		(649	)		(54	)		14			(40	)		(141	)		35			(106	)
Consumer indirect		608			(125	)		483			567			(15	)		552			1,856			(716	)		1,140			3,302			(1,275	)		2,027
Other consumer		6			(35	)		(29	)		26			(129	)		(103	)		(31	)		10			(21	)		(73	)		26			(47	)
Total loans		2,610			(1,414	)		1,196			6,894			(5,499	)		1,395			1,323			1,157			2,480			2,126			(407	)		1,719
Total interest income		4,020			(2,891	)		1,129			9,123			(8,436	)		687			2,770			1,531			4,301			5,624			(282	)		5,342
Interest expense:
Deposits:
Interest-bearing demand		46			13			59			98			(127	)		(29	)		32			(41	)		(9	)		74			(56	)		18
Savings and money market		330			(509	)		(179	)		887			(1,757	)		(870	)		12			224			236			122			10			132
Time deposits		(161	)		(2,231	)		(2,392	)		(1,072	)		(5,325	)		(6,397	)		20			(46	)		(26	)		92			(571	)		(479	)
Total interest-bearing deposits		215			(2,727	)		(2,512	)		(87	)		(7,209	)		(7,296	)		64			137			201			288			(617	)		(329	)
Short-term borrowings		(142	)		(142	)		(284	)		(2,289	)		1,232			(1,057	)		252			—			252			389			(228	)		161
Long-term borrowings		497			(59	)		438			996			(114	)		882			4			1			5			9			(5	)		4
Total borrowings		355			(201	)		154			(1,293	)		1,118			(175	)		256			1			257			398			(233	)		165
Total interest expense		570			(2,928	)		(2,358	)		(1,380	)		(6,091	)		(7,471	)		320			138			458			686			(850	)		(164	)
Net interest income	$	3,450		$	37		$	3,487		$	10,503		$	(2,345	)	$	8,158		$	2,450		$	1,393		$	3,843		$	4,938		$	568		$	5,506

~~Provision~~Provision/Benefit for Credit Losses

The provision for credit losses for the three and six months ended June 30, ~~2021 were benefits~~2022 was $0.6 million and $2.9 million, respectively, compared to benefit for credit losses of $4.6 million and $6.6 million ~~respectively, compared to provisions of $3.7 million and $17.7 million~~ for the corresponding periods in ~~2020. The benefits~~2021. Included in the second quarter of 2022 was a $2.0 million recovery in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the second quarter of 2021. Loan loss provision returned to a more normalized level in 2022, excluding the commercial loan recovery recognized this quarter, due to the impact of qualitative factors reflecting economic uncertainty associated with higher interest rates and ~~first six months of~~global political unrest, partially offset by low net charge-offs, national unemployment trends and a reduction in overall specific reserve levels. The benefits in 2021 were due to ~~continued~~ improvement in the national unemployment forecast following the initial impact of the COVID-19 pandemic, the designated loss driver for our current expected credit loss ~~(“CECL”~~("CECL") model, and positive trends in qualitative factors, resulting in ~~releases~~a release of credit loss reserves. The provisions in the second quarter and first six months of 2020 was driven by the adoption of the CECL standard and the impact of the COVID-19 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.

~~- 53 -~~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 June 30,						Six months ended June 30,					Three months ended June 30,						Six months ended June 30,
	2021			2020			2021		2020			2022			2021			2022			2021
Service charges on deposits	$	1,287		$	480		$	2,579	$	2,067		$	1,437		$	1,287		$	2,806		$	2,579
Insurance income		1,147			819			2,543		2,168			1,234			1,147			3,331			2,543
Card interchange income		2,194			1,776			4,152		3,378			2,103			2,194			4,055			4,152
Investment advisory		2,886			2,251			5,658		4,497			2,906			2,886			5,947			5,658
Company owned life insurance		693			462			1,350		927			869			693			1,702			1,350
Investments in limited partnerships		238			(244	)		1,093		(31	)		242			238			1,037			1,093
Loan servicing		91			50			188		57			135			91			244			188
Income (loss) from derivative instruments, net		(592	)		1,940			1,283		2,686			645			(592	)		1,164			1,283
Net gain on sale of loans held for sale		790			612			1,868		864			828			790			737			1,868
Net gain (loss) on investment securities		(3	)		674			71		895
Net gain (loss) on other assets		153			(1	)		148		63
Net gain (loss) on tax credit investments		276			(40	)		191		(80	)
Net (loss) gain on investment securities													(15	)		(3	)		(15	)		71
Net gain on other assets													7			153			7			148
Net (loss) gain on tax credit investments													(92	)		276			(319	)		191
Other		1,030			934			2,025		2,132			1,061			1,030			1,986			2,025
Total noninterest income	$	10,190		$	9,713		$	23,149	$	19,623		$	11,360		$	10,190		$	22,682		$	23,149

~~Service charges on deposits~~Insurance income increased ~~$807~~$87 thousand, or 8%, to ~~$1.3~~$1.2 million for the second quarter of ~~2021,~~2022 compared to $480 thousand for the second quarter of 2020. For the first six months of 2021, service charges on deposits increased $512 thousand, or 25%, to $2.6 million compared to $2.1 million for the first six months of 2020. The increases were the result of our COVID-19 relief initiatives of temporarily waiving or eliminating fees during the second quarter of 2020.

~~Insurance income increased $328 thousand, or 40%,~~ to $1.1 million for the second quarter of ~~2021 compared to $819 thousand for the second quarter of 2020.~~2021. For the first six months of ~~2021,~~2022, insurance income increased ~~$375~~$788 thousand, or 31%, to ~~$2.5~~$3.3 million compared to ~~$2.2~~$2.5 million for the first six months of ~~2020.~~2021. The ~~increases were primarily due to acquisition of~~increase was driven by the two 2021 bolt on acquisitions (North Woods in August 2021 and Landmark ~~Group~~in February 2021), growth in the ~~first quarter~~legacy SDN business, including the impact of ~~2021.~~increasing insurance premiums, and higher contingent revenues in 2022.

~~Card interchange~~Company owned life insurance income increased ~~$418~~$176 thousand, or ~~40%~~25%, to ~~$2.2 million~~$869 thousand for the second quarter of ~~2021,~~2022 compared to ~~$1.8 million~~$693 thousand for ~~the~~ second quarter of ~~2020.~~2021. For the first six months of ~~2021, card interchange~~2022, company owned life insurance income increased ~~$774~~$352 thousand, or ~~23%,~~26% to ~~$4.2~~$1.7 million compared to ~~$3.4~~$1.4 million for the first six months of ~~2020. The increases were primarily due to an increase~~2021. We made additional investments in ~~customer transactions.~~

~~Investment advisory income increased $635 thousand, or 28%, to $2.9~~company-owned life insurance of $20.0 million ~~for~~in the ~~second~~third quarter of 2021 ~~compared~~ to ~~$2.3 million for the second quarter~~take advantage of ~~2020. For the first six months of 2021, investment advisory income~~attractive tax-equivalent yields and partially offset employee benefit expenses.

Income (loss) from derivative instruments, net, increased $1.2 million, or ~~26%~~209%, to $5.7 million compared to $4.5 million for the first six months of 2020. The increases were 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.

~~Income (loss) from investments in limited partnerships increased $482 thousand,~~ to income of ~~$238~~$645 thousand for the second quarter of ~~2021~~2022 compared to a loss of $244 thousand for the second quarter of 2020. For the first six months of 2021, income (loss) from investments in limited partnerships increased $1.1 million, to income of $1.1 million compared to a loss of $31 thousand for the first six months of 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 (loss) from derivative instruments, net decreased $2.5 million~~ to a loss of $592 thousand for the second quarter of ~~2021 compared to income of $1.9 million for the second quarter of 2020.~~2021. For the first six months of ~~2021,~~2022, income from derivative instruments, net decreased ~~$1.4 million~~$119 thousand, or 9%, to ~~$1.3~~$1.2 million compared to ~~$2.7~~$1.3 million for the first six months of ~~2020.~~2021. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed during the ~~quarter~~period combined with the impact of changes in the fair market value of borrower-facing trades. ~~A lower level of interest rate swap transactions was executed during the second quarter of 2021 and fair market values were negatively impacted by the decrease in longer-term interest rates in 2021.~~

Net gain ~~(loss)~~ on ~~investment securities~~sale of loans held for sale was ~~a loss of $3~~$828 thousand for the second quarter of ~~2021~~2022 compared to ~~a gain of $674~~$790 thousand for the second quarter of ~~2020.~~2021. For the first six months of ~~2021,~~2022, net gain on ~~investment securities~~sale of loans held for sale was ~~$71~~$737 thousand compared to ~~$895 thousand~~$1.9 million for the first six months of ~~2020. The net gains~~2021. Included in the second quarter of 2022 was a gain of $586 thousand related to the sale of a $31.2 million portfolio of indirect loans. Sales volumes and margins for residential loans have moderated in 2022, following historically high levels in 2021 as a result of the rising interest rate environment.

Net (loss) gain on tax credit investments was a net loss of $92 thousand for the second quarter of 2022, compared to a $276 thousand net gain for the second quarter of 2021. For the first six months of ~~2020 were primarily attributable~~2022, net (loss) gain on tax credit investments was a net loss of $319 thousand compared to a $191 thousand net gain for the ~~management~~first six months of ~~premium risk, largely achieved through~~2021. These losses include the ~~sale~~amortization of ~~$25.9 million of fixed rate mortgage backed securities with higher expected prepayment speeds. Proceeds were reinvested~~tax credit investments, partially offset by New York investment tax credits that are refundable and recorded in ~~current coupon bonds, with lower anticipated prepayment behavior.~~noninterest income.

~~- 54 -~~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 June 30,				Six months ended June 30,				Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Salaries and employee benefits	$	14,519	$	15,074	$	28,984	$	30,088	$	16,966	$	14,519	$	33,582	$	28,984
Occupancy and equipment		3,286		3,388		6,668		7,144		4,015		3,286		7,771		6,668
Professional services		1,603		1,580		3,498		3,732		1,269		1,603		2,925		3,498
Computer and data processing		3,460		2,699		6,581		5,372		4,573		3,460		8,552		6,581
Supplies and postage		430		517		914		1,070		469		430		1,010		914
FDIC assessments		480		539		1,245		911		621		480		1,134		1,245
Advertising and promotions		436		545		760		1,100		406		436		786		760
Amortization of intangibles		266		287		537		581		249		266		503		537
Restructuring charges										1,269		-		1,269		-
Other		2,464		1,946		4,497		4,247		3,050		2,464		5,490		4,497
Total noninterest expense	$	26,944	$	26,575	$	53,684	$	54,245	$	32,887	$	26,944	$	63,022	$	53,684

Salaries and employee benefits expense ~~decreased by $555 thousand,~~increased $2.4 million, or 4%17%, to $17.0 million for the second quarter of 2022 compared to $14.5 million for the second quarter of ~~2021 compared to $15.1 million for the second quarter of 2020.~~2021. For the first six months of ~~2021,~~2022, salaries and employee benefits expense ~~decreased by $1.1~~increased $4.6 million, or 4%16%, to ~~$29.0~~$33.6 million compared to ~~$30.1~~$29.0 million for the first six months of ~~2020.~~2021. The ~~decreases reflect a streamlining~~increase in salaries and employee benefits expense was primarily the result of ~~retail branches~~investments in personnel, higher stock-based compensation expense, and annual merit increases, along with wage pressures driven by the current competitive labor market.

Occupancy and equipment expense increased $0.7 million, or 22%, to ~~better align with shifting customer needs and preferences, including the closure of seven branches since~~$4.0 million for the second quarter of ~~2020.~~2022 compared to $3.3 million for the second quarter of 2021. For the first six months of 2022, occupancy and equipment expense increased $1.1 million, or 17%, to $7.8 million compared to $6.7 million for the first six months of 2021. The increase in occupancy and equipment expense in 2022 was primarily due to the purchase of laptop computers in the second quarter of 2022 to support our flexible work model, as well as repairs and maintenance in the branch network.

Professional services expense decreased $334 thousand, or 20.8%, to $1.3 million for the second quarter of 2022 compared to $1.6 million for the second quarter of 2021. For the first six months of 2022, professional services expense decreased $573 thousand, or 16.4%, to $2.9 million compared to $3.5 million for the first six months of 2021. The decrease in professional services expense was primarily as a result of higher expense incurred in the prior year for enterprise standardization expense and miscellaneous consulting fees.

