UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20212022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto.
Commission File Number: 001-13695
(Exact name of registrant as specified in its charter)
Delaware |
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(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
5790 Widewaters Parkway, DeWitt, New York | |
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(Address of principal executive offices) | | (Zip Code) |
(315) 445-2282
(Registrant’s telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, $1.00 par value per share | | CBU | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ |
| Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
Indicate the numberNumber of shares outstanding of each of the issuer’s classes of common stock, par value $1.00 per share, outstanding as of the latest practicable date. 53,931,054 sharesclose of Common Stock, $1.00 par value per share, were outstandingbusiness on October 31, 2021.2022: 53,734,397 shares
TABLE OF CONTENTS
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| | Consolidated Statements of Condition September 30, | | 3 |
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| | Consolidated Statements of Income Three and nine months ended September 30, | | 4 |
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| | Consolidated Statements of Cash Flows Nine months ended September 30, | | 8 |
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| | Notes to the Consolidated Financial Statements September 30, | | 9 |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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2
Part I. Financial Information
Item 1. Financial Statements
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
(In Thousands, Except Share Data)
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
| | 2021 |
| 2020 | | 2022 |
| 2021 | ||||
Assets: | | |
|
| |
| | |
|
| |
|
Cash and cash equivalents | | $ | 2,322,661 | | $ | 1,645,805 | | $ | 247,391 | | $ | 1,875,064 |
Available-for-sale investment securities (cost of $4,406,878 and $3,427,779, respectively) | |
| 4,358,371 | |
| 3,547,892 | ||||||
Equity and other securities (cost of $44,069 and $46,511, respectively) | |
| 45,027 | |
| 47,455 | ||||||
Loans held for sale, at fair value | |
| 117 | |
| 1,622 | ||||||
Loans | |
| 7,282,582 | |
| 7,415,952 | ||||||
Available-for-sale investment securities includes pledged securities that can be sold or repledged of $427,164 and $485,414, respectively (cost of $6,136,544 and $4,980,102, respectively) | |
| 5,170,689 | |
| 4,934,210 | ||||||
Equity and other securities (cost of $55,665 and $43,917, respectively) | |
| 56,603 | |
| 44,879 | ||||||
| | | | | | | ||||||
Loans, net | |
| 8,543,607 | |
| 7,373,639 | ||||||
Allowance for credit losses | |
| (49,499) | |
| (60,869) | |
| (60,363) | |
| (49,869) |
Net loans | |
| 7,233,083 | |
| 7,355,083 | |
| 8,483,244 | |
| 7,323,770 |
| |
| | | | | |
| | | | |
Goodwill, net | |
| 799,127 | |
| 793,708 | ||||||
Goodwill | |
| 844,984 | |
| 799,109 | ||||||
Core deposit intangibles, net | |
| 10,165 | |
| 13,831 | |
| 13,550 | |
| 9,087 |
Other intangibles, net | |
| 58,812 | |
| 39,109 | |
| 50,690 | |
| 56,139 |
Intangible assets, net | |
| 868,104 | |
| 846,648 | ||||||
Goodwill and intangible assets, net | |
| 909,224 | |
| 864,335 | ||||||
| | | | | | | | | | | | |
Premises and equipment, net | |
| 160,776 | |
| 165,655 | | | 161,966 | | | 160,651 |
Accrued interest and fees receivable | |
| 34,072 | |
| 39,031 | |
| 41,627 | |
| 35,894 |
Other assets | |
| 308,887 | |
| 281,903 | |
| 523,803 | |
| 313,854 |
| | | | | | | | | | | | |
Total assets | | $ | 15,331,098 | | $ | 13,931,094 | | $ | 15,594,547 | | $ | 15,552,657 |
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| | |
| | |
| | |
| |
Liabilities: | | | | | | | | | | | | |
Noninterest-bearing deposits | | $ | 3,864,951 | | $ | 3,361,768 | | $ | 4,281,859 | | $ | 3,921,663 |
Interest-bearing deposits | |
| 8,858,870 | |
| 7,863,206 | |
| 9,204,462 | |
| 8,989,505 |
Total deposits | |
| 12,723,821 | |
| 11,224,974 | |
| 13,486,321 | |
| 12,911,168 |
| | | | | | | | | | | | |
Overnight borrowings | |
| 119,800 | |
| 0 | ||||||
Securities sold under agreement to repurchase, short-term | |
| 316,763 | |
| 284,008 | |
| 352,772 | |
| 324,720 |
Other Federal Home Loan Bank borrowings | |
| 2,912 | |
| 6,658 | |
| 19,472 | |
| 1,888 |
Subordinated notes payable | |
| 3,283 | |
| 3,303 | |
| 3,256 | |
| 3,277 |
Subordinated debt held by unconsolidated subsidiary trusts | |
| 0 | |
| 77,320 | ||||||
Accrued interest and other liabilities | |
| 214,385 | |
| 230,724 | |
| 151,763 | |
| 210,797 |
Total liabilities | |
| 13,261,164 | |
| 11,826,987 | |
| 14,133,384 | |
| 13,451,850 |
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Commitments and contingencies (See Note J) | | | | | | | | | | | | |
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Shareholders’ equity: | | | | | | | | | | | | |
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Common stock, $1.00 par value, 75,000,000 shares authorized; 54,071,989 and 53,754,599 shares issued, respectively | |
| 54,072 | |
| 53,755 | ||||||
Common stock, $1.00 par value, 75,000,000 shares authorized; 54,188,008 and 54,092,421 shares issued, respectively | |
| 54,188 | |
| 54,092 | ||||||
Additional paid-in capital | |
| 1,039,146 | |
| 1,025,163 | |
| 1,048,444 | |
| 1,041,304 |
Retained earnings | |
| 1,037,936 | |
| 960,183 | |
| 1,123,641 | |
| 1,058,286 |
Accumulated other comprehensive (loss) income | |
| (63,826) | |
| 62,077 | ||||||
Treasury stock, at cost (146,002 shares, including 145,987 shares held by deferred compensation arrangements at September 30, 2021 and 161,472 shares including 161,457 shares held by deferred compensation arrangements at December 31, 2020, respectively) | |
| (5,693) | |
| (6,198) | ||||||
Deferred compensation arrangements (145,987 and 161,457 shares, respectively) | |
| 8,299 | |
| 9,127 | ||||||
Accumulated other comprehensive loss | |
| (746,381) | |
| (50,627) | ||||||
Treasury stock, at cost (451,992 shares, including 134,477 shares held by deferred compensation arrangements at September 30, 2022 and 214,374 shares including 146,860 shares held by deferred compensation arrangements at December 31, 2021, respectively) | |
| (26,426) | |
| (10,610) | ||||||
Deferred compensation arrangements (134,477 and 146,860 shares, respectively) | |
| 7,697 | |
| 8,362 | ||||||
Total shareholders’ equity | |
| 2,069,934 | |
| 2,104,107 | |
| 1,461,163 | |
| 2,100,807 |
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Total liabilities and shareholders’ equity | | $ | 15,331,098 | | $ | 13,931,094 | | $ | 15,594,547 | | $ | 15,552,657 |
TheSee accompanying notes are an integral part of theto consolidated financial statements.statements (unaudited).
3
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In Thousands, Except Per-Share Data)
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
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| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Interest income: |
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Interest and fees on loans | | $ | 75,825 | | $ | 79,646 | | $ | 231,446 | | $ | 236,931 |
Interest and dividends on taxable investments | |
| 17,361 | |
| 14,881 | |
| 49,325 | |
| 45,633 |
Interest and dividends on nontaxable investments | |
| 2,480 | |
| 2,963 | |
| 7,920 | |
| 9,113 |
Total interest income | |
| 95,666 | |
| 97,490 | |
| 288,691 | |
| 291,677 |
| | | | | | | | | | | | |
Interest expense: | |
| | |
| | |
| | |
| |
Interest on deposits | |
| 2,822 | |
| 3,655 | |
| 8,897 | |
| 13,373 |
Interest on borrowings | |
| 195 | |
| 292 | |
| 716 | |
| 1,280 |
Interest on subordinated notes payable | |
| 38 | |
| 184 | |
| 115 | |
| 553 |
Interest on subordinated debt held by unconsolidated subsidiary trusts | |
| 0 | |
| 394 | |
| 293 | |
| 1,501 |
Total interest expense | |
| 3,055 | |
| 4,525 | |
| 10,021 | |
| 16,707 |
| | | | | | | | | | | | |
Net interest income | |
| 92,611 | |
| 92,965 | |
| 278,670 | |
| 274,970 |
Provision for credit losses | |
| (944) | |
| 1,945 | |
| (11,001) | |
| 17,313 |
Net interest income after provision for credit losses | |
| 93,555 | |
| 91,020 | |
| 289,671 | |
| 257,657 |
| | | | | | | | | | | | |
Noninterest revenues: | |
| | |
| | |
| | |
| |
Deposit service fees | |
| 15,442 | |
| 14,260 | |
| 43,758 | |
| 42,722 |
Mortgage banking | | | 460 | |
| 3,908 | |
| 1,479 | |
| 6,199 |
Other banking services | |
| 996 | |
| 924 | |
| 2,830 | |
| 2,574 |
Employee benefit services | |
| 29,923 | |
| 25,159 | |
| 83,933 | |
| 74,593 |
Insurance services | |
| 9,176 | |
| 8,531 | |
| 25,538 | |
| 24,772 |
Wealth management services | |
| 8,322 | | | 6,889 | | | 24,748 | | | 20,389 |
Unrealized (loss) gain on equity securities | | | (10) | |
| (12) | |
| 14 | |
| (30) |
Total noninterest revenues | |
| 64,309 | |
| 59,659 | |
| 182,300 | |
| 171,219 |
| | | | | | | | | | | | |
Noninterest expenses: | |
| | |
| | |
| | |
| |
Salaries and employee benefits | |
| 62,883 | |
| 57,280 | |
| 178,407 | |
| 170,252 |
Occupancy and equipment | |
| 9,867 | |
| 10,134 | |
| 31,437 | |
| 30,627 |
Data processing and communications | |
| 12,966 | |
| 12,096 | |
| 38,123 | |
| 33,342 |
Amortization of intangible assets | |
| 3,703 | |
| 3,581 | |
| 10,300 | |
| 10,772 |
Legal and professional fees | |
| 3,352 | |
| 2,365 | |
| 8,885 | |
| 8,577 |
Business development and marketing | |
| 2,383 | |
| 3,145 | |
| 7,071 | |
| 7,162 |
Litigation accrual | | | (100) | | | 2,950 | | | (100) | | | 2,950 |
Acquisition expenses | |
| 102 | |
| 796 | | | 133 | |
| 4,537 |
Other expenses | |
| 5,280 | |
| 4,619 | | | 12,969 | |
| 13,313 |
Total noninterest expenses | |
| 100,436 | |
| 96,966 | | | 287,225 | |
| 281,532 |
| | | | | | | | | | | | |
Income before income taxes | |
| 57,428 | |
| 53,713 | | | 184,746 | |
| 147,344 |
Income taxes | |
| 12,092 | |
| 10,904 | | | 38,616 | |
| 29,153 |
Net income | | $ | 45,336 | | $ | 42,809 | | $ | 146,130 | | $ | 118,191 |
| | | | | | | | | | | | |
Basic earnings per share | | $ | 0.84 | | $ | 0.80 | | $ | 2.70 | | $ | 2.23 |
Diluted earnings per share | | $ | 0.83 | | $ | 0.79 | | $ | 2.68 | | $ | 2.22 |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Interest income: |
| |
|
| |
|
| |
|
| |
|
Interest and fees on loans | | $ | 88,434 | | $ | 75,825 | | $ | 238,907 | | $ | 231,446 |
Interest and dividends on taxable investments | |
| 23,737 | |
| 17,361 | |
| 71,228 | |
| 49,325 |
Interest and dividends on nontaxable investments | |
| 3,704 | |
| 2,480 | |
| 9,611 | |
| 7,920 |
Total interest income | |
| 115,875 | |
| 95,666 | |
| 319,746 | |
| 288,691 |
| | | | | | | | | | | | |
Interest expense: | |
| | |
| | |
| | |
| |
Interest on deposits | |
| 3,855 | |
| 2,822 | |
| 9,111 | |
| 8,897 |
Interest on borrowings | |
| 1,588 | |
| 195 | |
| 2,113 | |
| 716 |
Interest on subordinated notes payable | |
| 38 | |
| 38 | |
| 115 | |
| 115 |
Interest on subordinated debt held by unconsolidated subsidiary trusts | |
| 0 | |
| 0 | |
| 0 | |
| 293 |
Total interest expense | |
| 5,481 | |
| 3,055 | |
| 11,339 | |
| 10,021 |
| | | | | | | | | | | | |
Net interest income | |
| 110,394 | |
| 92,611 | |
| 308,407 | |
| 278,670 |
Provision for credit losses | |
| 5,061 | |
| (944) | |
| 12,005 | |
| (11,001) |
Net interest income after provision for credit losses | |
| 105,333 | |
| 93,555 | |
| 296,402 | |
| 289,671 |
| | | | | | | | | | | | |
Noninterest revenues: | |
| | |
| | |
| | |
| |
Deposit service fees | |
| 17,452 | |
| 15,442 | |
| 49,745 | |
| 43,758 |
Mortgage banking | | | 171 | |
| 460 | |
| 595 | |
| 1,479 |
Other banking services | |
| 912 | |
| 996 | |
| 2,521 | |
| 2,830 |
Employee benefit services | |
| 27,884 | |
| 29,923 | |
| 86,385 | |
| 83,933 |
Insurance services | |
| 11,332 | |
| 9,176 | |
| 31,521 | |
| 25,538 |
Wealth management services | |
| 7,502 | | | 8,322 | | | 24,276 | | | 24,748 |
Unrealized (loss) gain on equity securities | |
| (4) | |
| (10) | |
| (24) | |
| 14 |
Total noninterest revenues | |
| 65,249 | |
| 64,309 | |
| 195,019 | |
| 182,300 |
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Noninterest expenses: | |
| | |
| | |
| | |
| |
Salaries and employee benefits | |
| 66,190 | |
| 62,883 | |
| 193,236 | |
| 178,407 |
Occupancy and equipment | |
| 10,364 | |
| 9,867 | |
| 31,740 | |
| 31,437 |
Data processing and communications | |
| 14,184 | |
| 12,966 | |
| 40,454 | |
| 38,123 |
Amortization of intangible assets | |
| 3,837 | |
| 3,703 | |
| 11,420 | |
| 10,300 |
Legal and professional fees | |
| 3,194 | |
| 3,352 | |
| 10,196 | |
| 8,885 |
Business development and marketing | |
| 3,616 | |
| 2,383 | |
| 9,975 | |
| 7,071 |
Litigation accrual | | | 0 | | | (100) | | | 0 | | | (100) |
Acquisition expenses | | | 409 | | | 102 | | | 4,668 | | | 133 |
Acquisition-related contingent consideration adjustment | | | 0 | | | 0 | | | 400 | | | 0 |
Other expenses | |
| 6,391 | |
| 5,280 | | | 16,327 | |
| 12,969 |
Total noninterest expenses | |
| 108,185 | |
| 100,436 | | | 318,416 | |
| 287,225 |
| | | | | | | | | | | | |
Income before income taxes | |
| 62,397 | |
| 57,428 | | | 173,005 | |
| 184,746 |
Income taxes | |
| 13,706 | |
| 12,092 | | | 37,454 | |
| 38,616 |
Net income | | $ | 48,691 | | $ | 45,336 | | $ | 135,551 | | $ | 146,130 |
| | | | | | | | | | | | |
Basic earnings per share | | $ | 0.90 | | $ | 0.84 | | $ | 2.51 | | $ | 2.70 |
Diluted earnings per share | | $ | 0.90 | | $ | 0.83 | | $ | 2.49 | | $ | 2.68 |
TheSee accompanying notes are an integral part of theto consolidated financial statements.statements (unaudited).