Computer and data processing expense increased ~~$761 thousand,~~$1.1 million, or ~~28%~~32%, to $4.6 million for the second quarter of 2022 compared to $3.5 million for the second quarter of ~~2021 compared to $2.7 million for the second quarter of 2020.~~2021. For the first six months of ~~2021,~~2022, computer and data processing expense increased ~~$1.2~~$2.0 million, or ~~23%~~30%, to ~~$6.6~~$8.6 million compared to ~~$5.4~~$6.6 million for the first six months of ~~2020.~~2021. The ~~increases were primarily due to investments~~increase was a result of our strategic investment in technology, including ~~costs related to the Bank’s ongoing~~ digital banking initiatives, a customer relationship management solution across all lines of business, and Banking as a Service (BaaS) initiatives.

Restructuring charges of $1.3 million were recognized in the second quarter of 2022 in connection with the write-down of real estate assets to fair market value based upon existing purchase offers and current market conditions for five locations that were closed in the second half of 2020.

Other expense increased ~~$518 thousand,~~$0.6 million, or ~~27%~~24%, to $3.1 million for the second quarter of 2022 compared to $2.5 million for the second quarter of ~~2021~~2021. For the first six months of 2022, other expense increased $1.0 million, or 22%, to $5.5 million compared to ~~$1.9~~$4.5 million for the ~~second quarter~~first six months of ~~2020.~~2021. The increase was ~~primarily~~ due to ~~lower education,~~a combination of factors, including inflation and the outsourcing of certain functions previously handled internally, as well as a return to more normal expense levels post-pandemic in areas, such as, training, conferences, travel and business development expenses as a result of the stay-at home orders implemented in the second quarter of 2020 in response to the COVID-19 pandemic, combined with lower expense incurred in connection with indirect consumer lending activity, which was significantly lower in the second quarter of 2020.entertainment.

Our efficiency ratio for the first six months of ~~2021~~2022 was ~~54.22%~~60.51% compared with ~~62.70%~~54.22% for the first six months of ~~2020.~~2021. The ~~lower~~higher efficiency ratio was primarily the result of an increase in ~~net interest income, associated~~noninterest expense in 2022 as described above, coupled with ~~an increase~~the $3.8 million decline in ~~average interest-earning assets, and an increase~~PPP revenue in ~~noninterest income compared to the prior year quarter.~~2022 versus 2021. 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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Income Taxes

For the three and six months ended June 30, ~~2021,~~2022, we recorded income tax expense of ~~$10.7~~$3.9 million and $7.3 million, respectively, versus ~~$2.8~~$5.4 million and $10.7 million for the same ~~period~~periods in the prior year. In the ~~first six months~~second quarter of ~~2021,~~2022, we recognized federal and state tax benefits related to tax credit investments placed in service resulting in a reduction in income tax expense of ~~$668~~$426 thousand, ~~and a net gain recorded in noninterest income of $191 thousand. In the first six months of 2020, we recognized tax credit investments resulting in a reduction in income tax expense of $393~~versus $424 thousand ~~and a net loss recorded in noninterest income of $80 thousand. For the three months ended June 30, 2021, we recorded income tax expense of $5.4 million, versus $2.4 million~~ for the same period in the prior year.

~~During the three~~ The six months ended June 30, 2022 and 2021 also included related benefits of $1.0 million and $668 thousand, respectively.

During the second quarter of 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 ~~2022 and~~through 2023 for taxpayers with New York State income over $5.0 million. This rate change did not result in a material impact to our tax ~~provision~~provision.

Our effective tax rates for the three and six months ended June 30, ~~2021.~~

~~Our effective tax rates~~2022 were 19.8% and 19.2%, respectively, versus 21.1% and 20.8% for the ~~first six months of 2021 and 2020 were 20.8% and 18.4%, respectively. Our effective tax rates for~~same periods in the ~~second quarter of 2021 and 2020 were 21.1% and 18.0%, respectively.~~prior year. The increase in effective tax rates iswas the result of ~~higher~~lower 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 ~~2021~~2022 and ~~2020~~2021 reflects the New York State tax benefit generated by our real estate investment trust.

~~- 55 -~~

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~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

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
	June 30, 2021					December 31, 2020					June 30, 2022					December 31, 2021
	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	$	6,249		$	6,563	$	6,239		$	6,635	$	24,535		$	22,190	$	15,793		$	15,891
Mortgage-backed securities:
Agency mortgage-backed securities		888,975			895,858		601,426			620,989		1,158,770			1,034,828		1,169,042			1,162,214
Non-Agency mortgage-backed securities		—			424		—			435		—			—		—			410
Total available for sale securities		895,224			902,845		607,665			628,059		1,183,305			1,057,018		1,184,835			1,178,515
Securities held to maturity:
U.S. Government agency and government-sponsored enterprise securities												16,288			16,183		—			—
State and political subdivisions		113,437			116,820		144,506			148,984		105,978			100,466		111,399			113,511
Mortgage-backed securities		105,427			109,224		127,467			133,051		82,672			78,802		94,187			96,309
Total held to maturity securities		218,864			226,044		271,973			282,035		204,938			195,451		205,586			209,820
Allowance for credit losses - securities		(6	)				(7	)
Allowance for credit losses – securities												(5	)				(5	)
Total held to maturity securities, net		218,858					271,966					204,933					205,581
Total investment securities	$	1,114,082		$	1,128,889	$	879,631		$	910,094	$	1,388,238		$	1,252,469	$	1,390,416		$	1,388,335

~~The~~Our available for sale (“AFS”) investment securities portfolio ~~increased $274.8~~decreased $1.5 million from ~~$628.1 million at~~ December 31, ~~2020~~2021 to ~~$902.8 million at~~ June 30, ~~2021. The increase from year-end 2020 was primarily due~~2022. Our primary investment strategy for the past several quarters has been to ~~the deployment of~~deploy excess liquidity into cash flowing agency ~~backed securities.~~mortgage-backed securities, reallocating excess Federal Reserve cash balances into securities demonstrating higher yields; however, activity has slowed as a portion of the cash flow from the portfolio was utilized to fund loan originations during the second quarter of 2022. The AFS portfolio had a net unrealized ~~gains~~loss of ~~$7.6 million and $20.4~~$126.3 million at June 30, ~~2021~~2022 and $6.3 million at December 31, ~~2020,~~2021, respectively. The decline in the portfolio balance was largely driven by a decrease in the market value of the portfolio, due to rising interest rates. The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change.

Table of Contents

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 June 30, ~~2021.~~2022. In this table, Yield is defined as the book yield weighted against the ending book value. 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	$	—		—	%	$	6,249		2.42	%	$	—		—	%	$	—		—	%	$	6,249		2.42	%	$	—		0.00	%	$	15,000		1.69	%	$	9,535		1.90	%	$	—		—		$	24,535		1.77	%
Mortgage-backed securities		4,875		2.17			55,024		2.45			162,075		1.98			667,001		1.50			888,975		1.65			5,550		2.27			71,194		2.63			143,303		1.82			938,723		1.65			1,158,770		1.73
		4,875		2.17			61,273		2.45			162,075		1.98			667,001		1.50			895,224		1.66			5,550		2.27			86,194		2.46			152,838		1.82			938,723		1.65			1,183,305		1.74
Held to maturity debt securities:
U.S. Government agencies and government-sponsored enterprises																										$	—		0.00	%	$	—		0.00	%	$	16,288		3.22	%	$	—		0.00	%	$	16,288		3.22	%
State and political subdivisions		39,335		2.08			72,989		1.90			1,113		1.99			—		—			113,437		1.96			33,317		2.04			45,992		1.85			5,004		1.62			21,665		2.44			105,978		2.02
Mortgage-backed securities		—		—			2,295		2.28			17,680		2.16			85,452		2.24			105,427		2.22			2,226		2.23			—		—			17,981		2.40			62,465		2.58			82,672		2.53
		39,335		2.08			75,284		1.91			18,793		2.15			85,452		2.24			218,864		2.09			35,543		2.05			45,992		1.85			39,273		2.64			84,130		2.54			204,938		2.32
Total investment securities	$	44,210		2.09	%	$	136,557		2.15	%	$	180,868		2.00	%	$	752,453		1.59	%	$	1,114,088		1.74	%	$	41,093		2.08	%	$	132,186		2.25	%	$	192,111		1.99	%	$	1,022,853		1.73	%	$	1,388,243		1.82	%

~~- 56 -~~

~~Table of Contents~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

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 six months ended June 30, ~~2021~~2022 and ~~2020~~2021 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.

Table of Contents

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~~(dollars in thousands).


	Loan Portfolio Composition										Loan Portfolio Composition
	June 30, 2021					December 31, 2020					June 30, 2022					December 31, 2021
	Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total
Commercial business	$	731,208		20.1	%	$	794,148		22.1	%	$	611,102		16.2	%	$	638,293		17.3	%
Commercial mortgage		1,315,404		36.2			1,253,901		34.9			1,448,152		38.5			1,412,788		38.4
Total commercial		2,046,612		56.3			2,048,049		57.0			2,059,254		54.7			2,051,081		55.7
Residential real estate loans		590,303		16.3			599,800		16.7			574,784		15.3			577,299		15.7
Residential real estate lines		80,781		2.2			89,805		2.5			76,108		2.0			78,531		2.2
Consumer indirect		899,018		24.8			840,421		23.4			1,039,251		27.6			958,048		26.0
Other consumer		15,454		0.4			17,063		0.4			14,621		0.4			14,477		0.4
Total consumer		1,585,556		43.7			1,547,089		43.0			1,704,764		45.3			1,628,355		44.3
Total loans		3,632,168		100.0	%		3,595,138		100.0	%		3,764,018		100.0	%		3,679,436		100.0	%
Less: Allowance for credit losses - loans		46,365					52,420
Less: Allowance for credit losses – loans												42,452					39,676
Total loans, net	$	3,585,803				$	3,542,718				$	3,721,566				$	3,639,760

Total loans increased ~~$37.0~~$84.6 million to ~~$3.63~~$3.76 billion at June 30, ~~2021~~2022 from ~~$3.60~~$3.68 billion at December 31, ~~2020.~~2021. The increase in loans was primarily attributable to our organic growth initiatives.

~~Commercial~~Total commercial loans ~~decreased $1.4~~increased $8.2 million during the six months ended June 30, ~~2021~~2022 and represented ~~56.3%~~54.7% of total loans as of June 30, ~~2021.~~2022. The ~~decrease~~increase was due to a decrease of $76.0 million in PPP loans, net of deferred fees, from $248.0 million at December 31, 2020 to $171.9 million at June 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 $61.5 million and $13.1 million, respectively, primarily as a result of our continued commercial business development efforts.

~~The consumer indirect portfolio totaled $899.0~~ PPP loans, net of deferred fees, were $8.9 million and $55.3 million at June 30, 2022 and December 31, 2021, respectively, and are included in our commercial business loans. PPP loan balances were significantly lower in 2022 as a result of the PPP loan forgiveness and repayment process. We expect the PPP loan balances will continue to decline as loans are forgiven by the SBA.

Total consumer loans increased $76.4 million to $1.70 billion and represented ~~24.8%~~45.3% of total loans as of June 30, ~~2021.~~2022. During the first six months of 2022, we originated $304.6 million in indirect automobile loans with a mix of approximately 27% new automobile and 73% used automobile. During the first six months of 2021, we originated $230.0 million in indirect ~~auto~~automobile loans with a mix of approximately 28% new ~~auto~~automobile and 72% used ~~auto. During the first six months of 2020, we originated $135.6 million in indirect auto loans with a mix of approximately 30% new auto and 70% used auto. Our origination~~automobile loans. 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 period was primarily a result of increased customer 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 ~~$3.9~~$4.3 million and ~~$4.3~~$6.2 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 ~~$256.4~~$361.8 million and ~~$241.7~~$272.7 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

~~- 57 -~~59

Table of Contents

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

Allowance for Credit Losses - Loans

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

Loan Loss Analysis

Three months ended
June 30,

Six months ended
June 30,

2021

2020

2021

2020

Allowance for credit losses - loans, beginning of period, prior to adoption
of ASC 326

$
30,482

Impact of adopting ASC 326

9,594

Allowance for credit losses - loans, beginning of period, after adoption of
ASC 326

$
49,828

$
43,356

$
52,420

40,076

Charge-offs:

Commercial business

92

25

178

8,266

Commercial mortgage

—

1,072

203

1,072

Residential real estate loans

56

2

67

100

Residential real estate lines

—

—

70

—

Consumer indirect

1,157

2,554

3,570

5,978

Other consumer

424

70

505

339

Total charge-offs

1,729

3,723

4,593

15,755

Recoveries:

Commercial business

379

1,483

617

1,541

Commercial mortgage

7

—

7

—

Residential real estate loans

59

8

64

18

Residential real estate lines

—

—

—

3

Consumer indirect

1,583

1,379

3,253

3,047

Other consumer

95

67

159

217

Total recoveries

2,123

2,937

4,100

4,826

Net (recoveries) charge-offs

(394
)

786

493

10,929

Provision (benefit) for credit losses - loans

(3,857
)

3,746

(5,562
)

17,169

Allowance for credit losses - loans, end of period

$
46,365

$
46,316

$
46,365

$
46,316

Net loan (recoveries) charge-offs to average loans (annualized)

-0.04
%

0.09
%

0.03
%

0.66
%
Allowance for credit losses - loans to total loans

1.28
%

1.33
%

1.28
%

1.33
%
Allowance for credit losses - loans to non-performing loans

699
%

351
%

699
%

351
%


	Credit Loss - Loans Analysis
	Three months ended June 30,						Six months ended June 30,
	2022			2021			2022			2021
Allowance for credit losses - loans, beginning of period	$	40,966		$	49,828		$	39,676		$	52,420
Net charge-offs (recoveries):
Commercial business		90			(287	)		53			(439	)
Commercial mortgage		(2,018	)		(7	)		(2,019	)		196
Residential real estate loans		46			(3	)		41			3
Residential real estate lines		(12	)		—			(17	)		70
Consumer indirect		647			(426	)		1,197			317
Other consumer		207			329			492			346
Total net (recoveries) charge-offs		(1,040	)		(394	)		(253	)		493
Provision (benefit) for credit losses – loans		446			(3,857	)		2,523			(5,562	)
Allowance for credit losses – loans, end of period	$	42,452		$	46,365		$	42,452		$	46,365

Net loan charge-offs (recoveries) to average loans:
Commercial business		0.06	%		(0.15	)%		0.02	%		(0.11	)%
Commercial mortgage		(0.57	)%		—			(0.28	)%		0.03	%
Residential real estate loans		0.03	%		—			0.01	%		—
Residential real estate lines		(0.06	)%		—			(0.04	)%		0.17	%
Consumer indirect		0.25	%		(0.19	)%		0.24	%		0.07	%
Other consumer		5.86	%		8.58	%		6.91	%		4.43	%
Total loans		(0.11	)%		(0.04	)%		(0.01	)%		0.03	%

Allowance for credit losses – loans to total loans		1.13	%		1.28	%		1.13	%		1.28	%
Allowance for credit losses – loans to nonaccrual loans		648	%		530	%		648	%		530	%
Allowance for credit losses – loans to non-performing loans		648	%		699	%		648	%		699	%

~~The Company adopted CECL effective January 1, 2020, which resulted in an increase~~Loans not analyzed for a specific reserve are segmented into "pools" of loans based upon similar risk characteristics. This is referred to as the "pooled loan" component of 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.~~

estimate. The allowance for credit losses for ~~Pooled Loans~~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 6,6. Loans of the notes to the consolidated financial statements for further details on collateral dependent ~~loans~~.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 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.

~~- 58 -~~60

Table of Contents

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

Net recoveries of ~~$394 thousand~~$1.0 million in the second quarter of ~~2021~~2022 represented ~~0.04%~~0.11% of average loans on an annualized basis compared to net ~~charge-offs~~recoveries of ~~$786~~$394 thousand, or ~~0.09%, in~~0.04% of average loans for the second quarter of ~~2020.~~2021. For the six months ended June 30, ~~2021,~~2022, net recoveries of $253 thousand represented 0.01% of average loans, compared to net charge-offs of $493 thousand, ~~represented~~or 0.03% ~~of average loans, compared to $10.9 million or 0.66%~~ of average loans for the same period in ~~2020. The decrease~~2021. During the second quarter of 2022, we recovered $2.0 million in ~~net charge-offs~~connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the ~~six months ended June 30, 2021 was primarily due to an $8.2 million partial charge-off of an $11.9 million commercial loan downgraded in the first~~fourth 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.~~2021. The allowance for credit losses - loans was $42.5 million at June 30, 2022, compared with $46.4 million at June 30, ~~2021, compared with $52.4 million at December 31, 2020.~~2021. The ratio of the allowance for credit losses ~~-loans~~- loans to total loans was ~~1.28%~~1.13% and ~~1.46%~~1.28% at June 30, ~~2021~~2022 and ~~December 31, 2020,~~June 30, 2021, respectively. The ratio of allowance for credit losses - loans to non-performing loans was 648% at June 30, 2022, compared with 699% at June 30, ~~2021, compared with 551% at December 31, 2020.~~2021.

The following table sets forth the allocation of the allowance for credit losses - loans by loan category as of the dates indicated (dollars in thousands). The allocation is made for analytical purposes and is not necessarily indicative of the categories in which actual losses may occur. The total allowance is available to absorb losses from any segment of the loan portfolio.


	Allowance for Credit Losses - Loans by Loan Category
	June 30, 2022					December 31, 2021
			Percentage					Percentage
	Credit		of loans by			Credit		of loans by
	Loss		category to			Loss		category to
	Allowance		total loans			Allowance		total loans
Commercial business	$	10,140		23.9	%	$	11,099		17.3	%
Commercial mortgage		12,064		28.4			14,777		38.4
Residential real estate loans		2,140		5.1			1,604		15.7
Residential real estate lines		509		1.2			379		2.2
Consumer indirect		17,332		40.8			11,611		26.0
Other consumer		267		0.6			206		0.4
Total	$	42,452		100.0	%	$	39,676		100.0	%

Non-Performing Assets and Potential Problem Loans

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


	Non-Performing Assets						Non-Performing Assets
	June 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021
Nonaccrual loans:
Commercial business	$	1,555		$	1,975		$	422		$	602
Commercial mortgage		885			2,906			836			6,414
Residential real estate loans		2,615			2,587			2,738			2,373
Residential real estate lines		280			323			160			200
Consumer indirect		1,250			1,495			2,389			1,780
Other consumer		8			—			3			—
Total nonaccrual loans		6,593			9,286			6,548			11,369
Accruing loans 90 days or more delinquent		42			231			—			797
Total non-performing loans		6,635			9,517			6,548			12,166
Foreclosed assets		646			2,966			—			—
Total non-performing assets	$	7,281		$	12,483		$	6,548		$	12,166

Nonaccrual loans to total loans								0.17	%		0.31	%
Non-performing loans to total loans		0.18	%		0.26	%		0.17	%		0.33	%
Non-performing assets to total assets		0.14	%		0.25	%		0.12	%		0.22	%

Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at June 30, ~~2021~~2022 were ~~$7.3~~$6.5 million, a decrease of ~~$5.2~~$5.6 million from the ~~$12.5~~$12.2 million balance at December 31, ~~2020.~~2021. The decrease in non-performing assets related primarily to the pay-off of a nonaccrual commercial mortgage that resulted in the $2.0 million recovery noted previously. The primary component of non-performing assets is non-performing loans, which were ~~$6.6~~$6.5 million or ~~0.18%~~0.17% of total loans at June 30, ~~2021, compared with $9.5~~2022, down from $12.2 million or ~~0.26%~~0.33% of total loans at December 31, ~~2020.~~2021 primarily due to pay-downs or payments received and applied to principal for the non-performing loans.

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

Approximately ~~$2.1~~$3.7 million, or ~~32%~~56%, of the ~~$6.6~~$6.5 million in non-performing loans as of June 30, ~~2021~~2022 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 $0 and $200 thousand~~ at June 30, ~~2021~~2022 and December 31, ~~2020, respectively. There~~2021. Additionally, there were no TDRs accruing interest as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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 one property totaling $646 thousand~~ at June 30, ~~2021~~2022 and ~~two properties totaling $3.0 million at~~ December 31, 2020. The decrease in foreclosed assets during the first six months of 2021 was the result of the sale of an asset on which foreclosure occurred in the third quarter of 2020. The borrower’s business was related to the hospitality industry and the downgrade and partial charge-off in the first quarter of 2020 were precipitated by the impact of the COVID-19 pandemic.2021.

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 ~~$28.9~~$27.9 million and ~~$17.9~~$22.7 million in loans that continued to accrue interest which were classified as substandard as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

~~- 59 -~~Contractual Loan Maturity Schedule

The following table summarizes the contractual maturities of our loan portfolio at June 30, 2022. Loans, net of deferred loan origination costs, include principal amortization and non-accruing loans. Demand loans having no stated schedule of repayment or maturity and overdrafts as reported as due in one year or less (in thousands).


	Due in less than one year		Due from one to five years		Due from five to fifteen years		Due after fifteen years		Total
Commercial business	$	144,744	$	241,313	$	8,205	$	216,841	$	611,103
Commercial mortgage		327,888		678,549		438,151		3,564		1,448,152
Residential real estate loans		70,972		235,257		257,485		11,070		574,784
Residential real estate lines		2,221		8,814		28,927		36,146		76,108
Consumer indirect (1)		394,709		644,542		—		—		1,039,251
Other consumer		6,879		7,130		567		45		14,621
Total loans	$	947,413	$	1,815,605	$	733,335	$	267,666	$	3,764,019

Loans maturing after one year:
With a predetermined interest rate
Commercial business			$	81,909	$	2,701	$	10,669	$	95,279
Commercial mortgage				389,790		213,371		509		603,670
Residential real estate loans				213,801		238,840		9,376		462,017
Residential real estate lines				11		35		3		49
Consumer indirect (1)				644,542		—		—		644,542
Other consumer				7,130		567		45		7,742
With a floating or adjustable rate
Commercial business				159,404		5,504		206,171		371,079
Commercial mortgage				288,759		224,780		3,055		516,594
Residential real estate loans				21,456		18,645		1,694		41,795
Residential real estate lines				8,803		28,892		36,143		73,838
Consumer indirect (1)				—		—		—		—
Other consumer				—		—		—		—
Total loans maturing after one year			$	1,815,605	$	733,335	$	267,665	$	2,816,605

_________

(1) Amounts include prepayment assumptions based on actual historical experience.

Table of Contents

~~MANAGEMENT’S~~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
	June 30, 2021					December 31, 2020					June 30, 2022					December 31, 2021
	Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total
Noninterest-bearing demand	$	1,121,827		24.1	%	$	1,018,549		23.8	%	$	1,114,460		23.1	%	$	1,107,561		22.9	%
Interest-bearing demand		799,299		17.2			731,885		17.1			877,661		18.2	%		864,528		17.9	%
Savings and money market		1,796,813		38.5			1,642,340		38.4			1,845,186		38.3	%		1,933,047		40.1	%
Time deposits < $250,000		768,161		16.5			684,885		16.0
Time deposits of $250,000 or more		173,121		3.7			200,708		4.7
Time deposits												983,209		20.4	%		921,954		19.1	%
Total deposits	$	4,659,221		100.0	%	$	4,278,367		100.0	%	$	4,820,516		100.0	%	$	4,827,090		100.0	%

As of June 30, 2022 and December 31, 2021, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $1.24 billion and $1.29 billion, respectively. The portion of our time deposits by account that were in excess of the FDIC insurance limit was $131.5 million and $182.3 million at June 30, 2022 and December 31, 2021, respectively. The maturities of our uninsured time deposits at June 30, 2022 were as follows: $83.7 million in three months or less; $19.7 million between three months and six months; $27.9 million between six months and one year; and $244 thousand over one year.

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 June 30, ~~2021,~~2022, total deposits were ~~$4.66~~$4.82 billion, representing ~~an increase~~a decrease of ~~$380.9~~$6.6 million from December 31, ~~2020.~~2021. The ~~increase~~decrease was due to lower public deposits and reciprocal deposits, partially offset by growth in ~~public,~~ non-public ~~demand, reciprocal~~deposits and brokered deposits. The decrease in public and reciprocal deposits was due to a combination of seasonal outflows and less demand due to the rising interest rate environment presenting alternative investment opportunities for customers. Time deposits were approximately 20% and ~~21%~~19% of total deposits at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

~~Nonpublic~~Non-public deposits, the largest component of our funding sources, totaled ~~$2.71~~$2.76 billion and ~~$2.55~~$2.70 billion at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, and represented ~~58%~~57% and ~~60%~~56% of total deposits as of the end of each period, respectively. 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.~~market area. 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 ~~$977.1 million~~$1.02 billion and ~~$834.9 million~~$1.10 billion at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, and represented 21% and ~~20%~~23% of total deposits as of ~~the end of~~ each ~~period,~~date, respectively. The ~~increase~~decrease in public deposits during ~~2021~~2022 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 ~~$762.2~~$672.3 million at June 30, ~~2021,~~2022, compared to ~~$612.3~~$771.4 million at December 31, ~~2020.~~2021, as customers have been withdrawing funds from the program to re-balance operating accounts. Reciprocal deposits represented ~~16%~~14% and ~~14%~~16% of total deposits as of ~~the end of~~ each ~~period,~~date, respectively.