4
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Pension and other post retirement obligations: | | |
|
| |
|
| |
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| |
| | |
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| |
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| |
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| |
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Amortization of actuarial losses included in net periodic pension cost, gross | | $ | 911 | | $ | 820 | | $ | 2,733 | | $ | 2,460 | | $ | 220 | | $ | 911 | | $ | 660 | | $ | 2,733 |
Tax effect | |
| (219) | |
| (197) | |
| (657) | |
| (591) | |
| (53) | |
| (219) | |
| (160) | |
| (657) |
Amortization of actuarial losses included in net periodic pension cost, net | |
| 692 | |
| 623 | |
| 2,076 | | | 1,869 | |
| 167 | |
| 692 | |
| 500 | | | 2,076 |
Amortization of prior service cost included in net periodic pension cost, gross | |
| 50 | |
| 15 | |
| 150 | |
| 46 | |
| 109 | |
| 50 | |
| 327 | |
| 150 |
Tax effect | |
| (12) | |
| (4) | |
| (36) | |
| (11) | |
| (26) | |
| (12) | |
| (79) | |
| (36) |
Amortization of prior service cost included in net periodic pension cost, net | |
| 38 | |
| 11 | |
| 114 | |
| 35 | |
| 83 | |
| 38 | |
| 248 | |
| 114 |
Other comprehensive income related to pension and other post-retirement obligations, net of taxes | |
| 730 | |
| 634 | |
| 2,190 | |
| 1,904 | |
| 250 | |
| 730 | |
| 748 | |
| 2,190 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized (losses) gains on available-for-sale securities: | |
| | |
| | |
| | |
| | ||||||||||||
Net unrealized holding (losses) gains arising during period, gross | |
| (21,268) | |
| (8,821) | |
| (168,621) | |
| 121,439 | ||||||||||||
Unrealized losses on available-for-sale securities: | |
| | |
| | |
| | |
| | ||||||||||||
Net unrealized losses arising during period, gross | |
| (301,023) | |
| (21,268) | |
| (919,962) | |
| (168,621) | ||||||||||||
Tax effect | |
| 5,112 | |
| 2,118 | |
| 40,528 | |
| (29,155) | |
| 73,119 | |
| 5,112 | |
| 223,460 | |
| 40,528 |
Net unrealized holding (losses) gains arising during period, net | |
| (16,156) | |
| (6,703) | |
| (128,093) | |
| 92,284 | ||||||||||||
Other comprehensive (loss) income related to unrealized gains (losses) on available-for-sale securities, net of taxes | |
| (16,156) | |
| (6,703) | |
| (128,093) | |
| 92,284 | ||||||||||||
Other comprehensive (loss) income, net of tax | |
| (15,426) | |
| (6,069) | |
| (125,903) | |
| 94,188 | ||||||||||||
Other comprehensive loss related to unrealized losses on available-for-sale securities, net of taxes | |
| (227,904) | |
| (16,156) | |
| (696,502) | |
| (128,093) | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Other comprehensive loss, net of tax | |
| (227,654) | |
| (15,426) | |
| (695,754) | |
| (125,903) | ||||||||||||
Net income | |
| 45,336 | |
| 42,809 | |
| 146,130 | |
| 118,191 | |
| 48,691 | |
| 45,336 | |
| 135,551 | |
| 146,130 |
Comprehensive income | | $ | 29,910 | | $ | 36,740 | | $ | 20,227 | | $ | 212,379 | ||||||||||||
Comprehensive (loss) income | | $ | (178,963) | | $ | 29,910 | | $ | (560,203) | | $ | 20,227 |
| | | | | | | | | | | | |
| | As of | | As of | ||||||||
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Accumulated Other Comprehensive (Loss) Income By Component: |
| | | | | | ||||||
Accumulated Other Comprehensive Loss By Component: |
| | | | | | ||||||
Unrealized loss for pension and other post-retirement obligations |
| $ | (19,637) | | $ | (20,624) | ||||||
Tax effect |
|
| 4,915 | |
| 5,154 | ||||||
Net unrealized loss for pension and other post-retirement obligations |
|
| (14,722) | |
| (15,470) | ||||||
| | | | | | | | | | | | |
Unrealized (loss) for pension and other post-retirement obligations |
| $ | (35,384) | | $ | (38,267) | ||||||
Unrealized loss on available-for-sale securities |
|
| (965,855) | |
| (45,893) | ||||||
Tax effect |
|
| 8,701 | |
| 9,394 |
|
| 234,196 | |
| 10,736 |
Net unrealized (loss) for pension and other post-retirement obligations |
|
| (26,683) | |
| (28,873) | ||||||
Net unrealized loss on available-for-sale securities |
|
| (731,659) | |
| (35,157) | ||||||
| | | | | | | | | | | | |
Unrealized (loss) gain on available-for-sale securities |
|
| (48,507) | |
| 120,114 | ||||||
Tax effect |
|
| 11,364 | |
| (29,164) | ||||||
Net unrealized (loss) gain on available-for-sale securities |
|
| (37,143) | |
| 90,950 | ||||||
| | | | | | | ||||||
Accumulated other comprehensive (loss) income |
| $ | (63,826) | | $ | 62,077 | ||||||
Accumulated other comprehensive loss |
| $ | (746,381) | | $ | (50,627) |
TheSee accompanying notes are an integral part of theto consolidated financial statements.statements (unaudited).
5
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Three months ended September 30, 20212022 and 20202021
(In Thousands, Except Share Data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| |
|
| |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| | ||
| | Common Stock | | Additional | | | | | Other | | | | | Deferred | | | | | Common Stock | | Additional | | | | | Other | | | | | Deferred | | | | ||||||||||||
| | Shares | | Amount | | Paid-In | | Retained | | Comprehensive | | Treasury | | Compensation | | | | | Shares | | Amount | | Paid-In | | Retained | | Comprehensive | | Treasury | | Compensation | | | | ||||||||||||
|
| Outstanding |
| Issued |
| Capital |
| Earnings |
| (Loss) Income |
| Stock |
| Arrangements |
| Total |
| Outstanding |
| Issued |
| Capital |
| Earnings |
| Loss |
| Stock |
| Arrangements |
| Total | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at June 30, 2022 |
| 53,734,027 | | $ | 54,185 | | $ | 1,046,303 | | $ | 1,098,664 | | $ | (518,727) | | $ | (26,369) | | $ | 7,640 | | $ | 1,661,696 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Net income |
| | |
| | |
| | |
| 48,691 | |
| | |
| | |
| | |
| 48,691 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Other comprehensive loss, net of tax |
| | |
| | |
| | |
| | |
| (227,654) | |
| | |
| | |
| (227,654) | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Dividends declared: |
| | |
| | |
| | |
| | |
|
| |
| | |
| | |
| | |||||||||||||||||||||||
Common, $0.44 per share |
| | |
| | |
| | |
| (23,714) | |
|
| |
| | |
| | |
| (23,714) | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Common stock activity under employee stock plans |
| 2,892 | |
| 3 | |
| 284 | |
| | |
|
| |
| | |
| | |
| 287 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Stock-based compensation |
| | |
| | |
| 1,857 | |
|
| |
|
| |
| | |
| | |
| 1,857 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Treasury stock purchased for benefit plans, net |
| (903) | |
| | |
| | | | | |
| | |
| (57) | |
| 57 | |
| 0 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at September 30, 2022 |
| 53,736,016 | | $ | 54,188 | | $ | 1,048,444 | | $ | 1,123,641 | | $ | (746,381) | | $ | (26,426) | | $ | 7,697 | | $ | 1,461,163 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 |
| 53,918,695 | | $ | 54,064 | | $ | 1,037,088 | | $ | 1,015,742 | | $ | (48,400) | | $ | (5,632) | | $ | 8,238 | | $ | 2,061,100 |
| 53,918,695 | | $ | 54,064 | | $ | 1,037,088 | | $ | 1,015,742 | | $ | (48,400) | | $ | (5,632) | | $ | 8,238 | | $ | 2,061,100 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income |
| | |
| | |
| | |
| 45,336 | |
| | |
| | |
| | |
| 45,336 |
| | |
| | |
| | |
| 45,336 | |
| | |
| | |
| | |
| 45,336 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss, net of tax |
| | |
| | |
| | |
| | |
| (15,426) | |
| | |
| | |
| (15,426) |
| | |
| | |
| | |
| | |
| (15,426) | |
| | |
| | |
| (15,426) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared: |
| | |
| | |
| | |
| | |
|
| |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Common, $0.43 per share |
| | |
| | |
| | |
| (23,142) | |
|
| |
| | |
| | |
| (23,142) |
| | |
| | |
| | |
| (23,142) | |
| | |
| | |
| | |
| (23,142) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock activity under employee stock plans |
| 8,122 | |
| 8 | |
| 464 | |
| | |
|
| |
| | |
| | |
| 472 |
| 8,122 | |
| 8 | |
| 464 | |
| | |
| | |
| | |
| | |
| 472 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation |
| | |
| | |
| 1,594 | |
|
| |
|
| |
| | |
| | |
| 1,594 |
| | |
| | |
| 1,594 | |
| | |
| | |
| | |
| | |
| 1,594 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock issued to benefit plans, net |
| (830) | |
| | |
| | | | | |
| | |
| (61) | |
| 61 | |
| 0 | |||||||||||||||||||||||
Treasury stock purchased for benefit plans, net |
| (830) | |
| | |
| | | | | | | | |
| (61) | |
| 61 | |
| 0 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2021 |
| 53,925,987 | | $ | 54,072 | | $ | 1,039,146 | | $ | 1,037,936 | | $ | (63,826) | | $ | (5,693) | | $ | 8,299 | | $ | 2,069,934 |
| 53,925,987 | | $ | 54,072 | | $ | 1,039,146 | | $ | 1,037,936 | | $ | (63,826) | | $ | (5,693) | | $ | 8,299 | | $ | 2,069,934 |
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at June 30, 2020 |
| 53,514,216 | | $ | 53,672 | | $ | 1,019,291 | | $ | 916,002 | | $ | 90,031 | | $ | (6,066) | | $ | 8,995 | | $ | 2,081,925 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Net income |
| | |
| | |
| | |
| 42,809 | |
| | |
| | |
| | |
| 42,809 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Other comprehensive loss, net of tax |
| | |
| | |
| | |
| | |
| (6,069) | |
| | |
| | |
| (6,069) | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Cash dividends declared: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |||||||||||||||||||||||
Common, $0.42 per share |
| | |
| | |
| | |
| (22,538) | |
| | |
| | |
| | |
| (22,538) | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Common stock activity under employee stock plans |
| 24,584 | |
| 26 | |
| 1,092 | |
| | |
| | |
| | |
| | |
| 1,118 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Stock-based compensation |
| | |
| | |
| 1,415 | |
| | |
| | |
| | |
| | |
| 1,415 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Treasury stock issued to benefit plans, net |
| (1,207) | |
| | |
| | | | | | | | |
| (65) | |
| 65 | |
| 0 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at September 30, 2020 |
| 53,537,593 | | $ | 53,698 | | $ | 1,021,798 | | $ | 936,273 | | $ | 83,962 | | $ | (6,131) | | $ | 9,060 | | $ | 2,098,660 |
TheSee accompanying notes are an integral part of theto consolidated financial statements.statements (unaudited).
6
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Nine months ended September 30, 20212022 and 20202021
(In Thousands, Except Share Data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | | |
| |
|
| |
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| | ||
| | Common Stock | | Additional | | | | | Other | | | | | Deferred | | | | | Common Stock | | Additional | | | | | Other | | | | | Deferred | | | | ||||||||||||
| | Shares | | Amount | | Paid-In | | Retained | | Comprehensive | | Treasury | | Compensation | |
| | | Shares | | Amount | | Paid-In | | Retained | | Comprehensive | | Treasury | | Compensation | | | | ||||||||||||
| | Outstanding | | Issued | | Capital | | Earnings | | Income (Loss) | | Stock | | Arrangements | | Total |
| Outstanding |
| Issued |
| Capital |
| Earnings |
| (Loss) Income |
| Stock |
| Arrangements |
| Total | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at December 31, 2021 |
| 53,878,047 | | $ | 54,092 | | $ | 1,041,304 | | $ | 1,058,286 | | $ | (50,627) | | $ | (10,610) | | $ | 8,362 | | $ | 2,100,807 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Net income |
| | |
| | |
| | |
| 135,551 | |
| | |
| | |
| | |
| 135,551 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Other comprehensive loss, net of tax |
| | |
| | |
| | |
| | |
| (695,754) | |
| | |
| | |
| (695,754) | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Dividends declared: |
| | |
| | |
| | |
| | |
|
| |
| | |
| | |
| | |||||||||||||||||||||||
Common, $1.30 per share |
| | |
| | |
| | |
| (70,196) | |
|
| |
| | |
| | |
| (70,196) | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Common stock activity under employee stock plans |
| 95,586 | |
| 96 | |
| 990 | |
| | |
|
| |
| | |
| | |
| 1,086 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Stock-based compensation |
| | |
| | |
| 6,047 | |
|
| |
|
| |
| | |
| | |
| 6,047 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Distribution of stock under deferred compensation arrangements |
| 14,934 | |
| | |
| 103 | |
| | |
|
| |
| 739 | |
| (842) | |
| 0 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Treasury stock purchased | | (250,000) | | | | | | | | | | | | | | | (16,378) | | | | | | (16,378) | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Treasury stock purchased for benefit plans, net |
| (2,551) | |
| | |
| | | | | |
| | |
| (177) | |
| 177 | |
| 0 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at September 30, 2022 |
| 53,736,016 | | $ | 54,188 | | $ | 1,048,444 | | $ | 1,123,641 | | $ | (746,381) | | $ | (26,426) | | $ | 7,697 | | $ | 1,461,163 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 |
| 53,593,127 | | $ | 53,755 | | $ | 1,025,163 | | $ | 960,183 | | $ | 62,077 | | $ | (6,198) | | $ | 9,127 | | $ | 2,104,107 |
| 53,593,127 | | $ | 53,755 | | $ | 1,025,163 | | $ | 960,183 | | $ | 62,077 | | $ | (6,198) | | $ | 9,127 | | $ | 2,104,107 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income |
| | |
| | |
| | |
| 146,130 | |
| | |
| | |
| | |
| 146,130 |
| | |
| | |
| | |
| 146,130 | |
| | |
| | |
| | |
| 146,130 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss, net of tax |
| | |
| | |
| | |
| | |
| (125,903) | |
| | |
| | |
| (125,903) |
| | |
| | |
| | |
| | |
| (125,903) | |
| | |
| | |
| (125,903) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash dividends declared: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |||||||||||||||||||||||
Dividends declared: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |||||||||||||||||||||||
Common, $1.27 per share |
| | |
| | |
| | |
| (68,377) | |
| | |
| | |
| | |
| (68,377) |
| | |
| | |
| | |
| (68,377) | |
| | |
| | |
| | |
| (68,377) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock activity under employee stock plans |
| 317,390 | |
| 317 | |
| 8,824 | |
| | |
| | |
| | |
| | |
| 9,141 |
| 317,390 | |
| 317 | |
| 8,824 | |
| | |
| | |
| | |
| | |
| 9,141 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation |
| | |
| | |
| 4,836 | |
| | |
| | |
| | |
| | |
| 4,836 |
| | |
| | |
| 4,836 | |
| | |
| | |
| | |
| | |
| 4,836 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distribution of stock under deferred compensation arrangements |
| 18,089 | |
| | |
| 323 | | | | | | | |
| 694 | |
| (1,017) | |
| 0 | | 18,089 | | | | | | 323 | | | | | | | | | 694 | | | (1,017) | | | 0 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock issued to benefit plans, net |
| (2,619) | |
| | |
| | | | | | | | |
| (189) | |
| 189 | |
| 0 | |||||||||||||||||||||||
Treasury stock purchased for benefit plans, net |
| (2,619) | |
| | |
| | | | | | | | |
| (189) | |
| 189 | |
| 0 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2021 |
| 53,925,987 | | $ | 54,072 | | $ | 1,039,146 | | $ | 1,037,936 | | $ | (63,826) | | $ | (5,693) | | $ | 8,299 | | $ | 2,069,934 |
| 53,925,987 | | $ | 54,072 | | $ | 1,039,146 | | $ | 1,037,936 | | $ | (63,826) | | $ | (5,693) | | $ | 8,299 | | $ | 2,069,934 |
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at December 31, 2019 |
| 51,793,923 | | $ | 51,975 | | $ | 927,337 | | $ | 882,851 | | $ | (10,226) | | $ | (6,823) | | $ | 10,120 | | $ | 1,855,234 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Net income |
| | |
| | |
| | |
| 118,191 | |
| | |
| | |
| | |
| 118,191 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Other comprehensive income, net of tax |
| | |
| | |
| | |
| | |
| 94,188 | |
| | |
| | |
| 94,188 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Cumulative effect of change in accounting Principle - Current Expected Credit Losses | | | | | | | | | | | 1,140 | | | | | | | | | | | | 1,140 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Cash dividends declared: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |||||||||||||||||||||||
Common, $1.24 per share |
| | |
| | |
| | |
| (65,909) | |
| | |
| | |
| | |
| (65,909) | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Common stock activity under employee stock ownership plans |
| 359,934 | |
| 360 | |
| 13,781 | |
| | |
| | |
| | |
| | |
| 14,141 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Stock-based compensation |
| | |
| | |
| 4,648 | |
| | |
| | |
| | |
| | |
| 4,648 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Stock issued for acquisition | | 1,363,259 | | | 1,363 | | | 75,579 | | | | | | | | | | | | | | | 76,942 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |||||||||||||||||||||||
Distribution of stock under deferred compensation arrangements |
| 22,497 | |
| | |
| 415 | | | | | | | |
| 849 | |
| (1,264) | |
| 0 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Treasury stock issued to benefit plans, net |
| (2,020) | |
| | |
| 38 | | | | | | | |
| (157) | |
| 204 | |
| 85 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at September 30, 2020 |
| 53,537,593 | | $ | 53,698 | | $ | 1,021,798 | | $ | 936,273 | | $ | 83,962 | | $ | (6,131) | | $ | 9,060 | | $ | 2,098,660 |
TheSee accompanying notes are an integral part of theto consolidated financial statements (unaudited).