Brokered deposits totaled ~~$210.9~~$367.6 million and ~~$279.6~~$254.7 million at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, and represented 5%8% and 7%5% of total deposits as of ~~the end of~~ each ~~period,~~date, respectively.

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):

June 30,

December 31,

2021

2020

Short-term borrowings - FHLB

$
—

$
5,300

Long-term borrowings - Subordinated notes, net

73,756

73,623

Total borrowings

$
73,756

$
78,923


	June 30,		December 31,
	2022		2021
Short-term borrowings – FHLB	$	109,000	$	30,000
Long-term borrowings – Subordinated notes, net		74,067		73,911
Total borrowings	$	183,067	$	103,911

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MANAGEMENT'S DISCUSSION AND ANALYSIS

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. ~~We had no short-term~~Short-term FHLB borrowings at June 30, ~~2021~~2022 and ~~no amount of short-term FHLB borrowings outstanding at any month-end during the six months ended June 30, 2021. Short-term FHLB borrowings at~~ December 31, ~~2020~~2021 consisted of ~~$5.3~~$109.0 million and $30.0 million, respectively, in short-term ~~borrowings. The decline in short-term borrowings at June 30, 2021, was the result of the Company’s decision to utilize brokered deposits 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.

~~- 60 -~~

~~Table~~ $50 million of ~~Contents~~the short-term borrowings balance at June 30, 2022 is designated as a cash-flow hedge, which became effective in April 2022, at a fixed rate of 0.79%.

~~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 ~~$201.8~~$354.0 million of immediate credit capacity with the FHLB as of June 30, ~~2021.~~2022. We had approximately ~~$575.7~~$602.7 million in secured borrowing capacity at the Federal Reserve Bank (“FRB”) discount window, none of which was outstanding at June 30, ~~2021.~~2022. 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 June 30, ~~2021~~2022 and December 31, ~~2020, respectively.~~2021. Additionally, we had approximately ~~$407.3~~$859.1 million of unencumbered liquid securities available for ~~pledging.~~pledging at June 30, 2022.

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 June 30, ~~2021,~~2022, 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. Proceeds, net of debt issuance costs of $740 thousand, were $34.3 million. The 2020 Notes qualify as Tier 2 capital for regulatory purposes.

On April 15, 2015, we issued $40.0 million of subordinated notes (the “2015 Notes”) in a registered public offering. The 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”) 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 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 2015 Notes qualify as Tier 2 capital for regulatory purposes.

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 June 30, ~~2021,~~2022, 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.

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 brokered deposit ~~relationships~~.relationships. The primary source of our non-deposit short-term borrowings is FHLB advances, of which we had $0$109.0 million outstanding at June 30, ~~2021~~ ~~due to the excess liquidity position partially due to the seasonal inflow of public deposits~~.2022. In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately ~~$907.5 million~~$1.09 billion 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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

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 June 30, ~~2021.~~2022. The line of credit has a one-year term and matures in May ~~2022.~~2023. Funds drawn would be used for general corporate purposes and backup liquidity.

Cash and cash equivalents were ~~$206.4~~$109.7 million as of June 30, ~~2021,~~2022, up ~~$112.5~~$30.6 million from ~~$93.9~~$79.1 million as of December 31, ~~2020.~~2021. Net cash provided by operating activities totaled ~~$30.9~~$81.8 million and the principal source of operating activity cash flow was net income adjusted for noncash income and expense ~~items.~~items and an increase in other liabilities. Net cash used in investing activities totaled ~~$278.8~~$98.9 million, which included outflows of ~~$37.5~~$84.3 million for net loan originations and ~~$236.7~~$10.0 million from net ~~investment securities transactions.~~purchases of company owned life insurance. Net cash provided by financing activities of ~~$360.4~~$47.7 million was attributed to a ~~$380.9~~$79.0 million increase in ~~deposits,~~short-term borrowings, partially offset by ~~a $5.3 million decrease in short-term borrowings, $6.0~~$15.3 million in common stock repurchases $9.4 million dividend payments and ~~$9.2~~a $6.6 million decrease in ~~dividend payments. The increase in the period end cash balance was due to growth in public, non-public demand, reciprocal and brokered~~ deposits.

~~- 61 -~~

~~Table of Contents~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

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 ~~$487.1~~$425.8 million at June 30, ~~2021, an increase~~2022, a decrease of ~~$18.8~~$79.3 million from ~~$468.4~~$505.1 million at December 31, ~~2020.~~2021. Net income for the six months ended June 30, ~~2021~~2022 increased shareholders’ equity by ~~$40.9~~$15.6 million, offset by common and preferred stock dividends declared of ~~$9.3~~$9.6 million. Accumulated other comprehensive loss included in shareholders’ equity increased ~~$8.1~~$86.5 million during the ~~first~~ six months ~~of 2021~~ended June 30, 2022 due primarily to ~~lower~~increased net unrealized ~~gains~~losses on securities available for ~~sale.~~sale as a result of the increase in market interest rates.

The FRB and FDIC have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies. As of June 30, ~~2021,~~2022, 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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

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


	June 30,			December 31,			June 30,			December 31,
	2021			2020			2022			2021
Common shareholders’ equity	$	469,834		$	451,035		$	408,509		$	487,850
Add: CECL transitional amount		10,287			12,061			6,403			8,537
Less: Goodwill and other intangible assets		71,672			71,235			71,192			71,748
Net unrealized gain on investment securities ⁽¹⁾		5,343			14,743
Net unrealized loss on investment securities (1)								(93,931	)		(4,971	)
Hedging derivative instruments		747			(316	)		3,735			1,160
Net periodic pension and postretirement benefits plan adjustments		(12,024	)		(12,299	)		(9,301	)		(9,396	)
Other		—			—			(228	)		—
Common Equity Tier 1 (“CET1”) Capital		414,383			389,733			443,445			437,846
Plus: Preferred stock		17,292			17,328			17,292			17,292
Less: Other		—			—			—			—
Tier 1 Capital		431,675			407,061			460,737			455,138
Plus: Qualifying allowance for credit losses		35,188			40,509			35,958			29,938
Subordinated Notes		73,756			73,623			74,067			73,911
Total regulatory capital	$	540,619		$	521,193		$	570,762		$	558,987
Adjusted average total assets (for leverage capital purposes)	$	5,287,222		$	4,933,597		$	5,621,888		$	5,532,987
Total risk-weighted assets	$	3,992,859		$	3,844,380		$	4,476,865		$	4,260,101

Regulatory Capital Ratios
Tier 1 Leverage (Tier 1 capital to adjusted average assets)		8.16	%		8.25	%		8.20	%		8.23	%
CET1 Capital (CET1 capital to total risk-weighted assets)		10.38			10.14			9.91	%		10.28	%
Tier 1 Capital (Tier 1 capital to total risk-weighted assets)		10.81			10.59			10.29	%		10.68	%
Total Risk-Based Capital (Total regulatory capital to total risk-weighted assets)		13.54			13.56			12.75	%		13.12	%

(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~~were 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.

~~- 62 -~~

~~Table of Contents~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Basel III Capital Rules

Under the Basel III Capital Rules, 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; and

•

10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.

•

~~7.0% CET1 to risk-weighted assets;~~

•

~~8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and~~

•

~~10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to 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 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 Basel III Capital Rules.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table presents actual and required capital ratios as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021 for the Company and the Bank under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, under the Basel III Capital Rules ~~(in~~(dollars 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
June 30, 2021
																Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2022
Tier 1 leverage:
Company	$	431,675		8.16	%	$	211,489		4.00	%	$	264,361		5.00	%	$	460,737		8.20	%	$	244,876		4.00	%	$	281,094		5.00	%
Bank		470,805		8.92			211,194		4.00			263,993		5.00			512,380		9.13			244,505		4.00			280,631		5.00
CET1 capital:
Company		414,383		10.38			279,500		7.00			259,536		6.50			443,445		9.91			313,381		7.00			290,996		6.50
Bank		470,805		11.82			278,881		7.00			258,961		6.50			512,380		11.47			312,649		7.00			290,317		6.50
Tier 1 capital:
Company		431,675		10.81			339,393		8.50			319,429		8.00			460,737		10.29			380,534		8.50			358,149		8.00
Bank		470,805		11.82			338,642		8.50			318,722		8.00			512,380		11.47			379,645		8.50			357,313		8.00
Total capital:
Company		540,619		13.54			419,250		10.50			399,286		10.00			570,762		12.75			470,071		10.50			447,687		10.00
Bank		505,992		12.70			418,322		10.50			398,402		10.00			548,338		12.28			468,973		10.50			446,641		10.00
December 31, 2020
December 31, 2021
Tier 1 leverage:
Company	$	407,061		8.25	%	$	197,344		4.00	%	$	246,680		5.00	%	$	455,138		8.23	%	$	221,319		4.00	%	$	276,649		5.00	%
Bank		441,929		8.97			197,064		4.00			246,330		5.00			496,337		8.98			220,963		4.00			276,204		5.00
CET1 capital:
Company		389,733		10.14			269,107		7.00			249,885		6.50			437,846		10.28			298,207		7.00			276,907		6.50
Bank		441,929		11.52			268,483		7.00			249,306		6.50			496,337		11.68			297,489		7.00			276,240		6.50
Tier 1 capital:
Company		407,061		10.59			326,772		8.50			307,550		8.00			455,138		10.68			362,109		8.50			340,808		8.00
Bank		441,929		11.52			326,015		8.50			306,838		8.00			496,337		11.68			361,237		8.50			339,987		8.00
Total capital:
Company		521,193		13.56			403,660		10.50			384,438		10.00			558,987		13.12			447,311		10.50			426,010		10.00
Bank		482,439		12.58			402,725		10.50			383,547		10.00			526,274		12.38			446,233		10.50			424,984		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.

~~- 63 -~~67

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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, ~~2020~~2021 in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, as filed with the Securities and Exchange Commission on March ~~15, 2021.~~10, 2022. 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, ~~2020~~2021 to June 30, ~~2021,~~2022, aside from asset growth due to an increased liquidity position. The ~~increased~~prolonged excess liquidity position has resulted from continued deposit growth and ~~drove~~has driven higher investment security ~~purchases~~balances in 2021 and ~~an excess Federal Reserve interest earning cash balance at quarter end.~~2022. 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 June 30, ~~2022~~2023 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	$	(2,756	)	$	2,388		$	5,150		$	7,749		$	(2,197	)	$	(1,144	)	$	(2,343	)	$	(3,528	)
% Change		-1.90	%		1.65	%		3.56	%		5.35	%		-1.36	%		-0.71	%		-1.46	%		-2.19	%

In the rising rate scenarios, the static model results indicate that net interest income is modeled to ~~increase~~decrease compared to the flat rate scenario over a one-year timeframe. This is a result of ~~assumed commercial loan products~~borrowing costs in the short-term repricing quicker than assets, and ~~investment security cash flow repricing~~a model change from last quarter that places net income into non-interest rate sensitive accounts rather than back into Federal Reserve balances which reprice at the full force of the market rate changes. This simulation does not consider balance sheet growth or a ~~higher frequency than underlying borrowing and deposit costs.~~change in the balance sheet mix. As intermediate and longer-term assets continue to mature and are replaced at higher yields, net interest income ~~improves~~should improve over longer term timeframes. Model results in the declining rate scenario indicate a higher degree of decreases in net interest income due to assets having the ability to reprice downward near full market rate shocks, while deposit and borrowing liabilities 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. Furthermore, given the static balance sheet approach, retained earnings are considered to be reinvested in a non-interest earning asset.

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).

~~- 64 -~~

~~Table of Contents~~

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 June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands). The analysis additionally presents a measurement of the interest rate sensitivity at June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. 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):


	June 30, 2021								December 31, 2020								June 30, 2022								December 31, 2021
Rate Shock Scenario:	EVE		Change			Percentage Change			EVE		Change			Percentage Change			EVE		Change			Percentage Change			EVE		Change			Percentage Change
Pre-Shock Scenario	$	687,342							$	583,156							$	886,181							$	775,697
- 100 Basis Points		651,753	$	(35,589	)		-5.18	%		574,345	$	(8,811	)		-1.51	%		890,553	$	4,372			0.49	%		746,770	$	(28,927	)		-3.73	%
+100 Basis Points		722,418		35,076			5.10			617,768		34,612			5.94			873,161		(13,020	)		(1.47	)		782,438		6,741			0.87
+ 200 Basis Points		752,720		65,378			9.51			638,224		55,068			9.44			862,585		(23,596	)		(2.66	)		786,362		10,665			1.37
+ 300 Basis Points		772,760		85,418			12.43			651,518		68,362			11.72			853,690		(32,491	)		(3.67	)		784,923		9,226			1.19

The increase in the Pre-Shock Scenario EVE at June 30, ~~2021~~2022 compared to December 31, ~~2020~~2021 is the result of ~~growth in investments. The~~the increase in market rates. Although fixed rate assets decreased in value, this was offset by a positive trend in deposit premiums due to deposit cost controls during the ~~-100~~first half of the year. The slight decrease in sensitivity in the +100 basis point Rate Shock Scenario to EVE at June 30, 2022 compared to December 31, 2021 is a result of increased wholesale borrowing during the ~~growth~~six month period which doesn't realize the same economic value benefit as core deposits in ~~deposits over the last two quarters, compounded with the growth of fixed~~higher rate ~~long-term assets not receiving the full benefit in value appreciation typically observed in down rate scenarios.~~environments.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, ~~2021,~~2022, 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 June 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~- 65 -~~69

Table of Contents

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 and~~ ~~the mediation commenced in May 2021~~. On ~~October 19, 2020,~~September 30, 2021, the Court granted plaintiffs’ motion for ~~judgment~~class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). There are approximately 5,200 members in the New York classes and approximately 300 members in the Pennsylvania classes. We are currently awaiting a ruling from the Superior Court of Pennsylvania on our motion seeking permission to appeal the denial of our motion to dismiss the action for lack of standing. On February 8, 2022, plaintiffs filed a motion for partial summary judgement for most of the relief they seek. We filed a cross motion for summary judgement seeking the dismissal of a portion of the class and sought an offset in the form of recoupment which reduces any liability that may be imposed against us by the amounts that the borrowers owe to the Bank for failing to repay their motor vehicle loans. At this time, the briefing on the ~~pleadings dismissing~~motions for partial summary judgment is complete. Although the Court had indicated a hearing would be held on these motions, it has not been scheduled and we have no indication of when or if such a hearing will in fact be held. In addition, on April 25, 2022, the Pennsylvania Supreme Court declared unconstitutional a statute on which the Court may have based jurisdiction in this case. Therefore, on June 27, 2022, we filed a motion for reconsideration of the Court's June 5, 2018 decision overruling our ~~affirmative defense against one named~~preliminary objections based on lack of personal jurisdiction as to the New York ~~plaintiff~~plaintiffs. Plaintiffs have responded to that ~~his claim was time-barred under New York law, applying~~motion claiming an alternative basis for jurisdiction. Discovery is now ongoing and through a ~~six-year statute of limitations rather than~~Case Management Order dated February 10, 2022, it must be completed by October 3, 2022. Based on the ~~three years limitation period we had argued. The plaintiff’s motion for class certification was argued on June 16, 2021~~current schedule, pre-trial motions must be submitted by November 21, 2022, and the ~~motion remains pending.~~ case must be ready for trial on March 6, 2023. 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 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 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.

~~- 66 -~~ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

In June 2022, the Company’s Board of Directors authorized a share repurchase program for up to 766,447 shares of common stock. The program will expire at the earlier of the completion of all share repurchases or a Board vote to retire the program.

The Company’s repurchases of its common stock during the second quarter of 2022 were as follows:


Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 - 30, 2022		—	$	—		—		—
May 1 - 31, 2022		11,275		26.75		—		—
June 1 - 30, 2022		—		—		—		766,447
Total		11,275	$	26.75		—		766,447

(1)

This column reflects the deemed surrender to us of 11,275 shares of common stock to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units.

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

~~10.1+~~		~~Financial Institutions, Inc. Amended and Restated 2015 Long-Term Incentive Plan~~31.1	~~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)

~~+ Management contract, compensatory plan or arrangement.~~

~~- 67 -~~71

Table of Contents

SIGNATURES

~~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		, August ~~9, 2021~~8, 2022
Martin K. Birmingham
President and Chief Executive Officer
(Principal Executive Officer)


/s/ W. Jack Plants II		, August ~~9, 2021~~8, 2022
W. Jack Plants II
Senior Vice President and Chief Financial Officer and Treasurer
(Principal Financial Officer)


/s/ Sonia M. Dumbleton		, August ~~9, 2021~~8, 2022
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


(Dollars in thousands, except share and per share data)	June 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021
ASSETS
Cash and due from banks	$	206,387		$	93,878		$	109,705		$	79,112
Securities available for sale, at fair value		902,845			628,059			1,057,018			1,178,515
Securities held to maturity, at amortized cost (net of allowance for credit losses of $6 and $7, respectively) (fair value of $226,044 and $282,035, respectively)		218,858			271,966
Securities held to maturity, at amortized cost (net of allowance for credit losses of $5 in each period) (fair value of $195,451 and $209,820, respectively)								204,933			205,581
Loans held for sale		3,929			4,305			4,265			6,202
Loans (net of allowance for credit losses of $46,365 and $52,420, respectively)		3,585,803			3,542,718
Loans (net of allowance for credit losses of $42,452 and $39,676, respectively)								3,721,566			3,639,760
Company owned life insurance		102,257			100,895			135,611			123,898
Premises and equipment, net		43,572			40,610			40,461			40,111
Goodwill and other intangible assets, net		74,262			73,789			73,897			74,400
Other assets		157,189			156,086			220,742			173,200
Total assets	$	5,295,102		$	4,912,306		$	5,568,198		$	5,520,779
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	1,121,827		$	1,018,549		$	1,114,460		$	1,107,561
Interest-bearing demand		799,299			731,885			877,661			864,528
Savings and money market		1,796,813			1,642,340			1,845,186			1,933,047
Time deposits		941,282			885,593			983,209			921,954
Total deposits		4,659,221			4,278,367			4,820,516			4,827,090
Short-term borrowings		—			5,300			109,000			30,000
Long-term borrowings, net of issuance costs of $1,244 and $1,377, respectively		73,756			73,623
Long-term borrowings, net of issuance costs of $933 and $1,089, respectively								74,067			73,911
Other liabilities		74,999			86,653			138,814			84,636
Total liabilities		4,807,976			4,443,943			5,142,397			5,015,637
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; 171,486 and 171,847 shares issued, respectively		17,149			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 shares issued								17,149			17,149
Total preferred equity		17,292			17,328			17,292			17,292
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		125,253			125,118			125,568			126,105
Retained earnings		356,485			324,850			405,019			384,007
Accumulated other comprehensive (loss) income		(5,934	)		2,128
Treasury stock, at cost – 257,627 and 57,630 shares, respectively		(6,131	)		(1,222	)
Accumulated other comprehensive loss								(99,725	)		(13,207	)
Treasury stock, at cost – 765,465 and 354,103 shares, respectively								(22,514	)		(9,216	)
Total shareholders’ equity		487,126			468,363			425,801			505,142
Total liabilities and shareholders’ equity	$	5,295,102		$	4,912,306		$	5,568,198		$	5,520,779


(Dollars in thousands)	Three months ended June 30,						Six months ended June 30,						Three months ended June 30,						Six months ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
Net income	$	20,200		$	11,132		$	40,910		$	12,259		$	15,648		$	20,200		$	30,631		$	40,910
Other comprehensive income (loss), net of tax:
Other comprehensive (loss) income, net of tax:
Securities available for sale and transferred securities		5,002			1,741			(9,400	)		13,847			(33,415	)		5,002			(89,188	)		(9,400	)
Hedging derivative instruments		(501	)		(388	)		1,063			(297	)		737			(501	)		2,575			1,063
Pension and post-retirement obligations		137			233			275			467			47			137			95			275
Total other comprehensive income (loss), net of tax		4,638			1,586			(8,062	)		14,017
Comprehensive income	$	24,838		$	12,718		$	32,848		$	26,276
Total other comprehensive (loss) income, net of tax														(32,631	)		4,638			(86,518	)		(8,062	)
Comprehensive (loss) income													$	(16,983	)	$	24,838		$	(55,887	)	$	32,848


(Dollars in thousands)	Six months ended June 30,						Six months ended June 30,
	2021			2020			2022			2021
Cash flows from operating activities:
Net income	$	40,910		$	12,259		$	30,631		$	40,910
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,931			3,950			4,218			3,931
Net amortization of premiums on securities		2,452			1,378			2,736			2,452
(Benefit) provision for credit losses		(6,603	)		17,661
Provision (benefit) for credit losses								2,882			(6,603	)
Share-based compensation		778			701			1,390			778
Deferred income tax expense (benefit)		2,333			(1,663	)
Deferred income tax expense								(646	)		2,333
Proceeds from sale of loans held for sale		42,767			31,504			18,768			42,767
Originations of loans held for sale		(40,523	)		(33,070	)		(16,094	)		(40,523	)
Income on company owned life insurance		(1,350	)		(927	)		(1,702	)		(1,350	)
Net gain on sale of loans held for sale		(1,868	)		(864	)		(737	)		(1,868	)
Net gain on investment securities		(71	)		(895	)
Net loss (gain) on investment securities								15			(71	)
Net gain on other assets		(148	)		(63	)		(7	)		(148	)
Noncash restructuring charges against assets		11			—			1,269			11
Decrease (increase) in other assets		2,950			(36,571	)
(Decrease) increase in other liabilities		(14,620	)		16,772
(Increase) decrease in other assets								(14,393	)		2,950
Increase (decrease) in other liabilities								53,454			(14,620	)
Net cash provided by operating activities		30,949			10,172			81,784			30,949
Cash flows from investing activities:
Purchases of available for sale securities		(411,641	)		(121,622	)		(75,269	)		(411,641	)
Purchases of held to maturity securities		(1,830	)		(4,761	)		(36,035	)		(1,830	)
Proceeds from principal payments, maturities and calls on available for sale securities		70,596			59,228			68,269			70,596
Proceeds from principal payments, maturities and calls on held to maturity securities		54,288			53,282			36,265			54,288
Proceeds from sales of securities available for sale		51,891			29,631			6,252			51,891
Net loan originations		(37,523	)		(276,409	)		(84,329	)		(37,523	)
Purchases of company owned life insurance, net of proceeds received		(12	)		(7	)		(10,011	)		(12	)
Proceeds from sales of other assets		2,459			482			0			2,459
Purchases of premises and equipment		(6,284	)		(2,375	)		(3,999	)		(6,284	)
Cash consideration paid for acquisition, net of cash acquired		(759	)		—			0			(759	)
Net cash used in investing activities		(278,815	)		(262,551	)		(98,857	)		(278,815	)
Cash flows from financing activities:
Net increase in deposits		380,854			438,333
Net decrease in short-term borrowings		(5,300	)		(170,200	)
Net (decrease) increase in deposits								(6,574	)		380,854
Net increase (decrease) in short-term borrowings								79,000			(5,300	)
Repurchase of preferred stock		(43	)		—			0			(43	)
Purchases of common stock for treasury		(5,964	)		(196	)		(15,327	)		(5,964	)
Cash dividends paid to common and preferred shareholders		(9,172	)		(8,895	)		(9,433	)		(9,172	)
Net cash provided by financing activities		360,375			259,042			47,666			360,375
Net increase in cash and cash equivalents		112,509			6,663			30,593			112,509
Cash and cash equivalents, beginning of period		93,878			112,947			79,112			93,878
Cash and cash equivalents, end of period	$	206,387		$	119,610		$	109,705		$	206,387


Large accelerated filer	☐	Accelerated filer	☑

Non-accelerated filer	☐	☐	Smaller reporting company	☐

		Emerging growth company	☐


		PAGE
PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Statements of Financial Condition (Unaudited) - at June 30, ~~2021~~2022 and December 31, ~~2020~~2021	3

	Consolidated Statements of Income (Unaudited) - Three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	4

	Consolidated Statements of Comprehensive (Loss) Income (Unaudited) - Three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	5