7
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2021 |
| 2020 | ||
Operating activities: |
| |
|
| |
|
Net income | | $ | 146,130 | | $ | 118,191 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Depreciation | |
| 11,898 | |
| 11,946 |
Amortization of intangible assets | |
| 10,300 | |
| 10,772 |
Net accretion on securities, loans and borrowings | |
| (17,260) | |
| (7,954) |
Stock-based compensation | |
| 4,836 | |
| 4,648 |
Provision for credit losses | |
| (11,001) | |
| 17,313 |
Amortization of mortgage servicing rights | |
| 397 | |
| 266 |
Unrealized (gain) loss on equity securities | | | (14) | | | 30 |
Income from bank-owned life insurance policies | |
| (1,500) | |
| (1,398) |
Net gain on sale of loans and other assets | |
| (408) | |
| (1,633) |
Change in other assets and other liabilities | |
| 9,646 | |
| (26,944) |
Net cash provided by operating activities | |
| 153,024 | |
| 125,237 |
Investing activities: | |
|
| |
|
|
Proceeds from maturities, calls, and paydowns of available-for-sale investment securities | |
| 313,913 | |
| 219,503 |
Proceeds from maturities and redemptions of equity and other investment securities | |
| 2,652 | |
| 436 |
Purchases of available-for-sale investment securities | |
| (1,284,544) | |
| (91,381) |
Purchases of equity and other securities | |
| (210) | |
| (3,064) |
Net decrease (increase) in loans | |
| 141,491 | |
| (228,235) |
Cash (paid) received for acquisitions, net of cash acquired of $541 and $55,973, respectively | |
| (29,329) | |
| 34,360 |
Purchases of premises and equipment, net | |
| (10,196) | |
| (8,727) |
Real estate tax credit investments | |
| (586) | |
| (1,071) |
Net cash used in investing activities | |
| (866,809) | |
| (78,179) |
Financing activities: | |
|
| |
|
|
Net increase in deposits | |
| 1,498,847 | |
| 1,609,349 |
Net decrease in borrowings | |
| 29,009 | |
| 28,690 |
Payments on subordinated debt held by unconsolidated subsidiary trusts | | | (77,320) | | | (2,062) |
Issuance of common stock | |
| 9,141 | |
| 14,141 |
Purchases of treasury stock | |
| (189) | |
| (204) |
Sales of treasury stock | |
| 0 | |
| 85 |
Increase in deferred compensation arrangements | |
| 189 | |
| 204 |
Cash dividends paid | |
| (67,823) | |
| (64,593) |
Withholding taxes paid on share-based compensation | |
| (1,213) | |
| (1,177) |
Net cash provided by financing activities | |
| 1,390,641 | |
| 1,584,433 |
Change in cash and cash equivalents | |
| 676,856 | |
| 1,631,491 |
Cash and cash equivalents at beginning of period | |
| 1,645,805 | |
| 205,030 |
Cash and cash equivalents at end of period | | $ | 2,322,661 | | $ | 1,836,521 |
| | | | | | |
Supplemental disclosures of cash flow information: | | | | | | |
Cash paid for interest | | $ | 10,722 | | $ | 16,927 |
Cash paid for income taxes | |
| 34,067 | |
| 28,705 |
| | | | | | |
Supplemental disclosures of noncash financing and investing activities: | | | | | | |
Dividends declared and unpaid | |
| 23,249 | |
| 22,658 |
Transfers from loans to other real estate | |
| 281 | |
| 1,192 |
| | | | | | |
Acquisitions: | | | | | | |
Common stock issued | |
| 0 | |
| 76,942 |
Fair value of assets acquired, excluding acquired cash and intangibles | |
| 1,324 | |
| 547,654 |
Fair value of liabilities assumed | |
| 1,101 | |
| 529,177 |
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2022 |
| 2021 | ||
Operating activities: |
| |
|
| |
|
Net income | | $ | 135,551 | | $ | 146,130 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Depreciation | |
| 10,956 | |
| 11,898 |
Amortization of intangible assets | |
| 11,420 | |
| 10,300 |
Net accretion on securities, loans and borrowings | |
| (14,519) | |
| (17,260) |
Stock-based compensation | |
| 6,047 | |
| 4,836 |
Provision for credit losses | |
| 12,005 | |
| (11,001) |
Amortization of mortgage servicing rights | |
| 554 | |
| 397 |
Unrealized loss (gain) on equity securities | | | 24 | | | (14) |
Income from bank-owned life insurance policies | |
| (1,543) | |
| (1,500) |
Net gain on sale of assets | |
| (570) | |
| (408) |
Change in other assets and other liabilities | |
| (16,889) | |
| 9,646 |
Net cash provided by operating activities | |
| 143,036 | |
| 153,024 |
Investing activities: | |
|
| |
|
|
Proceeds from maturities, calls, and paydowns of available-for-sale investment securities | |
| 210,152 | |
| 313,913 |
Proceeds from maturities and redemptions of equity and other securities | |
| 2,247 | |
| 2,652 |
Purchases of available-for-sale investment securities | |
| (1,348,400) | |
| (1,284,544) |
Purchases of equity and other securities | |
| (6,108) | |
| (210) |
Net (increase) decrease in loans | |
| (735,072) | |
| 141,491 |
Cash received (paid) for acquisitions, net of cash acquired of $84,988 and $541, respectively | |
| 345 | |
| (29,329) |
Proceeds from sales of premises and equipment, net | | | 1,928 | | | 103 |
Purchases of premises and equipment, net | |
| (10,014) | |
| (10,299) |
Real estate tax credit investments | | | (247) | | | (586) |
Net cash used in investing activities | |
| (1,885,169) | |
| (866,809) |
Financing activities: | |
|
| |
|
|
Net increase in deposits | |
| 52,858 | |
| 1,498,847 |
Net increase in overnight borrowings | |
| 119,800 | |
| 0 |
Net increase in securities sold under agreement to repurchase, short-term | | | 28,052 | | | 32,755 |
Payments on other Federal Home Loan Bank borrowings | | | (71) | | | (3,746) |
Payments on subordinated debt held by unconsolidated subsidiary trusts | | | 0 | | | (77,320) |
Proceeds from the issuance of common stock | |
| 1,086 | |
| 9,141 |
Purchases of treasury stock | |
| (16,555) | |
| (189) |
Increase in deferred compensation arrangements | |
| 177 | |
| 189 |
Cash dividends paid | |
| (69,681) | |
| (67,823) |
Withholding taxes paid on share-based compensation | |
| (1,206) | |
| (1,213) |
Net cash provided by financing activities | |
| 114,460 | |
| 1,390,641 |
Change in cash and cash equivalents | |
| (1,627,673) | |
| 676,856 |
Cash and cash equivalents at beginning of period | |
| 1,875,064 | |
| 1,645,805 |
Cash and cash equivalents at end of period | | $ | 247,391 | | $ | 2,322,661 |
| | | | | | |
Supplemental disclosures of cash flow information: | | | | | | |
Cash paid for interest | | $ | 11,793 | | $ | 10,722 |
Cash paid for income taxes | |
| 41,061 | |
| 34,067 |
Supplemental disclosures of noncash financing and investing activities: | | | | | | |
Dividends declared and unpaid | |
| 23,750 | |
| 23,249 |
Transfers from loans to other real estate | |
| 303 | |
| 281 |
Transfers from premises and equipment, net to other assets | | | 5,113 | | | 0 |
| | | | | | |
Acquisitions: | | | | | | |
Fair value of assets acquired, excluding acquired cash and intangibles | |
| 486,077 | |
| 1,339 |
Fair value of liabilities assumed | |
| 542,668 | |
| 1,164 |
TheSee accompanying notes are an integral part of theto consolidated financial statements.statements (unaudited).
8
COMMUNITY BANK SYSTEM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBERSeptember 30, 20212022
NOTE A: BASIS OF PRESENTATION
The interim financial data as of and for the three and nine months ended September 30, 20212022 is unaudited; however, in the opinion of Community Bank System, Inc. (the “Company”), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement ofto present fairly the results for the interim periods in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and Article 10 of Regulation S-X. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. The Company’s unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 filed with the Securities and Exchange Commission (“SEC”) on March 1, 2021.2022.
NOTE B: ACQUISITIONS
Subsequent Event
On October 4, 2021, the Company announced that it had entered into an agreement to acquire Elmira Savings Bank ("Elmira"), a 12 branch banking franchise headquartered in Elmira, New York, for $82.8 million in cash. The acquisition will enhance the Company’s presence in five counties in New York’s Southern Tier and Finger Lakes regions. Elmira had total assets of $648.7 million, total deposits of $551.2 million, and net loans of $465.3 million at June 30, 2021. The Company expects to complete the acquisition in the first quarter of 2022, subject to customary closing conditions, including approval by the shareholders of Elmira and required regulatory approval.
Current and Prior Period Acquisitions
On August 2, 2021,May 13, 2022, the Company completed the acquisition of Elmira Savings Bank (“Elmira”), a New York State chartered savings bank headquartered in Elmira, New York, for $82.2 million in cash. The acquisition enhances the Company’s presence in five counties in New York’s Southern Tier and Finger Lakes regions. In connection with the acquisition, the Company acquired approximately $579.0 million of identifiable assets, including $437.0 million of loans, $11.3 million of investment securities, and $8.0 million of core deposit intangibles, as well as $522.3 million of deposits. Preliminary goodwill of $45.8 million was recognized as a result of the merger. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. The Company also recognized a $3.9 million acquisition-related provision for credit losses for loans acquired in the transaction. Revenues of approximately $4.8 million and $7.2 million and direct expenses of approximately $1.2 million and $1.8 million from the Elmira branch network were included in the consolidated statements of income for the three and nine months ended September 30, 2022, respectively. The Company incurred certain one-time, transaction-related costs in 2022 in connection with the Elmira acquisition.
On January 1, 2022, the Company, through its subsidiary OneGroup NY, Inc. (“OneGroup”), completed acquisitions of certain assets of three insurance agencies for an aggregate amount of $2.5 million in cash. The Company recorded a $2.5 million customer list intangible asset in conjunction with the acquisitions. The effects of the acquired assets have been included in the consolidated financial statements since that date. Revenues of approximately $0.2 million and $0.8 million and direct expenses of approximately $0.1 million and $0.3 million were included in the consolidated statements of income for the three and nine months ended September 30, 2022, respectively.
On August 2, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets and liabilities of the Thomas Gregory Associates Insurance Brokers, Inc. (“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area, for $11.6 million in cash plus contingent consideration with a fair value at acquisition date of $1.5 million. The Company recorded a $10.9 million customer list intangible asset and $2.2 million of goodwill in conjunction with the acquisition. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues of approximately $0.3$1.0 million and $3.0 million and direct expenses of approximately $0.2$0.4 million and $1.1 million from TGA were included in the consolidated income statementstatements for the three and nine months ended September 30, 2021.2022, respectively.
The acquisition of TGA includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on the future retained revenue of TGA over a three-year period. Amounts are payable in two payments, the first of which is two years after the acquisition date, and the second is three years after the acquisition date. The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between zero and $3.4 million. The fair value of the contingent consideration recognized on the acquisition date of $1.5 million was estimated by applying the income approach. Thatapproach, a measure that is based on significant Level 3 inputs not readily observable in the market. Key assumptions at the date of acquisition include (1) a discount rate range of 0.82% to 1.09%, applied to present value the payments, and (2) probability adjusted level of retained revenue between $2.3 million and $3.8 million.
9
The contingent consideration related to the TGA acquisition was revalued at June 30, 2022. The range of the undiscounted amounts the Company could pay under the agreement remained at between zero and $3.4 million. Key assumptions include (1) a discount rate range of 4.44% to 4.55% applied to present value the payments, and (2) probability adjusted level of retained revenue between $3.3 million and $3.7 million. Based on the results of the revaluation, the Company recorded a $0.5 million acquisition-related contingent consideration adjustment as of June 30, 2022 in the consolidated statements of income related to the TGA acquisition, for an adjusted fair value of $2.0 million at June 30, 2022. No adjustments were made to the fair value of the contingent consideration related to the TGA acquisition during the three months ended September 30, 2022.
On July 1, 2021, the Company, through its subsidiary Benefit Plans Administrative Services, Inc. (“BPA”), completed its acquisition of Fringe Benefits Design of Minnesota, Inc. ("FBD"(“FBD”) for $15.4 million in cash plus contingent consideration with a fair value at acquisition date of $1.4 million. The Company recorded a $14.0 million customer list intangible asset and $2.1 million of goodwill in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date. Revenues of approximately $1.4$0.8 million and $3.3 million and direct expenses of approximately $1.1$1.0 million and $3.2 million from FBD were included in the consolidated statements of income statement for the three and nine months ended September 30, 2021.2022, respectively.
9
The acquisition of FBD includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on the future retained revenue of FBD over a two-year period. Amounts are payable three years after the acquisition date. The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between zero and $2.7 million. The fair value of the contingent consideration recognized on the acquisition date of $1.4 million was estimated by applying the income approach. Thatapproach; a measure that is based on significant Level 3 inputs not readily observable in the market. Key assumptions at the date of acquisition include (1) a discount rate of 1.05%, applied to present value the payment, and (2) probability adjusted level of retained revenue between $5.6 million and $5.8 million.
The contingent consideration related to the FBD acquisition was revalued at June 30, 2022. The range of the undiscounted amounts the Company could pay under the agreement remained at between zero and $2.7 million. Key assumptions include (1) a discount rate of 4.51% applied to present value the payment, and (2) probability adjusted level of retained revenue between $5.2 million and $5.4 million. Based on the results of the revaluation, the Company recorded a reduction to the fair value by $0.1 million as of June 30, 2022 as an acquisition-related contingent consideration adjustment in the consolidated statements of income related to the FBD acquisition, for an adjusted fair value of $1.5 million at June 30, 2022. No adjustments were made to the fair value of the contingent consideration related to the FBD acquisition during the three months ended September 30, 2022.
On June 1, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets and liabilities of NuVantage Insurance Corp. ("NuVantage"(“NuVantage”), an insurance agency headquartered in Melbourne, Florida. The Company paid $2.9 million in cash and recorded a $1.4 million customer list intangible asset and $1.4 million of goodwill in conjunction with the acquisition. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues of approximately $0.3 million and $0.4$0.9 million and direct expenses of approximately $0.3 million and $0.9 million from NuVantage were included in the consolidated statements of income statement for the three and nine months ended September 30, 2021, respectively.