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	6

	Consolidated Statements of Cash Flows (Unaudited) - Six months ended June 30, ~~2021~~2022 and ~~2020~~2021	8

	Notes to Consolidated Financial Statements (Unaudited)	9

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	6468

ITEM 4.	Controls and Procedures	6569

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	6670

ITEM 6.2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

ITEM 6.	Exhibits	6771

	Signatures	6872


(In thousands, except per share amounts)	Three months ended June 30,						Six months ended June 30,						Three months ended June 30,						Six months ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
Interest income:
Interest and fees on loans	$	36,393		$	35,197		$	73,452		$	72,057		$	38,872		$	36,393		$	75,170		$	73,452
Interest and dividends on investment securities		4,498			4,538			8,685			9,120			6,294			4,498			12,330			8,685
Other interest income		61			24			88			235			110			61			127			88
Total interest income		40,952			39,759			82,225			81,412			45,276			40,952			87,627			82,225
Interest expense:
Deposits		2,165			4,677			4,400			11,696			2,366			2,165			4,071			4,400
Short-term borrowings		—			284			119			1,176			252			0			280			119
Long-term borrowings		1,055			617			2,117			1,235			1,061			1,055			2,121			2,117
Total interest expense		3,220			5,578			6,636			14,107			3,679			3,220			6,472			6,636
Net interest income		37,732			34,181			75,589			67,305			41,597			37,732			81,155			75,589
(Benefit) provision for credit losses		(4,622	)		3,746			(6,603	)		17,661
Net interest income after (benefit) provision for credit losses		42,354			30,435			82,192			49,644
Provision (benefit) for credit losses														563			(4,622	)		2,882			(6,603	)
Net interest income after provision (benefit) for credit losses														41,034			42,354			78,273			82,192
Noninterest income:
Service charges on deposits		1,287			480			2,579			2,067			1,437			1,287			2,806			2,579
Insurance income		1,147			819			2,543			2,168			1,234			1,147			3,331			2,543
Card interchange income		2,194			1,776			4,152			3,378			2,103			2,194			4,055			4,152
Investment advisory		2,886			2,251			5,658			4,497			2,906			2,886			5,947			5,658
Company owned life insurance		693			462			1,350			927			869			693			1,702			1,350
Investments in limited partnerships		238			(244	)		1,093			(31	)		242			238			1,037			1,093
Loan servicing		91			50			188			57			135			91			244			188
(Loss) income from derivative instruments, net		(592	)		1,940			1,283			2,686
Income (loss) from derivative instruments, net														645			(592	)		1,164			1,283
Net gain on sale of loans held for sale		790			612			1,868			864			828			790			737			1,868
Net (loss) gain on investment securities		(3	)		674			71			895			(15	)		(3	)		(15	)		71
Net gain (loss) on other assets		153			(1	)		148			63
Net gain (loss) on tax credit investments		276			(40	)		191			(80	)
Net gain on other assets														7			153			7			148
Net (loss) gain on tax credit investments														(92	)		276			(319	)		191
Other		1,030			934			2,025			2,132			1,061			1,030			1,986			2,025
Total noninterest income		10,190			9,713			23,149			19,623			11,360			10,190			22,682			23,149
Noninterest expense:
Salaries and employee benefits		14,519			15,074			28,984			30,088			16,966			14,519			33,582			28,984
Occupancy and equipment		3,286			3,388			6,668			7,144			4,015			3,286			7,771			6,668
Professional services		1,603			1,580			3,498			3,732			1,269			1,603			2,925			3,498
Computer and data processing		3,460			2,699			6,581			5,372			4,573			3,460			8,552			6,581
Supplies and postage		430			517			914			1,070			469			430			1,010			914
FDIC assessments		480			539			1,245			911			621			480			1,134			1,245
Advertising and promotions		436			545			760			1,100			406			436			786			760
Amortization of intangibles		266			287			537			581			249			266			503			537
Restructuring charges														1,269			0			1,269			0
Other		2,464			1,946			4,497			4,247			3,050			2,464			5,490			4,497
Total noninterest expense		26,944			26,575			53,684			54,245			32,887			26,944			63,022			53,684
Income before income taxes		25,600			13,573			51,657			15,022			19,507			25,600			37,933			51,657
Income tax expense		5,400			2,441			10,747			2,763			3,859			5,400			7,302			10,747
Net income	$	20,200		$	11,132		$	40,910		$	12,259		$	15,648		$	20,200		$	30,631		$	40,910
Preferred stock dividends		366			366			731			731			365			366			729			731
Net income available to common shareholders	$	19,834		$	10,766		$	40,179		$	11,528		$	15,283		$	19,834		$	29,902		$	40,179
Earnings per common share (Note 4):
Basic	$	1.25		$	0.67		$	2.53		$	0.72		$	1.00		$	1.25		$	1.94		$	2.53
Diluted	$	1.25		$	0.67		$	2.52		$	0.72		$	0.99		$	1.25		$	1.93		$	2.52
Cash dividends declared per common share	$	0.27		$	0.26		$	0.54		$	0.52		$	0.29		$	0.27		$	0.58		$	0.54


(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, 2020	$	17,328		$	161	$	125,118		$	324,850		$	2,128		$	(1,222	)	$	468,363
Balance at December 31, 2021																					$	17,292	$	161	$	126,105		$	384,007		$	(13,207	)	$	(9,216	)	$	505,142
Comprehensive income:
Net income		—			—		—			20,710			—			—			20,710			—		—		—			14,983			—			—			14,983
Other comprehensive loss, net of tax		—			—		—			—			(12,700	)		—			(12,700	)		—		—		—			—			(53,887	)		—			(53,887	)
Common stock issued		—			—		3			—			—			298			301
Purchases of common stock for treasury		—			—		—			—			—			(5,963	)		(5,963	)		—		—		—			—			—			(15,026	)		(15,026	)
Purchases of 8.48% preferred stock		(6	)		—		—			—			—			—			(6	)
Share-based compensation plans:
Share-based compensation		—			—		216			—			—			—			216			—		—		443			—			—			—			443
Restricted stock units released		—			—		(446	)		—			—			446			—			—		—		(667	)		—			—			667			—
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
Series A 3% Preferred-$0.75 per share																						—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share																						—		—		—			(364	)		—			—			(364	)
Common-$0.29 per share																						—		—		—			(4,444	)		—			—			(4,444	)
Balance at March 31, 2022																					$	17,292	$	161	$	125,881		$	394,181		$	(67,094	)	$	(23,575	)	$	446,846
Comprehensive income:
Net income		—			—		—			20,200			—			—			20,200			—		—		—			15,648			—			—			15,648
Other comprehensive income, net of tax		—			—		—			—			4,638			—			4,638			—		—		—			—			(32,631	)		—			(32,631	)
Purchases of common stock for treasury		—			—		—			—			—			(1	)		(1	)		—		—		—			—			—			(301	)		(301	)
Purchases of 8.48% preferred stock		(30	)		—		(7	)		—			—			—			(37	)
Share-based compensation plans:
Share-based compensation		—			—		562			—			—			—			562			—		—		947			—			—			—			947
Restricted stock units released																						—		—		(917	)		—			—			917			—
Restricted stock awards issued		—			—		(223	)		—			—			223			—			—		—		(332	)		—			—			332			—
Stock awards		—			—		30			—			—			88			118							(11	)								113			102
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
Series A 3% Preferred-$0.75 per share																						—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per share																						—		—		—			(363	)		—			—			(363	)
Common-$0.29 per share																						—		—		—			(4,446	)		—			—			(4,446	)
Balance at June 30, 2022																					$	17,292	$	161	$	125,568		$	405,019		$	(99,725	)	$	(22,514	)	$	425,801

	Principal Amount Outstanding		Net Deferred Loan (Fees) Costs			Loans, Net
June 30, 2021
									Principal Amount Outstanding		Net Deferred Loan (Fees) Costs			Loans, Net
June 30, 2022
Commercial business	$	735,928	$	(4,720	)	$	731,208		$	610,587	$	515		$	611,102
Commercial mortgage		1,317,754		(2,350	)		1,315,404			1,451,016		(2,864	)		1,448,152
Residential real estate loans		576,632		13,671			590,303			561,155		13,629			574,784
Residential real estate lines		77,773		3,008			80,781			72,972		3,136			76,108
Consumer indirect		868,430		30,588			899,018			1,000,252		38,999			1,039,251
Other consumer		15,322		132			15,454			14,508		113			14,621
Total	$	3,591,839	$	40,329			3,632,168		$	3,710,490	$	53,528			3,764,018
Allowance for credit losses - loans							(46,365	)							(42,452	)
Total loans, net						$	3,585,803							$	3,721,566
December 31, 2020
December 31, 2021
Commercial business	$	798,409	$	(4,261	)	$	794,148		$	639,368	$	(1,075	)	$	638,293
Commercial mortgage		1,256,525		(2,624	)		1,253,901			1,415,486		(2,698	)		1,412,788
Residential real estate loans		586,537		13,263			599,800			563,579		13,720			577,299
Residential real estate lines		86,708		3,097			89,805			75,515		3,016			78,531
Consumer indirect		812,816		27,605			840,421			923,052		34,996			958,048
Other consumer		16,913		150			17,063			14,355		122			14,477
Total	$	3,557,908	$	37,230			3,595,138		$	3,631,355	$	48,081			3,679,436
Allowance for credit losses - loans							(52,420	)							(39,676	)
Total loans, net						$	3,542,718							$	3,639,760

	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
June 30, 2021
																	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
June 30, 2022
Commercial business	$	80	$	—	$	—	$	80	$	1,555	$	734,293	$	735,928	$	899	$	108	$	1,392	$	0	$	1,500	$	422	$	608,665	$	610,587	$	369
Commercial mortgage		900		—		—		900		885		1,315,969		1,317,754		355		15		0		0		15		836		1,450,165		1,451,016		806
Residential real estate loans		612		16		—		628		2,615		573,389		576,632		2,615		1,052		129		0		1,181		2,738		557,236		561,155		2,738
Residential real estate lines		116		—		—		116		280		77,377		77,773		280		97		23		0		120		160		72,692		72,972		160
Consumer indirect		2,643		502		—		3,145		1,250		864,035		868,430		1,250		7,668		1,814		0		9,482		2,389		988,381		1,000,252		2,389
Other consumer		65		24		42		131		8		15,183		15,322		8		94		0		0		94		3		14,411		14,508		3
Total loans, gross	$	4,416	$	542	$	42	$	5,000	$	6,593	$	3,580,246	$	3,591,839	$	5,407	$	9,034	$	3,358	$	0	$	12,392	$	6,548	$	3,691,550	$	3,710,490	$	6,465
December 31, 2020
December 31, 2021
Commercial business	$	264	$	87	$	—	$	351	$	1,975	$	796,083	$	798,409	$	1,502	$	659	$	34	$	797	$	1,490	$	602	$	637,276	$	639,368	$	477
Commercial mortgage		822		26		—		848		2,906		1,252,771		1,256,525		2,709		69		0		0		69		6,414		1,409,003		1,415,486		781
Residential real estate loans		984		60		—		1,044		2,587		582,906		586,537		2,587		1,148		141		0		1,289		2,373		559,917		563,579		2,373
Residential real estate lines		40		15		—		55		323		86,330		86,708		323		18		3		0		21		200		75,294		75,515		200
Consumer indirect		3,966		1,348		—		5,314		1,495		806,007		812,816		1,495		5,706		770		0		6,476		1,780		914,796		923,052		1,780
Other consumer		133		18		231		382		—		16,531		16,913		—		121		1		0		122		0		14,233		14,355		0
Total loans, gross	$	6,209	$	1,554	$	231	$	7,994	$	9,286	$	3,540,628	$	3,557,908	$	8,616	$	7,721	$	949	$	797	$	9,467	$	11,369	$	3,610,519	$	3,631,355	$	5,611


	Collateral type
	Business assets		Real property		Total		Specific Reserve
June 30, 2022
Commercial business	$	205	$	974	$	1,179	$	237
Commercial mortgage		—		22,764		22,764		2,698
Total	$	205	$	23,738	$	23,943	$	2,935

December 31, 2021
Commercial business	$	326	$	993	$	1,319	$	1,055
Commercial mortgage		—		37,936		37,936		4,716
Total	$	326	$	38,929	$	39,255	$	5,771

	Term Loans Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total		Term Loans Amortized Cost Basis by Origination Year
June 30, 2021
																			2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
June 30, 2022
Commercial Business
Uncriticized	$	65,107	$	175,374	$	97,307	$	60,740	$	20,000	$	21,457	$	281,613	$	0	$	721,598	$	54,182	$	124,276	$	87,077	$	35,324	$	38,282	$	30,569	$	231,868	$	0	$	601,578
Special mention		27		104		14		129		26		1,083		2,974		0		4,357		220		2,342		12		194		140		0		1,185		0		4,093
Substandard		0		65		173		945		213		133		3,724		0		5,253		0		41		25		175		562		1,377		3,251		0		5,431
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total	$	65,134	$	175,543	$	97,494	$	61,814	$	20,239	$	22,673	$	288,311	$	0	$	731,208	$	54,402	$	126,659	$	87,114	$	35,693	$	38,984	$	31,946	$	236,304	$	0	$	611,102
Commercial Mortgage
Uncriticized	$	137,070	$	340,304	$	196,386	$	145,712	$	145,919	$	181,455	$	165	$	0	$	1,147,011	$	173,305	$	357,855	$	295,281	$	172,506	$	120,731	$	254,463	$	3,664	$	0	$	1,377,805
Special mention		496		16,636		50,195		9,635		25,426		39,954		0		0		142,342		0		484		2,370		14,489		195		29,083		0		0		46,621
Substandard		0		327		2,938		11,733		1,276		9,777		0		0		26,051		2,862		348		106		83		9,979		10,348		0		0		23,726
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total	$	137,566	$	357,267	$	249,519	$	167,080	$	172,621	$	231,186	$	165	$	0	$	1,315,404	$	176,167	$	358,687	$	297,757	$	187,078	$	130,905	$	293,894	$	3,664	$	0	$	1,448,152


																						Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended June 30, 2022
Beginning balance																						$	10,121		$	13,746		$	1,852		$	425		$	14,568		$	254		$	40,966
Charge-offs																							(191	)		0			(56	)		0			(2,672	)		(309	)		(3,228	)
Recoveries																							101			2,018			10			12			2,025			102			4,268
Provision (benefit)																							109			(3,700	)	��	334			72			3,411			220			446
Ending balance																						$	10,140		$	12,064		$	2,140		$	509		$	17,332		$	267		$	42,452
Six months ended June 30, 2022
Beginning balance																						$	11,099		$	14,777		$	1,604		$	379		$	11,611		$	206		$	39,676
Charge-offs																							(242	)		0			(56	)		0			(5,158	)		(685	)		(6,141	)
Recoveries																							189			2,019			15			17			3,961			193			6,394
(Benefit) provision																							(906	)		(4,732	)		577			113			6,918			553			2,523
Ending balance																						$	10,140		$	12,064		$	2,140		$	509		$	17,332		$	267		$	42,452


	Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total			Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended June 30, 2021
Beginning balance	$	12,670		$	22,672		$	3,109		$	482		$	10,557		$	338		$	49,828		$	12,670		$	22,672		$	3,109		$	482		$	10,557		$	338		$	49,828
Charge-offs		(92	)		0			(56	)		0			(1,157	)		(424	)		(1,729	)		(92	)		0			(56	)		0			(1,157	)		(424	)		(1,729	)
Recoveries		379			7			59			0			1,583			95			2,123			379			7			59			0			1,583			95			2,123
Provision (credit)		(1,952	)		(1,017	)		(813	)		(87	)		(235	)		247			(3,857	)
(Benefit) provision																							(1,952	)		(1,017	)		(813	)		(87	)		(235	)		247			(3,857	)
Ending balance	$	11,005		$	21,662		$	2,299		$	395		$	10,748		$	256		$	46,365		$	11,005		$	21,662		$	2,299		$	395		$	10,748		$	256		$	46,365
Six months ended June 30, 2021
Beginning balance	$	13,580		$	21,763		$	3,924		$	674		$	12,165		$	314		$	52,420			13,580			21,763			3,924			674			12,165			314			52,420
Charge-offs		(178	)		(203	)		(67	)		(70	)		(3,570	)		(505	)		(4,593	)		(178	)		(203	)		(67	)		(70	)		(3,570	)		(505	)		(4,593	)
Recoveries		617			7			64			0			3,253			159			4,100			617			7			64			0			3,253			159			4,100
Provision (credit)		(3,014	)		95			(1,622	)		(209	)		(1,100	)		288			(5,562	)
(Benefit) provision																							(3,014	)		95			(1,622	)		(209	)		(1,100	)		288			(5,562	)
Ending balance	$	11,005		$	21,662		$	2,299		$	395		$	10,748		$	256		$	46,365		$	11,005		$	21,662		$	2,299		$	395		$	10,748		$	256		$	46,365


Twelve months ended June 30,
2023	$	1,091
2024		1,769
2025		1,456
2026		1,382
2027		1,299
Thereafter		29,573
Total future minimum operating lease payments		36,570
Amounts representing interest		(13,377	)
Present value of net future minimum operating lease payments	$	23,193

Twelve months ended June 30,
2022	$	2,334
2023		2,045
2024		1,507
2025		1,417
2026		1,338
Thereafter		30,217
Total future minimum operating lease payments		38,858
Amounts representing interest		(14,055	)
Present value of net future minimum operating lease payments	$	24,803

	Banking		All Other ⁽¹⁾		Total
Balance, December 31, 2020	$	48,536	$	17,526	$	66,062
Acquisition		—		611		611
Balance, June 30, 2021	$	48,536	$	18,137	$	66,673


	Banking		All Other (1)		Total
Balance, December 31, 2021	$	48,536	$	18,535	$	67,071
Acquisitions		0		0		0
Balance, June 30, 2022	$	48,536	$	18,535	$	67,071

2021 (remainder of year)	$	513
2022		960
2023		887
2024		816
2025		745
2026		675


2022 (remainder of year)	$	482
2023		910
2024		838
2025		766
2026		694
2027		623


					Asset derivatives					Liability derivatives
	Gross notional amount				Balance	Fair value				Balance	Fair value
	June 30, 2022		December 31, 2021		sheet line item	June 30, 2022		December 31, 2021		sheet line item	June 30, 2022		December 31, 2021
Derivatives designated as hedging instruments
Cash flow hedges	$	50,000	$	50,000	Other assets	$	5,048	$	1,559	Other liabilities	$	—	$	0
Total derivatives	$	50,000	$	50,000		$	5,048	$	1,559		$	—	$	0
Derivatives not designated as hedging instruments
Interest rate swaps (1)		942,004		820,693	Other assets		33,033		14,702	Other liabilities		33,037		14,708
Credit contracts		116,104		106,671	Other assets		0		0	Other liabilities		0		1
Mortgage banking		14,614		18,199	Other assets		117		243	Other liabilities		90		4
Total derivatives	$	1,072,722	$	945,563		$	33,150	$	14,945		$	33,127	$	14,713


		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 June 30,					Six months ended June 30,					Line item of gain (loss)	Three months ended June 30,					Six months ended June 30,
Undesignated derivatives	recognized in income	2021			2020		2021			2020		recognized in income	2022		2021			2022			2021
Cash flow hedges	Income from derivative instruments, net	$	—		$	—	$	—		$	—
Interest rate swaps	Income from derivative instruments, net		(333	)		1,681		1,439			2,405	Income from derivative instruments, net		596		(333	)		1,358			1,439
Credit contracts	Income from derivative instruments, net		(12	)		128		36			123	Income from derivative instruments, net		18		(12	)		18			36
Mortgage banking	Income from derivative instruments, net		(247	)		131		(192	)		158	Income from derivative instruments, net		31		(247	)		(212	)		(192	)
Total undesignated		$	(592	)	$	1,940	$	1,283		$	2,686		$	645	$	(592	)	$	1,164		$	1,283

	Outstanding			Treasury			Issued
									Outstanding			Treasury			Issued
2022
Shares at December 31, 2021										15,745,453			354,103			16,099,556
Restricted stock units released										23,271			(23,271	)		—
Treasury stock purchases										(469,647	)		469,647			—
Shares at March 31, 2022										15,299,077			800,479			16,099,556
Restricted stock awards issued										11,300			(11,300	)		—
Stock awards										3,848			(3,848	)		—
Restricted stock units released										31,141			(31,141	)
Treasury stock purchases										(11,275	)		11,275			—
Shares at June 30, 2022										15,334,091			765,465			16,099,556
2021
Shares at December 31, 2020		16,041,926			57,630			16,099,556		16,041,926			57,630			16,099,556
Shares issued for Landmark Group acquisition		12,831			(12,831	)		—		12,831			(12,831	)		—
Restricted stock units released		18,819			(18,819	)		—		18,819			(18,819	)		—
Treasury stock purchases		(244,677	)		244,677			—		(244,677	)		244,677			—
Shares at March 31, 2021		15,828,899			270,657			16,099,556		15,828,899			270,657			16,099,556
Restricted stock awards issued		9,350			(9,350	)		—		9,350			(9,350	)		—
Stock awards		3,680			(3,680	)		—		3,680			(3,680	)		—
Shares at June 30, 2021		15,841,929			257,627			16,099,556		15,841,929			257,627			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

	Pre-tax Amount			Tax Effect			Net-of-tax Amount
Three months ended June 30, 2021
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	6,661		$	1,707		$	4,954
Reclassification adjustment for net gains included in net income ⁽¹⁾		64			16			48
Total securities available for sale and transferred securities		6,725			1,723			5,002
Hedging derivative instruments:
Change in unrealized gain/loss during the period		(674	)		(173	)		(501	)
Pension and post-retirement obligations:
Amortization of prior service credit included in income		—			—			—
Amortization of net actuarial loss included in income		185			48			137
Total pension and post-retirement obligations		185			48			137
Other comprehensive income	$	6,236		$	1,598		$	4,638
Six months ended June 30, 2021
										Pre-tax Amount			Tax Effect			Net-of-tax Amount
Three months ended June 30, 2022
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	(12,701	)	$	(3,254	)	$	(9,447	)	$	(44,966	)	$	(11,520	)	$	(33,446	)
Reclassification adjustment for net gains included in net income ⁽¹⁾		63			16			47			41			10			31
Total securities available for sale and transferred securities		(12,638	)		(3,238	)		(9,400	)		(44,925	)		(11,510	)		(33,415	)
Hedging derivative instruments:
Change in unrealized gain/loss during the period		1,429			366			1,063			991			254			737
Pension and post-retirement obligations:
Amortization of prior service credit included in income		(1	)		—			(1	)		0			0			0
Amortization of net actuarial loss included in income		371			95			276			64			17			47
Total pension and post-retirement obligations		370			95			275			64			17			47
Other comprehensive loss	$	(10,839	)	$	(2,777	)	$	(8,062	)	$	(43,870	)	$	(11,239	)	$	(32,631	)
Six months ended June 30, 2022
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period										$	(119,983	)	$	(30,741	)	$	(89,242	)
Reclassification adjustment for net gains included in net income (1)											72			18			54
Total securities available for sale and transferred securities											(119,911	)		(30,723	)		(89,188	)
Hedging derivative instruments:
Change in unrealized gain/loss during the period											3,462			887			2,575
Pension and post-retirement obligations:
Amortization of prior service credit included in income											0			0			0
Amortization of net actuarial loss included in income											128			33			95
Total pension and post-retirement obligations											128			33			95
Other comprehensive loss										$	(116,321	)	$	(29,803	)	$	(86,518	)

	Hedging Derivative Instruments			Securities Available for Sale and Transferred Securities			Pension and Post- retirement Obligations			Accumulated Other Comprehensive Income (Loss)
Three months ended June 30, 2021
Balance at beginning of period	$	1,248		$	341		$	(12,161	)	$	(10,572	)
Other comprehensive income (loss) before reclassifications		(501	)		4,954			—			4,453
Amounts reclassified from accumulated other comprehensive income (loss)		—			48			137			185
Net current period other comprehensive income (loss)		(501	)		5,002			137			4,638
Balance at end of period	$	747		$	5,343		$	(12,024	)	$	(5,934	)
Six months ended June 30, 2021
													Hedging Derivative Instruments			Securities Available for Sale and Transferred Securities			Pension and Post- retirement Obligations			Accumulated Other Comprehensive Income (Loss)
Three months ended June 30, 2022
Balance at beginning of period	$	(316	)	$	14,743		$	(12,299	)	$	2,128		$	2,998		$	(60,744	)	$	(9,348	)	$	(67,094	)
Other comprehensive income (loss) before reclassifications		1,063			(9,447	)		—			(8,384	)		737			(33,446	)		—			(32,709	)
Amounts reclassified from accumulated other comprehensive income (loss)		—			47			275			322			—			31			47			78
Net current period other comprehensive income (loss)		1,063			(9,400	)		275			(8,062	)		737			(33,415	)		47			(32,631	)
Balance at end of period	$	747		$	5,343		$	(12,024	)	$	(5,934	)	$	3,735		$	(94,159	)	$	(9,301	)	$	(99,725	)