On June 12, 2020, the Company completed its merger with Steuben Trust Corporation (“Steuben”), parent company of Steuben Trust Company, a New York State chartered bank headquartered in Hornell, New York, for $98.6 million in Company stock and cash, comprised of $21.6 million in cash and the issuance of 1.36 million shares of common stock. The merger extended the Company’s footprint into 2 new counties in Western New York State, and enhanced the Company’s presence in 4 Western New York State counties in which it had already operated. In connection with the merger, the Company added 11 full-service offices to its branch service network and acquired $607.8 million of assets, including $339.7 million of loans and $180.5 million of investment securities, as well as $516.3 million of deposits. Goodwill of $20.0 million was recognized as a result of the merger. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues, excluding interest income on acquired investments, interest income on acquired consumer indirect loans, and revenues associated with acquired loans and deposits consolidated into the legacy branch network, of approximately $3.3 million and $9.8 million, and direct expenses, which may not include certain shared expenses, of approximately $1.4 million and $3.9 million from Steuben were included in the consolidated income statement for the three and nine months ended September 30, 2021. The Company incurred certain one-time, transaction-related costs in 2020 in connection with the Steuben acquisition.2022.
The assets and liabilities assumed in the acquisitions were recorded at their estimated fair values based on management’s best estimates using information available at the dates of the acquisitions, and are subject to adjustment based on updated information not available at the time of the acquisitions. ThroughAccrued income taxes and deferred taxes associated with the Elmira acquisition were recorded on a provisional basis and could vary from the actual recorded balance once finalized. During the first and third quarter of 2021,2022, the carrying amount of other liabilities associated with the SteubenFBD acquisition decreased by $0.3 millionwas adjusted as a result of an adjustment to accrued income taxesworking capital based on the purchase agreement, for a total net increase to goodwill of $0.1 million. During the third quarter of 2022, the carrying amount of premises and equipment, other assets, and other liabilities related to the Elmira acquisition were adjusted upon receipt of new information as a result of adjustments to fair value and deferred income taxes. Goodwill associated withThe adjustments resulted in a net decrease of $4.9 million to goodwill recognized from the SteubenElmira acquisition decreased $0.3 million as a result of this adjustment.at September 30, 2022.
The acquisitions generally expanded the Company’s geographicalgeographic presence in New York, Florida, Massachusetts, and Minnesota, and management expects that the Company will benefit from greater geographic diversity and the advantages of other synergistic business development opportunities.
10
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed after considering the measurement period adjustments described above:assumed:
| | | | | | | | | | | | | | | |
| | 2021 | | 2020 | |||||||||||
(000s omitted) |
| TGA |
| FBD |
| NuVantage |
| Total |
| Steuben | |||||
Consideration: | | | | | |
|
| |
|
| |
|
| |
|
Cash | | $ | 11,620 | | $ | 15,350 | | $ | 2,900 | | $ | 29,870 | | $ | 21,613 |
Community Bank System, Inc. common stock | | | 0 | |
| 0 | |
| 0 | |
| 0 | |
| 76,942 |
Contingent consideration | | | 1,500 | | | 1,400 | | | 0 | | | 2,900 | | | 0 |
Total net consideration | | | 13,120 | |
| 16,750 | |
| 2,900 | |
| 32,770 | |
| 98,555 |
Recognized amounts of identifiable assets acquired and liabilities assumed: | | | | |
| | |
| | |
| | |
| |
Cash and cash equivalents | | | 0 | |
| 541 | |
| 0 | |
| 541 | |
| 55,973 |
Investment securities | | | 0 | |
| 0 | |
| 0 | |
| 0 | |
| 180,497 |
Loans, net of allowance for credit losses on PCD loans | | | 0 | |
| 0 | |
| 0 | |
| 0 | |
| 339,017 |
Premises and equipment, net | | | 279 | |
| 282 | |
| 199 | |
| 760 | |
| 7,764 |
Accrued interest and fees receivable | | | 0 | |
| 0 | |
| 0 | |
| 0 | |
| 2,701 |
Other assets | | | 0 | |
| 564 | |
| 0 | |
| 564 | |
| 17,675 |
Core deposit intangibles | | | 0 | |
| 0 | |
| 0 | |
| 0 | |
| 2,928 |
Other intangibles | | | 10,900 | |
| 14,000 | |
| 1,437 | |
| 26,337 | |
| 1,196 |
Deposits | | | 0 | |
| 0 | |
| 0 | |
| 0 | |
| (516,274) |
Other liabilities | | | (229) | |
| (698) | |
| (174) | |
| (1,101) | |
| (4,841) |
Other Federal Home Loan Bank borrowings | | | 0 | |
| 0 | |
| 0 | |
| 0 | |
| (6,000) |
Subordinated debt held by unconsolidated subsidiary trusts | | | 0 | |
| 0 | |
| 0 | |
| 0 | |
| (2,062) |
Total identifiable assets, net | | | 10,950 | |
| 14,689 | |
| 1,462 | |
| 27,101 | |
| 78,574 |
Goodwill | | $ | 2,170 | | $ | 2,061 | | $ | 1,438 | | $ | 5,669 | | $ | 19,981 |
| | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | |||||||||||||||||
(000s omitted) |
| Elmira | | Other(1) | | Total |
| TGA |
| FBD |
| NuVantage |
| Total | |||||||
Consideration: | | | | | | | | | | | | | | |
|
| |
|
| |
|
Cash | | $ | 82,179 | | $ | 2,464 | | $ | 84,643 | | $ | 11,620 | | $ | 15,350 | | $ | 2,900 | | $ | 29,870 |
Contingent consideration | | | 0 | | | 0 | | | 0 | | | 1,500 | | | 1,400 | | | 0 | | | 2,900 |
Total net consideration | | | 82,179 | | | 2,464 | | | 84,643 | | | 13,120 | |
| 16,750 | |
| 2,900 | |
| 32,770 |
Recognized amounts of identifiable assets acquired and liabilities assumed: | | | | | | | | | | | | | |
| | |
| | |
| |
Cash and cash equivalents | | | 84,988 | | | 0 | | | 84,988 | | | 0 | |
| 541 | |
| 0 | |
| 541 |
Investment securities | | | 11,305 | | | 0 | | | 11,305 | | | 0 | |
| 0 | |
| 0 | |
| 0 |
Loans, net of allowance for credit losses on PCD loans | | | 436,948 | | | 0 | | | 436,948 | | | 0 | |
| 0 | |
| 0 | |
| 0 |
Premises and equipment, net | | | 11,303 | | | 0 | | | 11,303 | | | 279 | |
| 282 | |
| 199 | |
| 760 |
Accrued interest and fees receivable | | | 884 | | | 0 | | | 884 | | | 0 | |
| 0 | |
| 0 | |
| 0 |
Other assets | | | 25,637 | | | 0 | | | 25,637 | | | 0 | |
| 579 | |
| 0 | |
| 579 |
Core deposit intangibles | | | 7,970 | | | 0 | | | 7,970 | | | 0 | |
| 0 | |
| 0 | |
| 0 |
Other intangibles | | | 0 | | | 2,464 | | | 2,464 | | | 10,900 | |
| 14,000 | |
| 1,437 | |
| 26,337 |
Deposits | | | (522,295) | | | 0 | | | (522,295) | | | 0 | |
| 0 | |
| 0 | |
| 0 |
Other liabilities | | | (2,757) | | | 0 | | | (2,757) | | | (229) | |
| (761) | |
| (174) | |
| (1,164) |
Other Federal Home Loan Bank borrowings | | | (17,616) | | | 0 | | | (17,616) | | | 0 | |
| 0 | |
| 0 | |
| 0 |
Total identifiable assets, net | | | 36,367 | | | 2,464 | | | 38,831 | | | 10,950 | |
| 14,641 | |
| 1,462 | |
| 27,053 |
Goodwill | | $ | 45,812 | | $ | 0 | | $ | 45,812 | | $ | 2,170 | | $ | 2,109 | | $ | 1,438 | | $ | 5,717 |
(1) | Includes amounts for all OneGroup acquisitions completed in 2022. |
The Company has acquired loans from SteubenElmira for which there was evidence of a more-than-insignificant deterioration in credit quality since origination (purchased credit deteriorated (“PCD”) loans). PCD loans are initially recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded as provision for (or reversal of) credit losses. There were no investment securities acquired from SteubenElmira for which there was evidence of a more-than-insignificant deterioration in credit quality since origination. The carrying amount of those loans is as follows at the date of acquisition:
| | | | | | |
(000s omitted) |
| PCD Loans |
| PCD Loans | ||
Par value of PCD loans at acquisition | | $ | 35,906 | | $ | 2,184 |
Allowance for credit losses at acquisition | |
| (668) | |
| (71) |
Non-credit premium at acquisition | |
| 103 | |||
Non-credit discount at acquisition | |
| (81) | |||
Fair value of PCD loans at acquisition | | $ | 35,341 | | $ | 2,032 |
11
Acquired loans that are deemed to not have experienced a more-than-insignificant credit deterioration since origination are considered non-PCD. At the acquisition date, a fair value adjustment is recorded that includes both credit and interest rate considerations. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to interest income over the loan’s remaining life. Fair value adjustments for revolving loans are accreted (or amortized) using a straight line method. Term loans are accreted (or amortized) using the constant effective yield method. A provision for credit losses is also recorded at acquisition for the credit considerations on non-PCD loans. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans are the same as originated loans and subsequent changes to the allowance for credit losses are recorded as provision for (or reversal of) credit losses. The following is a summary of the remaining loans acquired from Steuben for which there was no evidence of a more-than-insignificant deterioration in credit quality since origination at the date of acquisition:
| | | |
(000s omitted) |
| Non-PCD Loans | |
Contractually required principal and interest at acquisition | | $ | 400,738 |
Contractual cash flows not expected to be collected | |
| (2,994) |
Expected cash flows at acquisition | |
| 397,744 |
Interest component of expected cash flows | |
| (94,068) |
Fair value of non-PCD loans at acquisition | | $ | 303,676 |
The fair value of the Company’s common stock issued for the Steuben acquisition was determined using the market close price of the stock on June 12, 2020.
The fair value of checking, savings and money market deposit accounts acquired were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued at the present value of the certificates’ expected contractual payments discounted at market rates for similar certificates.
Borrowings assumed with the Elmira acquisition included Federal Home Loan Bank of New York (“FHLB”) borrowings with a fair value of $17.6 million, with maturity dates ranging from January 2023 through March 2027 and a weighted average interest rate of 2.48%.
The core deposit intangibles andrelated to the Elmira acquisition are being amortized using an accelerated method over an estimated useful life of eight years. The other intangibles related to the SteubenNuVantage acquisition and NuVantagethe OneGroup asset acquisitions completed in 2022 are being amortized using an accelerated method over their estimated useful of life of eight years.years for NuVantage and two of the 2022 OneGroup asset acquisitions, and ten years for the third 2022 OneGroup asset acquisition. The other intangibles related to the TGA and FBD acquisitions are being amortized using an accelerated method over their estimated useful life of 13 years and 15 years, respectively. The goodwill,Goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the SteubenElmira acquisition, the All Other segment for the NuVantage and TGA acquisitions, and the Employee Benefit Services segment for the FBD acquisition. Goodwill arising from the SteubenElmira and FBD acquisitions is not deductible for tax purposes. Goodwill arising from the NuVantage and TGA acquisitions is deductible for tax purposes.
Direct costs related to the acquisitions were expensed as incurred. Merger and acquisition integration-related expenses were $0.4 million and $4.7 million during the three and nine months ended September 30, 2022, respectively, and were $0.1 million during the three and nine months ended September 30, 2021 and amounted to $0.8 million and $4.5 million during the three and nine months ended September 30, 2020, respectively, and2021. These amounts have been separately stated in the consolidated statements of income.
11
Supplemental Pro Forma Financial Information
The following unaudited condensed pro forma information assumes the SteubenElmira acquisition had been completed as of January 1, 20192021 for the three and nine months ended September 30, 20202022 and September 30, 2019.2021. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the year presented, nor is it indicative of the Company’s future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of the acquisitions.acquisition.
12
The pro forma information set forth below reflects the historical results of SteubenElmira combined with the Company’s consolidated statements of income with adjustments related to (a) certain purchase accounting fair value adjustments and (b) amortization of customer lists and core deposit intangibles. Acquisition-related expenses totaling $0.8$0.4 million and $4.4$4.7 million for the three and nine months ended September 30, 20202022, respectively, related to SteubenElmira were included in the pro forma information as if they were incurred in the first quarter of 2019.2021.
| | | | | | | | | | | | |
| | Pro Forma (Unaudited) | | Pro Forma (Unaudited) | ||||||||
| | Three Months Ended |
| Nine Months Ended | ||||||||
(000’s omitted) |
| September 30, 2020 |
| September 30, 2019 |
| September 30, 2020 |
| September 30, 2019 | ||||
Total revenue, net of interest expense | | $ | 152,634 | | $ | 154,221 | | $ | 456,740 | | $ | 457,399 |
Net income | |
| 43,472 | |
| 40,695 | |
| 124,338 | |
| 126,874 |
| | | | | | | | | | | | |
|
| Pro Forma (Unaudited) |
| Pro Forma (Unaudited) | ||||||||
| | Three Months Ended | | Nine Months Ended | ||||||||
(000’s omitted) |
| September 30, 2022 |
| September 30, 2021 |
| September 30, 2022 |
| September 30, 2021 | ||||
Total revenue, net of interest expense | | $ | 175,595 | | $ | 163,627 | | $ | 512,687 | | $ | 480,668 |
Net income | |
| 49,016 | |
| 46,838 | |
| 141,138 | |
| 146,529 |
NOTE C: ACCOUNTING POLICIES
The accounting policies of the Company, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 7976 through 9288 of the Annual Report on Form 10-K for the year ended December 31, 20202021 filed with the Securities and Exchange Commission (“SEC”) on March 1, 20212022 except as noted below.
The extent to which the novel coronavirus (“COVID-19”) impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact national and international macroeconomic conditions including interest rates, unemployment rates, the speed of the anticipated recovery, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of September 30, 2021 and through the date of this Quarterly Report on Form 10-Q. The accounting matters assessed included, but were not limited to, the Company’s allowance for credit losses, decrease in fee and interest income, and the carrying value of the goodwill and other long-lived assets. While there was not a material impact to the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2021, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2021, $33.92022, $32.7 million of accounts receivable, including $8.5$9.9 million of unbilled fee revenue, and $3.1$3.5 million of unearned revenue, was recorded in the consolidated statements of condition. As of December 31, 2020, $30.32021, $31.6 million of accounts receivable, including $7.7$9.1 million of unbilled fee revenue and $1.4$2.2 million of unearned revenue, was recorded in the consolidated statements of condition.
Recently Adopted Accounting PronouncementsPremises and Equipment Held for Sale
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure RequirementsPremises and equipment designated as held for Defined Benefit Plans (Subtopic 715-20). The updated guidance removed the requirements to identify amounts thatsale totaling $5.1 million at September 30, 2022 are expected to be reclassified out of accumulatedincluded in other comprehensive income and recognized as components of net periodic benefit cost in the next fiscal year, as well as the effects of a one-percentage-point change in assumed health care cost trend rates on service and interest cost andassets on the postretirement benefit obligation. The updated guidance added annual disclosure requirements forconsolidated statements of condition and are carried at the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates, and explanations for significant gains and losses related to changes in the benefit obligation for the period. This new guidance is effective retrospectively for fiscal years beginning after December 15, 2020 with early adoption permitted. The Company adopted this guidance on January 1, 2021 and determined the adoptionlower of this guidance did not have a material impact on the Company’s consolidated financial statements.cost or fair value.
1312
In December 2019, the FASB issued ASU No. 2019-12, Simplifying theRecently Adopted Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, and clarifying and amending existing guidance to improve consistent application. This new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted in any interim periods for which financial statements have not been issued. The Company adopted this guidance on January 1, 2021 and determined the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
New Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04,Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The updated guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this guidance apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This new guidance is effective as of March 12, 2020 through December 31, 2022. Adoption is permitted in any interim periods for which financial statements have not been issued. WhileThe Company has established a working group that includes multiple functions to guide the transition from LIBOR to alternative reference rates. The Company has identified all known LIBOR exposures, created a preliminary plan to address the exposures, and new originations either do not expectedutilize LIBOR, or replacement rate language, provisions, and conventions have been specified. The Company continues to beevaluate its exposure to LIBOR and communicate with all stakeholders in order to facilitate the transition. The Company adopted this guidance on January 1, 2022 and determined that this guidance does not have a material toimpact on the Company due to its insignificantCompany’s consolidated financial statements as the Company’s exposure to LIBOR-based loans and financial instruments the Company is currently evaluating the impact the adoption of this guidance will have on the Company’s consolidated financial statements.insignificant.
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205),Financial Services-Depository and Lending (Topic 942), and andFinancial Services-Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-33-1083510835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments in this update are effective upon addition to the FASB Codification and the Company determined that this guidance does not have a material impact on the Company’s consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In March 2022, the FASB issued ASU 2022-02,Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the current expected credit losses (“CECL”) model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross charge-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities that have adopted the CECL accounting standard. Early adoption, however, is permitted if an entity has adopted the CECL accounting standard. While the guidance will result in expanded disclosures, the Company does not expect the adoption of this standard will have a material impact on the Company’s consolidated financial statements.
1413
NOTE D: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities as of September 30, 20212022 and December 31, 20202021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
| | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | | ||||||||
| | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | ||||||||||||||||
(000’s omitted) |
| Cost |
| Gains |
| Losses |
| Value |
| Cost |
| Gains |
| Losses |
| Value |
| Cost |
| Gains |
| Losses |
| Value |
| Cost |
| Gains |
| Losses |
| Value | ||||||||||||||||
Available-for-Sale Portfolio: | | | |
| |
|
| |
| | | | | | |
| |
|
| |
| | | | | | |
| |
|
| |
| | | | | | |
| |
|
| |
| | | |
U.S. Treasury and agency securities | | $ | 3,467,053 | | $ | 44,279 | | $ | 118,072 | | $ | 3,393,260 | | $ | 2,423,236 | | $ | 94,741 | | $ | 16,595 | | $ | 2,501,382 | | $ | 5,103,053 | | $ | 0 | | $ | 827,613 | | $ | 4,275,440 | | $ | 4,064,624 | | $ | 39,997 | | $ | 106,057 | | $ | 3,998,564 |
Obligations of state and political subdivisions | |
| 404,531 | |
| 17,654 | |
| 220 | |
| 421,965 | |
| 451,028 | |
| 24,632 | |
| 0 | |
| 475,660 | |
| 561,464 | |
| 496 | |
| 72,050 | |
| 489,910 | |
| 413,019 | |
| 17,326 | |
| 56 | |
| 430,289 |
Government agency mortgage-backed securities | |
| 503,548 | |
| 11,232 | |
| 4,104 | |
| 510,676 | |
| 506,540 | |
| 16,280 | |
| 182 | |
| 522,638 | |
| 449,808 | |
| 57 | |
| 64,974 | |
| 384,891 | |
| 474,506 | |
| 7,615 | |
| 5,065 | |
| 477,056 |
Corporate debt securities | |
| 8,000 | |
| 84 | |
| 6 | |
| 8,078 | |
| 4,499 | |
| 137 | |
| 1 | |
| 4,635 | |
| 8,000 | |
| 0 | |
| 967 | |
| 7,033 | |
| 8,000 | |
| 39 | |
| 77 | |
| 7,962 |
Government agency collateralized mortgage obligations | |
| 23,746 | |
| 647 | |
| 1 | |
| 24,392 | |
| 42,476 | |
| 1,111 | |
| 10 | |
| 43,577 | |
| 14,219 | |
| 1 | |
| 805 | |
| 13,415 | |
| 19,953 | |
| 410 | |
| 24 | |
| 20,339 |
Total available-for-sale portfolio | | $ | 4,406,878 | | $ | 73,896 | | $ | 122,403 | | $ | 4,358,371 | | $ | 3,427,779 | | $ | 136,901 | | $ | 16,788 | | $ | 3,547,892 | ||||||||||||||||||||||||
Total available-for-sale investment portfolio | | $ | 6,136,544 | | $ | 554 | | $ | 966,409 | | $ | 5,170,689 | | $ | 4,980,102 | | $ | 65,387 | | $ | 111,279 | | $ | 4,934,210 | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity and other Securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Equity securities, at fair value | | $ | 251 | | $ | 208 | | $ | 0 | | $ | 459 | | $ | 251 | | $ | 194 | | $ | 0 | | $ | 445 | | $ | 251 | | $ | 198 | | $ | 10 | | $ | 439 | | $ | 251 | | $ | 212 | | $ | 0 | | $ | 463 |
Federal Home Loan Bank common stock | |
| 7,251 | |
| 0 | |
| 0 | |
| 7,251 | |
| 7,468 | |
| 0 | |
| 0 | |
| 7,468 | |
| 18,438 | |
| 0 | |
| 0 | |
| 18,438 | |
| 7,188 | |
| 0 | |
| 0 | |
| 7,188 |
Federal Reserve Bank common stock | |
| 33,916 | |
| 0 | |
| 0 | |
| 33,916 | |
| 33,916 | |
| 0 | |
| 0 | |
| 33,916 | |
| 33,568 | |
| 0 | |
| 0 | |
| 33,568 | |
| 33,916 | |
| 0 | |
| 0 | |
| 33,916 |
Other equity securities, at adjusted cost | |
| 2,651 | |
| 750 | |
| 0 | |
| 3,401 | |
| 4,876 | |
| 750 | |
| 0 | |
| 5,626 | |
| 3,408 | |
| 750 | |
| 0 | |
| 4,158 | |
| 2,562 | |
| 750 | |
| 0 | |
| 3,312 |
Total equity and other securities | | $ | 44,069 | | $ | 958 | | $ | 0 | | $ | 45,027 | | $ | 46,511 | | $ | 944 | | $ | 0 | | $ | 47,455 | | $ | 55,665 | | $ | 948 | | $ | 10 | | $ | 56,603 | | $ | 43,917 | | $ | 962 | | $ | 0 | | $ | 44,879 |
A summary of investment securities that have been in a continuous unrealized loss position is as follows:
As of September 30, 20212022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Less than 12 Months |
| 12 Months or Longer |
| Total |
| Less than 12 Months |
| 12 Months or Longer |
| Total | ||||||||||||||||||||||||||||||||||||
| | | | | | Gross | | | | | | | Gross | | | | | | | Gross | | | | | | | Gross | | | | | | | Gross | | | | | | | Gross | |||||||
| | | | Fair | | Unrealized | | | | Fair | | Unrealized | | | | Fair | | Unrealized | | | | Fair | | Unrealized | | | | Fair | | Unrealized | | | | Fair | | Unrealized | ||||||||||||
(000’s omitted) |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
Available-for-Sale Portfolio: | |
| |
| | |
| |
| | |
| | |
| |
| | |
| | |
| |
| | |
| | |
| |
| | |
| | |
| |
| | | | | |
| |
U.S. Treasury and agency securities | | 38 | | $ | 1,223,230 | | $ | 41,243 | | 8 | | $ | 579,793 | | $ | 76,829 | | 46 | | $ | 1,803,023 | | $ | 118,072 | | 76 | | $ | 2,797,064 | | $ | 321,932 | | 51 | | $ | 1,478,376 | | $ | 505,681 | | 127 | | $ | 4,275,440 | | $ | 827,613 |
Obligations of state and political subdivisions | | 21 | |
| 16,608 | |
| 220 | | 0 | |
| 0 | |
| 0 | | 21 | |
| 16,608 | |
| 220 | | 701 | |
| 407,699 | |
| 65,889 | | 27 | |
| 17,786 | |
| 6,161 | | 728 | |
| 425,485 | |
| 72,050 |
Government agency mortgage-backed securities | | 117 | |
| 169,915 | |
| 3,528 | | 20 | |
| 18,069 | |
| 576 | | 137 | |
| 187,984 | |
| 4,104 | | 636 | |
| 241,348 | |
| 30,136 | | 142 | |
| 140,785 | |
| 34,838 | | 778 | |
| 382,133 | |
| 64,974 |
Corporate debt securities | | 1 | | 4,994 | | | 6 | | 0 | | | 0 | | | 0 | | 1 | | | 4,994 | | | 6 | | 1 | | | 2,746 | | | 254 | | 1 | | | 4,287 | | | 713 | | 2 | | | 7,033 | | | 967 | |
Government agency collateralized mortgage obligations | | 5 | |
| 1,088 | |
| 1 | | 1 | |
| 73 | |
| 0 | | 6 | |
| 1,161 | |
| 1 | | 37 | |
| 11,761 | |
| 634 | | 10 | |
| 1,623 | |
| 171 | | 47 | |
| 13,384 | |
| 805 |
Total available-for-sale investment portfolio | | 182 | | $ | 1,415,835 | | $ | 44,998 | | 29 | | $ | 597,935 | | $ | 77,405 | | 211 | | $ | 2,013,770 | | $ | 122,403 | | 1,451 | | $ | 3,460,618 | | $ | 418,845 | | 231 | | $ | 1,642,857 | | $ | 547,564 | | 1,682 | | $ | 5,103,475 | | $ | 966,409 |
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Equity and other Securities: |
| | |
|
| |
|
|
| | |
|
| |
|
|
| | |
|
| |
| | ||||||||||||||||||||||||
Equity securities, at fair value |
| 1 | | $ | 91 | | $ | 10 |
| 0 | | $ | 0 | | $ | 0 |
| 1 | | $ | 91 | | $ | 10 | ||||||||||||||||||||||||
Total equity and other securities |
| 1 | | $ | 91 | | $ | 10 |
| 0 | | $ | 0 | | $ | 0 |
| 1 | | $ | 91 | | $ | 10 |
1514
As of December 31, 20202021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Less than 12 Months |
| 12 Months or Longer |
| Total |
| Less than 12 Months |
| 12 Months or Longer |
| Total | ||||||||||||||||||||||||||||||||||||
| | | | | | | Gross | | | | | | | Gross | | | | | | | Gross | | | | | | Gross | | | | | | | Gross | | | | | | | Gross | |||||||
| | | | Fair | | Unrealized | | | | Fair | | Unrealized | | | | Fair | | Unrealized | | | | Fair | | Unrealized | | | | Fair | | Unrealized | | | | Fair | | Unrealized | ||||||||||||
(000’s omitted) |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses |
| # |
| Value |
| Losses | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
Available-for-Sale Portfolio: | |
| | |
| | |
| |
| | |
| | |
| |
| | | | | |
| |
| |
| | |
| |
| | |
| | |
| |
| | |
| | |
| |
U.S. Treasury and agency securities | | 13 | | $ | 831,015 | | $ | 16,595 | | 0 | | $ | 0 | | $ | 0 | | 13 | | $ | 831,015 | | $ | 16,595 | | 47 | | $ | 1,224,101 | | $ | 14,873 | | 13 | | $ | 900,462 | | $ | 91,184 | | 60 | | $ | 2,124,563 | | $ | 106,057 |
Obligations of state and political subdivisions | | 1 | |
| 358 | |
| 0 | | 0 | |
| 0 | |
| 0 | | 1 | |
| 358 | |
| 0 | | 27 | |
| 23,966 | |
| 56 | | 0 | |
| 0 | |
| 0 | | 27 | |
| 23,966 | |
| 56 |
Government agency mortgage-backed securities | | 89 | |
| 75,992 | |
| 182 | | 2 | |
| 14 | |
| 0 | | 91 | |
| 76,006 | |
| 182 | | 147 | |
| 139,442 | |
| 2,475 | | 52 | |
| 67,273 | |
| 2,590 | | 199 | |
| 206,715 | |
| 5,065 |
Corporate debt securities | | 1 | | | 1,001 | | | 1 | | 0 | | | 0 | | | 0 | | 1 | | | 1,001 | | | 1 | | 1 | | 4,923 | | | 77 | | 0 | | | 0 | | | 0 | | 1 | | | 4,923 | | | 77 | |
Government agency collateralized mortgage obligations | | 13 | |
| 5,246 | |
| 10 | | 1 | |
| 0 | |
| 0 | | 14 | |
| 5,246 | |
| 10 | | 18 | |
| 3,146 | |
| 24 | | 1 | |
| 53 | |
| 0 | | 19 | |
| 3,199 | |
| 24 |
Total available-for-sale investment portfolio | | 117 | | $ | 913,612 | | $ | 16,788 | | 3 | | $ | 14 | | $ | 0 | | 120 | | $ | 913,626 | | $ | 16,788 | | 240 | | $ | 1,395,578 | | $ | 17,505 | | 66 | | $ | 967,788 | | $ | 93,774 | | 306 | | $ | 2,363,366 | | $ | 111,279 |
The unrealized losses reported pertaining to securities issued by the U.S. government and its sponsored entities include treasuries, agencies, and mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, which are currently rated AAA by Moody’s Investor Services, AA+ by Standard & Poor’s and are guaranteed by the U.S. government. The majority of the obligations of state and political subdivisions and corporations carry a credit rating of AA- or better. Additionally, a portion of the obligations of state and political subdivisionsbetter as well as carry a secondary level of credit enhancement. The Company holds two corporate debt securities in an unrealized loss position, which are currently rated A- or better, and the issuers of the securities both show a low risk of default. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to recovery of the amortized cost. Timely principal and interest payments continue to be made on the securities. The unrealized losses in the portfolios are primarily attributable to changes in interest rates. As such, management does not believe any individual unrealized loss as of September 30, 20212022 represents credit losses and no unrealized losses have been recognized intoin the provision for credit loss expense.losses. Accordingly, there is 0no allowance for credit losses on the Company’s available-for-sale investment portfolio as of September 30, 2021.2022. Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $12.5$18.5 million at September 30, 20212022 and is excluded from the estimate of credit losses.
The amortized cost and estimated fair value of debt securities at September 30, 2021,2022, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, including government agency mortgage-backed securities and government agency collateralized mortgage obligations, are shown separately.
| | | | | | | | | | | | |
|
| Available-for-Sale |
| Available-for-Sale | ||||||||
| | Amortized | | Fair | | Amortized | | Fair | ||||
(000’s omitted) |
| Cost |
| Value |
| Cost |
| Value | ||||
Due in one year or less | | $ | 187,457 | | $ | 189,642 | | $ | 546,740 | | $ | 541,161 |
Due after one through five years | |
| 693,642 | |
| 715,779 | |
| 1,420,259 | |
| 1,297,201 |
Due after five years through ten years | |
| 1,506,410 | |
| 1,515,582 | |
| 2,055,716 | |
| 1,762,074 |
Due after ten years | |
| 1,492,075 | |
| 1,402,300 | |
| 1,649,802 | |
| 1,171,947 |
Subtotal | |
| 3,879,584 | |
| 3,823,303 | |
| 5,672,517 | |
| 4,772,383 |
Government agency mortgage-backed securities | |
| 503,548 | |
| 510,676 | |
| 449,808 | |
| 384,891 |
Government agency collateralized mortgage obligations | |
| 23,746 | |
| 24,392 | |
| 14,219 | |
| 13,415 |
Total | | $ | 4,406,878 | | $ | 4,358,371 | | $ | 6,136,544 | | $ | 5,170,689 |
Investment securities with a carrying value of $2.48$2.41 billion and $2.03$2.32 billion at September 30, 20212022 and December 31, 2020,2021, respectively, were pledged to collateralize certain deposits and borrowings. Securities pledged to collateralize certain deposits and borrowings included $475.0$427.2 million and $473.4$485.4 million of U.S. Treasury securities that were pledged as collateral for securities sold under agreement to repurchase at September 30, 20212022 and December 31, 2020,2021, respectively. All securities sold under agreement to repurchase as of September 30, 20212022 and December 31, 20202021 have an overnight and continuous maturity.