Three months ended June 30, 2020
Six months ended June 30, 2022
Balance at beginning of period	$	(427	)	$	12,979		$	(14,634	)	$	(2,082	)	$	1,160		$	(4,971	)	$	(9,396	)	$	(13,207	)
Other comprehensive income (loss) before reclassifications		(388	)		2,166			—			1,778			2,575			(89,242	)		—			(86,667	)
Amounts reclassified from accumulated other comprehensive income (loss)		—			(425	)		233			(192	)		—			54			95			149
Net current period other comprehensive income (loss)		(388	)		1,741			233			1,586			2,575			(89,188	)		95			(86,518	)
Balance at end of period	$	(815	)	$	14,720		$	(14,401	)	$	(496	)	$	3,735		$	(94,159	)	$	(9,301	)	$	(99,725	)
Six months ended June 30, 2020


Three months ended June 30, 2021
Balance at beginning of period	$	(518	)	$	873		$	(14,868	)		(14,513	)	$	1,248		$	341		$	(12,161	)	$	(10,572	)
Other comprehensive income (loss) before reclassifications		(297	)		14,402			—			14,105
Amounts reclassified from accumulated other comprehensive income (loss)		—			(555	)		467			(88	)
Other comprehensive income before reclassifications														(501	)		4,954			—			4,453
Amounts reclassified from accumulated other comprehensive (loss) income														—			48			137			185
Net current period other comprehensive income (loss)		(297	)		13,847			467			14,017			(501	)		5,002			137			4,638
Balance at end of period	$	(815	)	$	14,720		$	(14,401	)	$	(496	)	$	747		$	5,343		$	(12,024	)	$	(5,934	)

Six months ended June 30, 2021
Balance at beginning of period													$	(316	)	$	14,743		$	(12,299	)	$	2,128
Other comprehensive (loss) income before reclassifications														1,063			(9,447	)		—			(8,384	)
Amounts reclassified from accumulated other comprehensive (loss) income														—			47			275			322
Net current period other comprehensive income (loss)														1,063			(9,400	)		275			(8,062	)
Balance at end of period													$	747		$	5,343		$	(12,024	)	$	(5,934	)


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 (Loss) Income						Affected Line Item in the Consolidated Statement of Income
	Three months ended							Three months ended June 30,
	June 30,
	2021			2020				2022			2021
Realized gain (loss) on sale of investment securities	$	(3	)	$	674		Net gain (loss) on investment securities
Amortization of unrealized holding losses on investment securities transferred from available for sale to held to maturity		(61	)		(103	)	Interest income
Realized loss on sale of investment securities								$	(15	)	$	(3	)	Net (loss) gain on investment securities
Amortization of unrealized holding gain on investment securities transferred from available for sale to held to maturity									(26	)		(61	)	Interest income
		(64	)		571		Total before tax		(41	)		(64	)	Total before tax
		16			(146	)	Income tax expense		10			16		Income tax expense
		(48	)		425		Net of tax		(31	)		(48	)	Net of tax
Amortization of pension and post-retirement items:
Prior service credit ⁽¹⁾		—			9		Salaries and employee benefits		0			0		Salaries and employee benefits
Net actuarial losses ⁽¹⁾		(185	)		(323	)	Salaries and employee benefits		(64	)		(185	)	Salaries and employee benefits
		(185	)		(314	)	Total before tax		(64	)		(185	)	Total before tax
		48			81		Income tax benefit		17			48		Income tax benefit
		(137	)		(233	)	Net of tax		(47	)		(137	)	Net of tax
Total reclassified for the period	$	(185	)	$	192			$	(78	)	$	(185	)

	Six months ended							Six months ended
	June 30,							June 30,
	2021			2020				2022			2021
Realized gain on sale of investment securities	$	71		$	895		Net gain (loss) on investment securities
Amortization of unrealized holding losses on investment securities transferred from available for sale to held to maturity		(134	)		(149	)	Interest income
Realized (loss) gain on sale of investment securities								$	(15	)	$	71		Net (loss) gain on investment securities
Amortization of unrealized holding gains on investment securities transferred from available for sale to held to maturity									(57	)		(134	)	Interest income
		(63	)		746		Total before tax		(72	)		(63	)	Total before tax
		16			(191	)	Income tax (expense) benefit		18			16		Income tax expense
		(47	)		555		Net of tax		(54	)		(47	)	Net of tax
Amortization of pension and post-retirement items:
Prior service credit ⁽¹⁾		1			18		Salaries and employee benefits		0			1		Salaries and employee benefits
Net actuarial losses ⁽¹⁾		(371	)		(646	)	Salaries and employee benefits		(128	)		(371	)	Salaries and employee benefits
		(370	)		(628	)	Total before tax		(128	)		(370	)	Total before tax
		95			161		Income tax benefit		33			95		Income tax benefit
		(275	)		(467	)	Net of tax		(95	)		(275	)	Net of tax
Total reclassified for the period	$	(322	)	$	88			$	(149	)	$	(322	)


	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		59,998	$	27.50		79,140	$	29.35
PSUs		22,178		27.58		29,324		29.35


	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		168,513		$	25.65		195,990		$	26.56
Granted		91,526			27.99		119,764			29.08
Vested		(29,888	)		26.64		(60,362	)		26.38
Forfeited		(25,977	)		26.68		(2,000	)		26.56
Outstanding at end of period		204,174		$	26.42		253,392		$	27.80

	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
June 30, 2021
											Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
June 30, 2022
Measured on a recurring basis:
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	—	$	6,563		$	—	$	6,563		$	—	$	22,190		$	—	$	22,190
Mortgage-backed securities		—		896,282			—		896,282			—		1,034,828			—		1,034,828
Other assets:
Hedging derivative instruments		—		1,004			—		1,004			—		5,048			—		5,048
Fair value adjusted through comprehensive income	$	—	$	903,849		$	—	$	903,849		$	—	$	1,062,066		$	—	$	1,062,066
Other assets:
Derivative instruments - interest rate swaps		—		15,108			—		15,108			—		33,033			—		33,033
Derivative instruments - credit contracts		—		14			—		14			—		0			—		0
Derivative instruments - mortgage banking		—		317			—		317			—		117			—		117
Other liabilities:
Derivative instruments - interest rate swaps		—		(14,972	)		—		(14,972	)		—		(33,037	)		—		(33,037	)
Derivative instruments - credit contracts		—		(53	)		—		(53	)		—		0			—		0
Derivative instruments - mortgage banking		—		(39	)		—		(39	)		—		(90	)		—		(90	)
Fair value adjusted through net income	$	—	$	375		$	—	$	375		$	—	$	23		$	—	$	23
Measured on a nonrecurring basis:
Loans:
Loans held for sale	$	—	$	3,929		$	—	$	3,929		$	—	$	4,265		$	—	$	4,265
Collateral dependent loans		—		—			53,268		53,268			—		—			21,008		21,008
Other assets:
Long-lived assets held for sale		—		1,118			—		1,118			—		0			1,813		1,813
Loan servicing rights		—		—			1,433		1,433			—		—			1,498		1,498
Other real estate owned		—		—			646		646
Total	$	—	$	5,047		$	55,347	$	60,394		$	—	$	4,265		$	24,319	$	28,584


	Level in	June 30, 2021				December 31, 2020				Level in	June 30, 2022				December 31, 2021
	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	$	206,387	$	206,387	$	93,878	$	93,878	Level 1	$	109,705	$	109,705	$	79,112	$	79,112
Securities available for sale	Level 2		902,845		902,845		628,059		628,059	Level 2		1,057,018		1,057,018		1,178,515		1,178,515
Securities held to maturity, net	Level 2		218,858		226,044		271,973		282,035	Level 2		204,933		195,451		205,581		209,820
Loans held for sale	Level 2		3,929		3,929		4,305		4,305	Level 2		4,265		4,265		6,202		6,202
Loans	Level 2		3,532,535		3,564,623		3,513,284		3,549,770
Loans ⁽¹⁾										Level 2		3,700,558		3,643,397		3,606,276		3,642,351
Loans ⁽¹⁾	Level 3		53,268		53,268		29,434		29,434	Level 3		21,008		21,008		33,484		33,484
Long-lived assets held for sale	Level 2		1,118		1,118		—		—	Level 3		1,813		1,813		2,560		2,560
Accrued interest receivable	Level 1		15,431		15,431		15,635		15,635	Level 1		15,872		15,872		15,482		15,482
Derivative instruments – cash flow hedges	Level 2		1,004		1,004		—		—	Level 2		5,048		5,048		1,559		1,559
Derivative instruments – interest rate products	Level 2		15,108		15,108		19,626		19,626	Level 2		33,033		33,033		14,702		14,702
Derivative instruments – credit contracts	Level 2		14		14		23		23	Level 2		0		0		0		0
Derivative instruments – mortgage banking	Level 2		317		317		471		471	Level 2		117		117		243		243
FHLB and FRB stock	Level 2		9,154		9,154		8,619		8,619	Level 2		15,098		15,098		10,770		10,770
Financial liabilities:
Non-maturity deposits	Level 1		3,717,939		3,717,939		3,392,774		3,392,774	Level 1		3,837,307		3,837,307		3,905,136		3,905,136
Time deposits	Level 2		941,282		941,649		885,593		887,113	Level 2		983,209		975,166		921,954		920,699
Short-term borrowings	Level 1		—		—		5,300		5,300	Level 1		109,000		109,000		30,000		30,000
Long-term borrowings	Level 2		73,756		78,286		73,623		83,953	Level 2		74,067		72,519		73,911		77,792
Accrued interest payable	Level 1		2,868		2,868		4,381		4,381	Level 1		1,805		1,805		2,147		2,147
Derivative instruments – cash flow hedges	Level 2		—		—		311		311	Level 2		—		—		0		0
Derivative instruments – interest rate products	Level 2		14,972		14,972		19,837		19,837	Level 2		33,037		33,037		14,708		14,708
Derivative instruments – credit contracts	Level 2		53		53		86		86	Level 2		0		0		1		1
Derivative instruments – mortgage banking	Level 2		39		39		1		1	Level 2		90		90		4		4


	Banking		All Other		Consolidated Totals
June 30, 2022
Goodwill	$	48,536	$	18,535	$	67,071
Other intangible assets, net		1		6,825		6,826
Total assets		5,529,426		38,772		5,568,198
December 31, 2021
Goodwill	$	48,536	$	18,535	$	67,071
Other intangible assets, net		3		7,326		7,329
Total assets		5,481,889		38,890		5,520,779

	Loan Loss Analysis
	Three months ended June 30,						Six months ended June 30,
	2021			2020			2021			2020
Allowance for credit losses - loans, beginning of period, prior to adoption of ASC 326										$	30,482
Impact of adopting ASC 326											9,594
Allowance for credit losses - loans, beginning of period, after adoption of ASC 326	$	49,828		$	43,356		$	52,420			40,076
Charge-offs:
Commercial business		92			25			178			8,266
Commercial mortgage		—			1,072			203			1,072
Residential real estate loans		56			2			67			100
Residential real estate lines		—			—			70			—
Consumer indirect		1,157			2,554			3,570			5,978
Other consumer		424			70			505			339
Total charge-offs		1,729			3,723			4,593			15,755
Recoveries:
Commercial business		379			1,483			617			1,541
Commercial mortgage		7			—			7			—
Residential real estate loans		59			8			64			18
Residential real estate lines		—			—			—			3
Consumer indirect		1,583			1,379			3,253			3,047
Other consumer		95			67			159			217
Total recoveries		2,123			2,937			4,100			4,826
Net (recoveries) charge-offs		(394	)		786			493			10,929
Provision (benefit) for credit losses - loans		(3,857	)		3,746			(5,562	)		17,169
Allowance for credit losses - loans, end of period	$	46,365		$	46,316		$	46,365		$	46,316

Net loan (recoveries) charge-offs to average loans (annualized)		-0.04	%		0.09	%		0.03	%		0.66	%
Allowance for credit losses - loans to total loans		1.28	%		1.33	%		1.28	%		1.33	%
Allowance for credit losses - loans to non-performing loans		699	%		351	%		699	%		351	%