1615
NOTE E: LOANS AND ALLOWANCE FOR CREDIT LOSSES
The segments of the Company’s loan portfolio are summarized as follows:
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
(000’s omitted) |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Business lending | | $ | 3,092,177 | | $ | 3,440,077 | | $ | 3,494,425 | | $ | 3,075,904 |
Consumer mortgage | |
| 2,470,974 | |
| 2,401,499 | |
| 2,975,521 | |
| 2,556,114 |
Consumer indirect | |
| 1,168,378 | |
| 1,021,885 | |
| 1,461,235 | |
| 1,189,749 |
Consumer direct | |
| 155,602 | |
| 152,657 | |
| 179,399 | |
| 153,811 |
Home equity | |
| 395,451 | |
| 399,834 | |
| 433,027 | |
| 398,061 |
Gross loans, including deferred origination costs | |
| 7,282,582 | |
| 7,415,952 | |
| 8,543,607 | |
| 7,373,639 |
Allowance for credit losses | |
| (49,499) | |
| (60,869) | |
| (60,363) | |
| (49,869) |
Loans, net of allowance for credit losses | | $ | 7,233,083 | | $ | 7,355,083 | | $ | 8,483,244 | | $ | 7,323,770 |
The following table presents the aging of the amortized cost basis of the Company’s past due loans including PCD loans, by segment as of September 30, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Past Due | | 90+ Days Past | | | | | | | | | | | | | | Past Due | | 90+ Days Past | | | | | | | | | | | | | ||||
| | 30 – 89 | | Due and | | | | | Total | | | | | | | | 30 – 89 | | Due and | | | | | Total | | | | | | | ||||||
(000’s omitted) |
| Days |
| Still Accruing |
| Nonaccrual |
| Past Due |
| Current |
| Total Loans |
| Days |
| Still Accruing |
| Nonaccrual |
| Past Due |
| Current |
| Total Loans | ||||||||||||
Business lending | | $ | 5,109 | | $ | 148 | | $ | 47,820 | | $ | 53,077 | | $ | 3,039,100 | | $ | 3,092,177 | | $ | 1,039 | | $ | 0 | | $ | 4,848 | | $ | 5,887 | | $ | 3,488,538 | | $ | 3,494,425 |
Consumer mortgage | |
| 8,869 | |
| 1,288 | |
| 15,605 | |
| 25,762 | |
| 2,445,212 | |
| 2,470,974 | |
| 12,138 | |
| 3,997 | |
| 20,890 | |
| 37,025 | |
| 2,938,496 | |
| 2,975,521 |
Consumer indirect | |
| 8,638 | |
| 131 | |
| 0 | |
| 8,769 | |
| 1,159,609 | |
| 1,168,378 | |
| 11,938 | |
| 215 | |
| 0 | |
| 12,153 | |
| 1,449,082 | |
| 1,461,235 |
Consumer direct | |
| 608 | |
| 19 | |
| 1 | |
| 628 | |
| 154,974 | |
| 155,602 | |
| 956 | |
| 38 | |
| 29 | |
| 1,023 | |
| 178,376 | |
| 179,399 |
Home equity | |
| 1,991 | |
| 288 | |
| 2,541 | |
| 4,820 | |
| 390,631 | |
| 395,451 | |
| 1,761 | |
| 166 | |
| 2,309 | |
| 4,236 | |
| 428,791 | |
| 433,027 |
Total | | $ | 25,215 | | $ | 1,874 | | $ | 65,967 | | $ | 93,056 | | $ | 7,189,526 | | $ | 7,282,582 | | $ | 27,832 | | $ | 4,416 | | $ | 28,076 | | $ | 60,324 | | $ | 8,483,283 | | $ | 8,543,607 |
The following table presents the aging of the amortized cost basis of the Company’s past due loans including PCD loans, by segment as of December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Past Due | | 90+ Days Past | | | | | | | | | | | | | | Past Due | | 90+ Days Past | | | | | | | | | | | | | ||||
| | 30 – 89 | | Due and | | | | | Total | | | | | | | | 30 – 89 | | Due and | | | | | Total | | | | | | | ||||||
(000’s omitted) |
| Days |
| Still Accruing |
| Nonaccrual |
| Past Due |
| Current |
| Total Loans |
| Days |
| Still Accruing |
| Nonaccrual |
| Past Due |
| Current |
| Total Loans | ||||||||||||
Business lending | | $ | 4,896 | | $ | 59 | | $ | 55,709 | | $ | 60,664 | | $ | 3,379,413 | | $ | 3,440,077 | | $ | 5,540 | | $ | 99 | | $ | 24,105 | | $ | 29,744 | | $ | 3,046,160 | | $ | 3,075,904 |
Consumer mortgage | |
| 13,236 | |
| 3,051 | |
| 14,970 | |
| 31,257 | |
| 2,370,242 | |
| 2,401,499 | |
| 10,297 | |
| 3,328 | |
| 15,027 | |
| 28,652 | |
| 2,527,462 | |
| 2,556,114 |
Consumer indirect | |
| 13,161 | |
| 219 | |
| 1 | |
| 13,381 | |
| 1,008,504 | |
| 1,021,885 | |
| 9,611 | |
| 87 | |
| 0 | |
| 9,698 | |
| 1,180,051 | |
| 1,189,749 |
Consumer direct | |
| 1,170 | |
| 28 | |
| 3 | |
| 1,201 | |
| 151,456 | |
| 152,657 | |
| 796 | |
| 22 | |
| 1 | |
| 819 | |
| 152,992 | |
| 153,811 |
Home equity | |
| 2,296 | |
| 565 | |
| 2,246 | |
| 5,107 | |
| 394,727 | |
| 399,834 | |
| 1,778 | |
| 272 | |
| 2,532 | |
| 4,582 | |
| 393,479 | |
| 398,061 |
Total | | $ | 34,759 | | $ | 3,922 | | $ | 72,929 | | $ | 111,610 | | $ | 7,304,342 | | $ | 7,415,952 | | $ | 28,022 | | $ | 3,808 | | $ | 41,665 | | $ | 73,495 | | $ | 7,300,144 | | $ | 7,373,639 |
The delinquency status for loans on payment deferment due to COVID-19 financial hardship were reported at September 30, 2021 based on their delinquency status at the execution date of the payment deferment, unless subsequent to the execution date of the payment deferment, the borrower made all required past due payments to bring the loan to current status. Certain loans under extended pandemic-related forbearance were reclassified to nonaccrual status.
NaNNo interest income on nonaccrual loans was recognized during the three and nine months ended September 30, 2021 and 2020.2022. An immaterial amount of accrued interest was written off on nonaccrual loans by reversing interest income in both periods.income.
1716
The Company uses several credit quality indicators to assess credit risk in an ongoing manner. The Company’s primary credit quality indicator for its business lending portfolio is an internal credit risk rating system that categorizes loans as “pass”, “special mention”, “classified”, or “doubtful”. Credit risk ratings are applied to loans individually to those classes of loans that have significant or unique credit characteristics that benefit frombased on a case-by-case evaluation. Loans that were granted COVID-19 related financial hardship payment deferrals were reviewed on a case-by-case basis for credit risk ratings. Loans on payment deferral will continue to be monitored for indications of deterioration that could result in future downgrades. In general, the following are the definitions of the Company’s credit quality indicators:
| | |
Pass | | The condition of the borrower and the performance of the loans are satisfactory or better. |
Special Mention | | The condition of the borrower has deteriorated although the loan performs as agreed. Loss may be incurred at some future date, if conditions deteriorate further. |
Classified | | The condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate and incur loss, if deficiencies are not corrected. |
Doubtful | | The condition of the borrower has deteriorated to the point that collection of the balance is improbable based on current facts and conditions and loss is likely. |
The following tables show the amount of business lending loans by credit quality category at September 30, 20212022 and December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Revolving | | | | | | | | | | | | | | | | | | | | | | | Revolving | | | | ||
| | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | ||
(000’s omitted) | | Term Loans Amortized Cost Basis by Origination Year | | Amortized | | | | | | | | | | | | | | | | | | | | | | | Amortized | | | | ||||||||||||||||||
September 30, 2021 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Cost Basis |
| Total | ||||||||||||||||||||||||||||||||
September 30, 2022 |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| Prior |
| Cost Basis |
| Total | ||||||||||||||||||||||||||||||||
Business lending: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Risk rating |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Pass | | $ | 418,709 | | $ | 365,951 | | $ | 339,050 | | $ | 261,444 | | $ | 179,753 | | $ | 624,089 | | $ | 501,995 | | $ | 2,690,991 | | $ | 617,776 | | $ | 422,638 | | $ | 306,960 | | $ | 325,181 | | $ | 249,442 | | $ | 710,320 | | $ | 636,686 | | $ | 3,269,003 |
Special mention | |
| 4,877 | |
| 12,376 | |
| 11,965 | |
| 39,450 | |
| 34,331 | |
| 64,406 | |
| 26,468 | |
| 193,873 | |
| 2,236 | |
| 5,229 | |
| 3,988 | |
| 4,442 | |
| 13,155 | |
| 64,432 | |
| 31,447 | |
| 124,929 |
Classified | |
| 788 | |
| 1,797 | |
| 20,851 | |
| 47,749 | |
| 25,280 | |
| 74,205 | |
| 34,856 | |
| 205,526 | |
| 836 | |
| 948 | |
| 1,259 | |
| 3,840 | |
| 28,498 | |
| 56,395 | |
| 8,717 | |
| 100,493 |
Doubtful | |
| 0 | |
| 0 | |
| 15 | |
| 916 | |
| 0 | |
| 0 | |
| 856 | |
| 1,787 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Total business lending | | $ | 424,374 | | $ | 380,124 | | $ | 371,881 | | $ | 349,559 | | $ | 239,364 | | $ | 762,700 | | $ | 564,175 | | $ | 3,092,177 | | $ | 620,848 | | $ | 428,815 | | $ | 312,207 | | $ | 333,463 | | $ | 291,095 | | $ | 831,147 | | $ | 676,850 | | $ | 3,494,425 |
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans Amortized Cost Basis by Origination Year | | | | | | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Revolving | | | | | | | | | | | | | | | | | | | | | | | Revolving | | | | ||
| | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | ||
(000’s omitted) | | Term Loans Amortized Cost Basis by Origination Year | | Amortized | | | | | | | | | | | | | | | | | | | | | | | Amortized | | | | ||||||||||||||||||
December 31, 2020 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| Prior |
| Cost Basis |
| Total | ||||||||||||||||||||||||||||||||
December 31, 2021 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Cost Basis |
| Total | ||||||||||||||||||||||||||||||||
Business lending: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Risk rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 860,178 | | $ | 351,350 | | $ | 312,087 | | $ | 217,138 | | $ | 231,453 | | $ | 543,999 | | $ | 483,018 | | $ | 2,999,223 | | $ | 524,302 | | $ | 328,885 | | $ | 320,638 | | $ | 248,175 | | $ | 186,074 | | $ | 584,912 | | $ | 524,553 | | $ | 2,717,539 |
Special mention | |
| 14,687 | |
| 36,041 | |
| 28,410 | |
| 21,875 | |
| 29,386 | |
| 51,657 | |
| 52,732 | |
| 234,788 | |
| 5,969 | |
| 11,013 | |
| 10,111 | |
| 46,318 | |
| 22,524 | |
| 57,134 | |
| 27,444 | |
| 180,513 |
Classified | |
| 6,336 | |
| 4,560 | |
| 30,422 | |
| 24,807 | |
| 14,891 | |
| 65,157 | |
| 56,000 | |
| 202,173 | |
| 1,870 | |
| 1,767 | |
| 20,315 | |
| 40,235 | |
| 21,904 | |
| 63,685 | |
| 27,511 | |
| 177,287 |
Doubtful | |
| 0 | |
| 18 | |
| 2,888 | |
| 0 | |
| 0 | |
| 108 | |
| 879 | |
| 3,893 | |
| 0 | |
| 0 | |
| 0 | |
| 62 | |
| 0 | |
| 0 | |
| 503 | |
| 565 |
Total business lending | | $ | 881,201 | | $ | 391,969 | | $ | 373,807 | | $ | 263,820 | | $ | 275,730 | | $ | 660,921 | | $ | 592,629 | | $ | 3,440,077 | | $ | 532,141 | | $ | 341,665 | | $ | 351,064 | | $ | 334,790 | | $ | 230,502 | | $ | 705,731 | | $ | 580,011 | | $ | 3,075,904 |
The business lending portfolio experienced an improvement in credit quality as a higher proportion of loans were classified as Pass at September 30, 2022 as compared to December 31, 2021. This change was the result of improvements in economic conditions, leading to improvements in the financial condition of the borrowers.
All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or nonperforming. Performing loans include loans classified as current as well as those classified as 30 - 89 days past due. Nonperforming loans include 90+ days past due and still accruing and nonaccrual loans.
1817
The following table details the balances in all other loan categories at September 30, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Revolving | | | | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Loans | | | | |
(000’s omitted) | | Term Loans Amortized Cost Basis by Origination Year | | Amortized | | | | |||||||||||||||||
September 30, 2021 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Cost Basis |
| Total | ||||||||
Consumer mortgage: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
FICO AB(1) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 360,580 | | $ | 237,931 | | $ | 195,086 | | $ | 127,786 | | $ | 125,836 | | $ | 612,420 | | $ | 0 | | $ | 1,659,639 |
Nonperforming | |
| 0 | |
| 0 | |
| 0 | |
| 256 | |
| 475 | |
| 2,851 | |
| 0 | |
| 3,582 |
Total FICO AB | |
| 360,580 | |
| 237,931 | |
| 195,086 | |
| 128,042 | |
| 126,311 | |
| 615,271 | |
| 0 | |
| 1,663,221 |
FICO CDE(2) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | |
| 109,400 | |
| 125,742 | |
| 91,312 | |
| 65,967 | |
| 58,841 | |
| 323,974 | |
| 19,206 | |
| 794,442 |
Nonperforming | |
| 80 | |
| 232 | |
| 977 | |
| 679 | |
| 781 | |
| 10,562 | |
| 0 | |
| 13,311 |
Total FICO CDE | |
| 109,480 | |
| 125,974 | |
| 92,289 | |
| 66,646 | |
| 59,622 | |
| 334,536 | |
| 19,206 | |
| 807,753 |
Total consumer mortgage | | $ | 470,060 | | $ | 363,905 | | $ | 287,375 | | $ | 194,688 | | $ | 185,933 | | $ | 949,807 | | $ | 19,206 | | $ | 2,470,974 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer indirect: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 480,254 | | $ | 229,368 | | $ | 209,894 | | $ | 126,128 | | $ | 48,624 | | $ | 73,979 | | $ | 0 | | $ | 1,168,247 |
Nonperforming | |
| 0 | |
| 39 | |
| 74 | |
| 9 | |
| 9 | |
| 0 | |
| 0 | |
| 131 |
Total consumer indirect | | $ | 480,254 | | $ | 229,407 | | $ | 209,968 | | $ | 126,137 | | $ | 48,633 | | $ | 73,979 | | $ | 0 | | $ | 1,168,378 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer direct: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 61,119 | | $ | 32,913 | | $ | 29,379 | | $ | 15,118 | | $ | 5,668 | | $ | 5,259 | | $ | 6,126 | | $ | 155,582 |
Nonperforming | |
| 0 | |
| 0 | |
| 1 | |
| 4 | |
| 0 | |
| 14 | |
| 1 | |
| 20 |
Total consumer direct | | $ | 61,119 | | $ | 32,913 | | $ | 29,380 | | $ | 15,122 | | $ | 5,668 | | $ | 5,273 | | $ | 6,127 | | $ | 155,602 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Home equity: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 56,317 | | $ | 45,314 | | $ | 39,025 | | $ | 21,292 | | $ | 17,137 | | $ | 39,052 | | $ | 174,485 | | $ | 392,622 |
Nonperforming | |
| 0 | |
| 118 | |
| 21 | |
| 104 | |
| 96 | |
| 793 | |
| 1,697 | |
| 2,829 |
Total home equity | | $ | 56,317 | | $ | 45,432 | | $ | 39,046 | | $ | 21,396 | | $ | 17,233 | | $ | 39,845 | | $ | 176,182 | | $ | 395,451 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Revolving | | | | |
| | | | | | | | | | | | | | | | | | | | Loans | | | | |
(000’s omitted) | | | | | | | | | | | | | | | | | | | | Amortized | | | | |
September 30, 2022 |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| Prior |
| Cost Basis |
| Total | ||||||||
Consumer mortgage: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
FICO AB(1) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 346,061 | | $ | 516,066 | | $ | 231,558 | | $ | 182,908 | | $ | 103,874 | | $ | 629,948 | | $ | 1,799 | | $ | 2,012,214 |
Nonperforming | |
| 0 | |
| 0 | |
| 392 | |
| 422 | |
| 407 | |
| 4,619 | |
| 0 | |
| 5,840 |
Total FICO AB | |
| 346,061 | |
| 516,066 | |
| 231,950 | |
| 183,330 | |
| 104,281 | |
| 634,567 | |
| 1,799 | |
| 2,018,054 |
FICO CDE(2) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | |
| 125,340 | |
| 190,264 | |
| 120,575 | |
| 85,509 | |
| 57,082 | |
| 336,435 | |
| 23,215 | |
| 938,420 |
Nonperforming | |
| 238 | |
| 1,061 | |
| 1,701 | |
| 1,443 | |
| 1,467 | |
| 13,137 | |
| 0 | |
| 19,047 |
Total FICO CDE | |
| 125,578 | |
| 191,325 | |
| 122,276 | |
| 86,952 | |
| 58,549 | |
| 349,572 | |
| 23,215 | |
| 957,467 |
Total consumer mortgage | | $ | 471,639 | | $ | 707,391 | | $ | 354,226 | | $ | 270,282 | | $ | 162,830 | | $ | 984,139 | | $ | 25,014 | | $ | 2,975,521 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer indirect: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 620,692 | | $ | 453,478 | | $ | 143,702 | | $ | 115,304 | | $ | 62,534 | | $ | 65,310 | | $ | 0 | | $ | 1,461,020 |
Nonperforming | |
| 26 | |
| 135 | |
| 35 | |
| 8 | |
| 11 | |
| 0 | |
| 0 | |
| 215 |
Total consumer indirect | | $ | 620,718 | | $ | 453,613 | | $ | 143,737 | | $ | 115,312 | | $ | 62,545 | | $ | 65,310 | | $ | 0 | | $ | 1,461,235 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer direct: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 72,531 | | $ | 52,234 | | $ | 19,832 | | $ | 15,548 | | $ | 7,045 | | $ | 5,615 | | $ | 6,527 | | $ | 179,332 |
Nonperforming | |
| 0 | |
| 0 | |
| 5 | |
| 1 | |
| 29 | |
| 12 | |
| 20 | |
| 67 |
Total consumer direct | | $ | 72,531 | | $ | 52,234 | | $ | 19,837 | | $ | 15,549 | | $ | 7,074 | | $ | 5,627 | | $ | 6,547 | | $ | 179,399 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Home equity: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 55,553 | | $ | 74,656 | | $ | 39,458 | | $ | 33,137 | | $ | 17,175 | | $ | 44,513 | | $ | 166,060 | | $ | 430,552 |
Nonperforming | |
| 0 | |
| 10 | |
| 122 | |
| 198 | |
| 153 | |
| 661 | |
| 1,331 | |
| 2,475 |
Total home equity | | $ | 55,553 | | $ | 74,666 | | $ | 39,580 | | $ | 33,335 | | $ | 17,328 | | $ | 45,174 | | $ | 167,391 | | $ | 433,027 |
(1) | FICO AB refers to higher tiered loans with FICO scores greater than or equal to |
(2) | FICO CDE refers to loans with FICO scores less than 720 at origination and potentially higher risk. |
1918
The following table details the balances in all other loan categories at December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Revolving | | | | |
| | | | | | | | | | | | | | | | | | | | Loans | | | | |
(000’s omitted) | | Term Loans Amortized Cost Basis by Origination Year | | Amortized | | | | |||||||||||||||||
December 31, 2020 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| Prior |
| Cost Basis |
| Total | ||||||||
Consumer mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
FICO AB(1) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Performing | | $ | 260,588 | | $ | 227,027 | | $ | 166,638 | | $ | 163,653 | | $ | 160,911 | | $ | 614,976 | | $ | 321 | | $ | 1,594,114 |
Nonperforming | |
| 0 | |
| 0 | |
| 275 | |
| 398 | |
| 345 | |
| 2,709 | |
| 0 | |
| 3,727 |
Total FICO AB | |
| 260,588 | |
| 227,027 | |
| 166,913 | |
| 164,051 | |
| 161,256 | |
| 617,685 | |
| 321 | |
| 1,597,841 |
FICO CDE(2) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | |
| 115,049 | |
| 102,788 | |
| 80,973 | |
| 75,289 | |
| 83,214 | |
| 314,668 | |
| 17,382 | |
| 789,363 |
Nonperforming | |
| 0 | |
| 1,010 | |
| 582 | |
| 877 | |
| 1,786 | |
| 10,040 | |
| 0 | |
| 14,295 |
Total FICO CDE | |
| 115,049 | |
| 103,798 | |
| 81,555 | |
| 76,166 | |
| 85,000 | |
| 324,708 | |
| 17,382 | |
| 803,658 |
Total consumer mortgage | | $ | 375,637 | | $ | 330,825 | | $ | 248,468 | | $ | 240,217 | | $ | 246,256 | | $ | 942,393 | | $ | 17,703 | | $ | 2,401,499 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer indirect: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 303,471 | | $ | 305,901 | | $ | 202,373 | | $ | 86,497 | | $ | 61,449 | | $ | 61,975 | | $ | 0 | | $ | 1,021,666 |
Nonperforming | |
| 51 | |
| 52 | |
| 82 | |
| 17 | |
| 16 | |
| 1 | |
| 0 | |
| 219 |
Total consumer indirect | | $ | 303,522 | | $ | 305,953 | | $ | 202,455 | | $ | 86,514 | | $ | 61,465 | | $ | 61,976 | | $ | 0 | | $ | 1,021,885 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer direct: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 49,181 | | $ | 46,992 | | $ | 27,872 | | $ | 12,326 | | $ | 5,232 | | $ | 4,146 | | $ | 6,878 | | $ | 152,627 |
Nonperforming | |
| 1 | |
| 19 | |
| 2 | |
| 5 | |
| 0 | |
| 3 | |
| 0 | |
| 30 |
Total consumer direct | | $ | 49,182 | | $ | 47,011 | | $ | 27,874 | | $ | 12,331 | | $ | 5,232 | | $ | 4,149 | | $ | 6,878 | | $ | 152,657 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Home equity: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 48,145 | | $ | 48,780 | | $ | 28,074 | | $ | 23,524 | | $ | 17,828 | | $ | 35,900 | | $ | 194,773 | | $ | 397,024 |
Nonperforming | |
| 0 | |
| 24 | |
| 73 | |
| 104 | |
| 183 | |
| 490 | |
| 1,936 | |
| 2,810 |
Total home equity | | $ | 48,145 | | $ | 48,804 | | $ | 28,147 | | $ | 23,628 | | $ | 18,011 | | $ | 36,390 | | $ | 196,709 | | $ | 399,834 |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Term Loans Amortized Cost Basis by Origination Year |
|
| |
|
| | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Revolving | | | | |
| | | | | | | | | | | | | | | | | | | | Loans | | | | |
(000’s omitted) | | | | | | | | | | | | | | | | | | | | Amortized | | | | |
December 31, 2021 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Cost Basis |
| Total | ||||||||
Consumer mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
FICO AB(1) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Performing | | $ | 514,680 | | $ | 229,039 | | $ | 183,469 | | $ | 113,618 | | $ | 116,417 | | $ | 566,129 | | $ | 0 | | $ | 1,723,352 |
Nonperforming | |
| 0 | |
| 266 | |
| 0 | |
| 131 | |
| 435 | |
| 3,236 | |
| 0 | |
| 4,068 |
Total FICO AB | |
| 514,680 | |
| 229,305 | |
| 183,469 | |
| 113,749 | |
| 116,852 | |
| 569,365 | |
| 0 | |
| 1,727,420 |
FICO CDE(2) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | |
| 168,870 | |
| 122,546 | |
| 85,253 | |
| 57,973 | |
| 54,396 | |
| 300,341 | |
| 25,028 | |
| 814,407 |
Nonperforming | |
| 0 | |
| 522 | |
| 972 | |
| 1,465 | |
| 939 | |
| 10,389 | |
| 0 | |
| 14,287 |
Total FICO CDE | |
| 168,870 | |
| 123,068 | |
| 86,225 | |
| 59,438 | |
| 55,335 | |
| 310,730 | |
| 25,028 | |
| 828,694 |
Total consumer mortgage | | $ | 683,550 | | $ | 352,373 | | $ | 269,694 | | $ | 173,187 | | $ | 172,187 | | $ | 880,095 | | $ | 25,028 | | $ | 2,556,114 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer indirect: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 590,857 | | $ | 204,529 | | $ | 182,458 | | $ | 107,683 | | $ | 39,385 | | $ | 64,750 | | $ | 0 | | $ | 1,189,662 |
Nonperforming | |
| 0 | |
| 34 | |
| 0 | |
| 24 | |
| 17 | |
| 12 | |
| 0 | |
| 87 |
Total consumer indirect | | $ | 590,857 | | $ | 204,563 | | $ | 182,458 | | $ | 107,707 | | $ | 39,402 | | $ | 64,762 | | $ | 0 | | $ | 1,189,749 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer direct: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 72,584 | | $ | 28,905 | | $ | 24,770 | | $ | 12,340 | | $ | 4,396 | | $ | 4,575 | | $ | 6,218 | | $ | 153,788 |
Nonperforming | |
| 0 | |
| 4 | |
| 18 | |
| 1 | |
| 0 | |
| 0 | |
| 0 | |
| 23 |
Total consumer direct | | $ | 72,584 | | $ | 28,909 | | $ | 24,788 | | $ | 12,341 | | $ | 4,396 | | $ | 4,575 | | $ | 6,218 | | $ | 153,811 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Home equity: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 76,041 | | $ | 43,106 | | $ | 35,990 | | $ | 18,824 | | $ | 15,134 | | $ | 35,740 | | $ | 170,422 | | $ | 395,257 |
Nonperforming | |
| 0 | |
| 64 | |
| 47 | |
| 102 | |
| 131 | |
| 679 | |
| 1,781 | |
| 2,804 |
Total home equity | | $ | 76,041 | | $ | 43,170 | | $ | 36,037 | | $ | 18,926 | | $ | 15,265 | | $ | 36,419 | | $ | 172,203 | | $ | 398,061 |
(1) | FICO AB refers to higher tiered loans with FICO scores greater than or equal to |
(2) | FICO CDE refers to loans with FICO scores less than 720 at origination and potentially higher risk. |
All loan classesCommercial loans greater than $0.5 million that are collectively evaluatedon nonaccrual are individually assessed, and if necessary, a specific allocation of the allowance for credit losses except business lending.is provided. A summary of individually assessed business loans as of September 30, 20212022 and December 31, 20202021 follows:
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| September 30, |
| December 31, | ||||
(000’s omitted) |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
Loans with allowance allocation | | $ | 21,688 | | $ | 27,437 | | $ | 0 | | $ | 7,102 |
Loans without allowance allocation | |
| 9,145 | |
| 8,138 | |
| 3,232 | |
| 7,417 |
Carrying balance | |
| 30,833 | |
| 35,575 | |
| 3,232 | |
| 14,519 |
Contractual balance | |
| 33,357 | |
| 38,362 | |
| 4,201 | |
| 16,963 |
Specifically allocated allowance | |
| 1,834 | |
| 3,874 | |
| 0 | |
| 566 |
The average carrying balance of individually assessed loans was $31.5$3.2 million and $8.8$31.5 million for the three months ended September 30, 20212022 and September 30, 2020,2021, respectively. The average carrying balance of individually assessed loans was $34.1$12.2 million and $4.2$34.1 million for the nine months ended September 30, 2022 and 2021, and September 30, 2020, respectively. NaNNo interest income was recognized on individually assessed loans for the three or nine months ended September 30, 20212022 and September 30, 2020.2021.
2019
In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial standing and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.
In accordance with the clarified guidance issued by the Office of the Comptroller of the Currency (“OCC”), loans that have been discharged in Chapter 7 bankruptcy, but not reaffirmed by the borrower, are classified as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified. The Company’s lien position against the underlying collateral remains unchanged. Pursuant to that guidance, the Company records a charge-off equal to any portion of the carrying value that exceeds the net realizable value of the collateral. The amount of loss incurred in the three and nine months ended September 30, 20212022 and 20202021 was immaterial.
TDRs less than $0.5 million are collectively included in the allowance for credit loss estimate. Commercial loans greater than $0.5 million are individually assessed, and if necessary, a specific allocation of the allowance for credit losses is provided. With regard to determination of the amount of the allowance for credit losses, TDR loans are considered to be impaired. As a result, the determination of the amount of allowance for credit losses related to impaired loans for each portfolio segment within TDRs is the same as detailed previously.
With respect to the Company’s lending activities, the Company implemented a customer forbearance program allowing for loan payment deferrals up to three months per request during 2020 to assist both consumer and business borrowers that were experiencing financial hardship due to COVID-19 related challenges. Business lending, consumer direct, and consumer indirect loans in deferment status continued to accrue interest on the deferred principal during the deferment period unless otherwise classified as nonaccrual. Consumer mortgage and home equity loans did not accrue interest on the deferred payments during the deferment period. Consistent with the Coronavirus Aid, Relief and Economic Security Act ( “CARES Act”), the Consolidated Appropriations Act of 2021 (“CAA”), and industry regulatory guidance, borrowers that were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period and were not classified as TDRs. Borrowers that were delinquent in their payments to the Company prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case-by-case basis for TDR classification and non-performing loan status.
As of September 30, 2021, the Company had 4 borrowers in forbearance due to COVID-19 related financial hardship, representing $3.9 million in outstanding loan balances, or 0.1% of total loans outstanding. These forbearances were comprised of 3 business borrowers representing $3.8 million in outstanding loan balances and 1 consumer borrower representing approximately $0.1 million in outstanding loan balances. As of December 31, 2020, the Company had 74 borrowers in forbearance due to COVID-19 related financial hardship, representing $66.5 million in outstanding loan balances, or 0.9% of total loans outstanding. These forbearances were comprised of 63 business borrowers representing $65.7 million in outstanding loan balances and 11 consumer borrowers representing approximately $0.8 million in outstanding loan balances.
Information regarding TDRs as of September 30, 20212022 and December 31, 20202021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| December 31, 2020 | | September 30, 2022 |
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(000’s omitted) | | Nonaccrual | | Accruing | | Total | | Nonaccrual | | Accruing | | Total | | Nonaccrual | | Accruing | | Total | | Nonaccrual | | Accruing | | Total | ||||||||||||||||||||||||||||||||||||
|
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount | ||||||||||||
Business lending | | 10 | | $ | 458 |
| 5 | | $ | 175 |
| 15 | | $ | 633 |
| 6 | | $ | 529 |
| 4 | | $ | 191 |
| 10 | | $ | 720 | | 2 | | $ | 161 |
| 3 | | $ | 282 |
| 5 | | $ | 443 |
| 10 | | $ | 1,011 |
| 4 | | $ | 811 |
| 14 | | $ | 1,822 |
Consumer mortgage | | 62 | |
| 2,828 |
| 44 | |
| 2,307 |
| 106 | |
| 5,135 |
| 56 | |
| 2,413 |
| 48 | |
| 2,266 |
| 104 | |
| 4,679 | | 56 | |
| 2,408 |
| 44 | |
| 2,041 |
| 100 | |
| 4,449 |
| 61 | |
| 2,694 |
| 47 | |
| 2,420 |
| 108 | |
| 5,114 |
Consumer indirect | | 0 | |
| 0 |
| 73 | |
| 816 |
| 73 | |
| 816 |
| 0 | |
| 0 |
| 86 | |
| 951 |
| 86 | |
| 951 | | 0 | |
| 0 |
| 59 | |
| 628 |
| 59 | |
| 628 |
| 0 | |
| 0 |
| 72 | |
| 829 |
| 72 | |
| 829 |
Consumer direct | | 0 | |
| 0 |
| 17 | |
| 10 |
| 17 | |
| 10 |
| 0 | |
| 0 |
| 23 | |
| 85 |
| 23 | |
| 85 | | 0 | |
| 0 |
| 11 | |
| 4 |
| 11 | |
| 4 |
| 0 | |
| 0 |
| 16 | |
| 7 |
| 16 | |
| 7 |
Home equity | | 10 | |
| 244 |
| 12 | |
| 240 |
| 22 | |
| 484 |
| 11 | |
| 285 |
| 13 | |
| 264 |
| 24 | |
| 549 | | 9 | |
| 116 |
| 10 | |
| 217 |
| 19 | |
| 333 |
| 10 | |
| 235 |
| 12 | |
| 232 |
| 22 | |
| 467 |
Total | | 82 | | $ | 3,530 |
| 151 | | $ | 3,548 |
| 233 | | $ | 7,078 |
| 73 | | $ | 3,227 |
| 174 | | $ | 3,757 |
| 247 | | $ | 6,984 | | 67 | | $ | 2,685 |
| 127 | | $ | 3,172 |
| 194 | | $ | 5,857 |
| 81 | | $ | 3,940 |
| 151 | | $ | 4,299 |
| 232 | | $ | 8,239 |
21
The following table presents information related to loans modified in a TDR during the three months and nine months ended September 30, 20212022 and 2020.2021. Of the loans noted in the table below, all consumer mortgage loans for the three months and nine months ended September 30, 20212022 and 20202021 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.
| | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended |
| Three Months Ended |
| Three Months Ended |
| Three Months Ended | ||||||||||||
| | September 30, 2021 | | September 30, 2020 | | September 30, 2022 | | September 30, 2021 | ||||||||||||
| | Number of | | Outstanding | | Number of | | Outstanding | | Number of | | Outstanding | | Number of | | Outstanding | ||||
(000’s omitted) |
| loans modified |
| Balance |
| loans modified |
| Balance |
| loans modified |
| Balance |
| loans modified |
| Balance | ||||
Business lending |
| 5 | | $ | 1,925 |
| 0 | | $ | 0 |
| 0 | | $ | 0 |
| 5 | | $ | 1,925 |
Consumer mortgage |
| 9 | |
| 728 |
| 8 | |
| 646 |
| 1 | |
| 184 |
| 9 | |
| 728 |
Consumer indirect |
| 5 | |
| 78 |
| 14 | |
| 131 |
| 6 | |
| 71 |
| 5 | |
| 78 |
Consumer direct |
| 1 | |
| 2 |
| 1 | |
| 2 |
| 2 | |
| 3 |
| 1 | |
| 2 |
Home equity |
| 0 | |
| 0 |
| 2 | |
| 56 |
| 0 | |
| 0 |
| 0 | |
| 0 |
Total |
| 20 | | $ | 2,733 |
| 25 | | $ | 835 |
| 9 | | $ | 258 |
| 20 | | $ | 2,733 |
| | | | | | | | | | |
| | Nine Months Ended | | Nine Months Ended | ||||||
| | September 30, 2021 | | September 30, 2020 | ||||||
| | Number of | | Outstanding | | Number of | | Outstanding | ||
(000’s omitted) |
| loans modified |
| Balance |
| loans modified |
| Balance | ||
Business lending |
| 5 | | $ | 1,925 |
| 0 | | $ | 0 |
Consumer mortgage |
| 19 | |
| 1,193 |
| 17 | |
| 1,378 |
Consumer indirect |
| 17 | |
| 222 |
| 25 | |
| 261 |
Consumer direct |
| 2 | |
| 8 |
| 2 | |
| 12 |
Home equity |
| 0 | |
| 0 |
| 2 | |
| 56 |
Total |
| 43 | | $ | 3,348 |
| 46 | | $ | 1,707 |
Allowance for Credit Losses
The following presents by segment the activity in the allowance for credit losses during the three months and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | |||||||||||||||
| | | | | | | | | | | | | | | |
| Nine Months Ended |
| Nine Months Ended | |||||||
|
| Three Months Ended September 30, 2021 | | September 30, 2022 | | September 30, 2021 | ||||||||||||||||||||
| | Beginning | | Charge- | | | | | | | | Ending | | Number of | | Outstanding | | Number of | | Outstanding | ||||||
(000’s omitted) |
| balance |
| offs |
| Recoveries |
| Provision |
| balance |
| loans modified |
| Balance |
| loans modified |
| Balance | ||||||||
Business lending | | $ | 23,417 | | $ | (872) | | $ | 169 | | $ | (2,688) | | $ | 20,026 | | 0 | | $ | 0 | | | 5 | | $ | 1,925 |
Consumer mortgage | |
| 10,001 | |
| (127) | |
| 3 | |
| (132) | |
| 9,745 |
| 5 |
| | 459 |
| | 19 |
| | 1,193 |
Consumer indirect | |
| 11,103 | |
| (1,365) | |
| 973 | |
| 1,334 | |
| 12,045 |
| 12 |
| | 127 |
| | 17 |
| | 222 |
Consumer direct | |
| 2,548 | |
| (309) | |
| 163 | |
| 268 | |
| 2,670 |
| 2 |
| | 3 |
| | 2 |
| | 8 |
Home equity | |
| 1,796 | |
| (30) | |
| 10 | |
| (56) | |
| 1,720 |
| 1 |
| | 6 |
| | 0 |
| | 0 |
Unallocated | |
| 1,000 | |
| 0 | |
| 0 | |
| 0 | |
| 1,000 | |||||||||||
Purchased credit deteriorated | |
| 1,885 | |
| 0 | |
| 35 | |
| 373 | |
| 2,293 | |||||||||||
Allowance for credit losses – loans | |
| 51,750 | |
| (2,703) | |
| 1,353 | |
| (901) | |
| 49,499 | |||||||||||
Liabilities for off-balance-sheet credit exposures | |
| 762 | |
| 0 | |
| 0 | |
| (43) | |
| 719 | |||||||||||
Total allowance for credit losses | | $ | 52,512 | | $ | (2,703) | | $ | 1,353 | | $ | (944) | | $ | 50,218 | |||||||||||
Total |
| 20 |
| $ | 595 |
| | 43 |
| $ | 3,348 |
2220
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 | |||||||||||||
|
| Beginning |
| Charge- |
| |
| |
| Ending | |||||
(000’s omitted) | | balance | | offs | | Recoveries | | Provision | | balance | |||||
Business lending | | $ | 24,204 | | $ | (736) | | $ | 67 | | $ | 3,539 | | $ | 27,074 |
Consumer mortgage | |
| 13,088 | |
| (248) | |
| 23 | |
| (599) | |
| 12,264 |
Consumer indirect | |
| 15,866 | |
| (1,281) | |
| 1,111 | |
| (963) | |
| 14,733 |
Consumer direct | |
| 4,028 | |
| (340) | |
| 225 | |
| (120) | |
| 3,793 |
Home equity | |
| 2,690 | |
| (24) | |
| 5 | |
| (124) | |
| 2,547 |
Unallocated | |
| 1,000 | |
| 0 | |
| 0 | |
| 4 | |
| 1,004 |
Purchased credit deteriorated | |
| 3,561 | |
| (91) | |
| 32 | |
| 45 | |
| 3,547 |
Allowance for credit losses – loans | |
| 64,437 | |
| (2,720) | |
| 1,463 | |
| 1,782 | |
| 64,962 |
Liabilities for off-balance-sheet credit exposures | |
| 1,452 | |
| 0 | |
| 0 | |
| 163 | |
| 1,615 |
Total allowance for credit losses | | $ | 65,889 | | $ | (2,720) | | $ | 1,463 | | $ | 1,945 | | $ | 66,577 |
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | |||||||||||||
|
| Beginning |
| Charge- |
|
| |
| Ending | ||||||
(000’s omitted) | | balance | | offs | | Recoveries | | Provision | | balance | |||||
Business lending | | $ | 28,190 | | $ | (925) | | $ | 491 | | $ | (7,730) | | $ | 20,026 |
Consumer mortgage | |
| 10,672 | |
| (369) | |
| 22 | |
| (580) | |
| 9,745 |
Consumer indirect | |
| 13,696 | |
| (3,514) | |
| 3,402 | |
| (1,539) | |
| 12,045 |
Consumer direct | |
| 3,207 | |
| (822) | |
| 607 | |
| (322) | |
| 2,670 |
Home equity | |
| 2,222 | |
| (145) | |
| 19 | |
| (376) | |
| 1,720 |
Unallocated | |
| 1,000 | |
| 0 | |
| 0 | |
| 0 | |
| 1,000 |
Purchased credit deteriorated | |
| 1,882 | |
| 0 | |
| 95 | |
| 316 | |
| 2,293 |
Allowance for credit losses – loans | |
| 60,869 | |
| (5,775) | |
| 4,636 | |
| (10,231) | |
| 49,499 |
Liabilities for off-balance-sheet credit exposures | |
| 1,489 | |
| 0 | |
| 0 | |
| (770) | |
| 719 |
Total allowance for credit losses | | $ | 62,358 | | $ | (5,775) | | $ | 4,636 | | $ | (11,001) | | $ | 50,218 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | ||||||||||||||||||||||
| | Beginning | | | | | Beginning | | | | | | | | | | | | | | | | ||
| | balance, | | | | | balance, | | | | | | | | | | | | | | | | ||
| | prior to the | | | | | after | | | | | | | | | | | | | | | | ||
| | adoption of | | Impact of | | adoption of | | | | | | | | Steuben | | | | | Ending | |||||
(000’s omitted) |
| ASC 326 |
| ASC 326 |
| ASC 326 |
| Charge-offs |
| Recoveries |
| acquisition |
| Provision |
| balance | ||||||||
Business lending | | $ | 19,426 | | $ | 288 | | $ | 19,714 | | $ | (919) | | $ | 289 | | $ | 2,483 | | $ | 5,507 | | $ | 27,074 |
Consumer mortgage | |
| 10,269 | |
| (1,051) | |
| 9,218 | |
| (668) | |
| 67 | |
| 146 | |
| 3,501 | |
| 12,264 |
Consumer indirect | |
| 13,712 | |
| (997) | |
| 12,715 | |
| (4,791) | |
| 3,107 | |
| 183 | |
| 3,519 | |
| 14,733 |
Consumer direct | |
| 3,255 | |
| (643) | |
| 2,612 | |
| (1,214) | |
| 578 | |
| 87 | |
| 1,730 | |
| 3,793 |
Home equity | |
| 2,129 | |
| 808 | |
| 2,937 | |
| (178) | |
| 23 | |
| 235 | |
| (470) | |
| 2,547 |
Unallocated | |
| 957 | |
| 43 | |
| 1,000 | |
| 0 | |
| 0 | |
| 0 | |
| 4 | |
| 1,004 |
Purchased credit deteriorated | |
| 0 | |
| 3,072 | |
| 3,072 | |
| (91) | |
| 80 | |
| 528 | |
| (42) | |
| 3,547 |
Purchased credit impaired | |
| 163 | |
| (163) | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Allowance for credit losses – loans | |
| 49,911 | |
| 1,357 | |
| 51,268 | |
| (7,861) | |
| 4,144 | |
| 3,662 | |
| 13,749 | |
| 64,962 |
Liabilities for off-balance-sheet credit exposures | |
| 0 | |
| 1,185 | |
| 1,185 | |
| 0 | |
| 0 | |
| 67 | |
| 363 | |
| 1,615 |
Total allowance for credit losses | | $ | 49,911 | | $ | 2,542 | | $ | 52,453 | | $ | (7,861) | | $ | 4,144 | | $ | 3,729 | | $ | 14,112 | | $ | 66,577 |
Allowance for Credit Losses
ImprovementsThe following presents by segment the activity in economic forecasts have resulted in anthe allowance for credit losses to total loans ratio of 0.68% atduring the three months and nine months ended September 30, 2021, 19 basis points lower than the level at September 30, 20202022 and 14 basis points lower than the level at December 31, 2020.2021:
Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $18.2 million at September 30, 2021 and is excluded from the estimate of credit losses and amortized cost basis of loans.
| | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, 2022 | |||||||||||||
| | | | | | | | | | | | | | | |
| | Beginning | | Charge- | | | | | | | | Ending | |||
(000’s omitted) |
| balance |
| offs |
| Recoveries |
| Provision |
| balance | |||||
Business lending | | $ | 23,241 | | $ | (495) | | $ | 755 | | $ | 430 | | $ | 23,931 |
Consumer mortgage | |
| 12,631 | |
| (113) | |
| 4 | |
| 1,296 | |
| 13,818 |
Consumer indirect | |
| 14,378 | |
| (1,706) | |
| 1,386 | |
| 2,960 | |
| 17,018 |
Consumer direct | |
| 2,822 | |
| (342) | |
| 174 | |
| 361 | |
| 3,015 |
Home equity | |
| 1,470 | |
| (32) | |
| 11 | |
| 132 | |
| 1,581 |
Unallocated | |
| 1,000 | |
| 0 | |
| 0 | |
| 0 | |
| 1,000 |
Allowance for credit losses – loans | |
| 55,542 | |
| (2,688) | |
| 2,330 | |
| 5,179 | |
| 60,363 |
Liabilities for off-balance-sheet credit exposures | |
| 1,223 | |
| 0 | |
| 0 | |
| (118) | |
| 1,105 |
Total allowance for credit losses | | $ | 56,765 | | $ | (2,688) | | $ | 2,330 | | $ | 5,061 | | $ | 61,468 |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | |||||||||||||
|
| Beginning |
| Charge- |
| |
| |
| Ending | |||||
(000’s omitted) | | balance | | offs | | Recoveries | | Provision | | balance | |||||
Business lending | | $ | 25,302 | | $ | (872) | | $ | 204 | | $ | (2,315) | | $ | 22,319 |
Consumer mortgage | |
| 10,001 | |
| (127) | |
| 3 | |
| (132) | |
| 9,745 |
Consumer indirect | |
| 11,103 | |
| (1,365) | |
| 973 | |
| 1,334 | |
| 12,045 |
Consumer direct | |
| 2,548 | |
| (309) | |
| 163 | |
| 268 | |
| 2,670 |
Home equity | |
| 1,796 | |
| (30) | |
| 10 | |
| (56) | |
| 1,720 |
Unallocated | |
| 1,000 | |
| 0 | |
| 0 | |
| 0 | |
| 1,000 |
Allowance for credit losses – loans | |
| 51,750 | |
| (2,703) | |
| 1,353 | |
| (901) | |
| 49,499 |
Liabilities for off-balance-sheet credit exposures | |
| 762 | |
| 0 | |
| 0 | |
| (43) | |
| 719 |
Total allowance for credit losses | | $ | 52,512 | | $ | (2,703) | | $ | 1,353 | | $ | (944) | | $ | 50,218 |
| | | | | | | | | | | | | | | | | | |
|
| Nine Months Ended September 30, 2022 | ||||||||||||||||
| | | | | | | | | | | PCD | | | | | | | |
| | Beginning | | Charge- | | | | | Allowance at | | | | | Ending | ||||
(000’s omitted) |
| balance |
| offs |
| Recoveries |
| Acquisition |
| Provision |
| balance | ||||||
Business lending | | $ | 22,995 | | $ | (650) | | $ | 1,249 | | $ | 71 | | $ | 266 | | $ | 23,931 |
Consumer mortgage | | | 10,017 | | | (230) | | | 21 | | | 0 | | | 4,010 | | | 13,818 |
Consumer indirect |
| | 11,737 |
| | (5,183) |
| | 3,732 |
| | 0 |
| | 6,732 |
| | 17,018 |
Consumer direct |
| | 2,306 |
| | (859) |
| | 577 |
| | 0 |
| | 991 |
| | 3,015 |
Home equity |
| | 1,814 |
| | (69) |
| | 132 |
| | 0 |
| | (296) |
| | 1,581 |
Unallocated |
| | 1,000 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 1,000 |
Allowance for credit losses – loans |
| | 49,869 |
| | (6,991) |
| | 5,711 |
| | 71 |
| | 11,703 |
| | 60,363 |
Liabilities for off-balance-sheet credit exposures |
| | 803 |
| | 0 |
| | 0 |
| | 0 |
| | 302 |
| | 1,105 |
Total allowance for credit losses | | $ | 50,672 | | $ | (6,991) | | $ | 5,711 | | $ | 71 | | $ | 12,005 | | $ | 61,468 |
2321
| | | | | | | | | | | | | | | |
|
| Nine Months Ended September 30, 2021 | |||||||||||||
| | Beginning | | Charge- | | | | | | | | Ending | |||
(000’s omitted) |
| balance |
| offs |
| Recoveries |
| Provision |
| balance | |||||
Business lending | | $ | 30,072 | | $ | (925) | | $ | 586 | | $ | (7,414) | | $ | 22,319 |
Consumer mortgage | |
| 10,672 | |
| (369) | |
| 22 | |
| (580) | |
| 9,745 |
Consumer indirect | |
| 13,696 | |
| (3,514) | |
| 3,402 | |
| (1,539) | |
| 12,045 |
Consumer direct | |
| 3,207 | |
| (822) | |
| 607 | |
| (322) | |
| 2,670 |
Home equity | |
| 2,222 | |
| (145) | |
| 19 | |
| (376) | |
| 1,720 |
Unallocated | |
| 1,000 | |
| 0 | |
| 0 | |
| 0 | |
| 1,000 |
Allowance for credit losses – loans | |
| 60,869 | |
| (5,775) | |
| 4,636 | |
| (10,231) | |
| 49,499 |
Liabilities for off-balance-sheet credit exposures | |
| 1,489 | |
| 0 | |
| 0 | |
| (770) | |
| 719 |
Total allowance for credit losses | | $ | 62,358 | | $ | (5,775) | | $ | 4,636 | | $ | (11,001) | | $ | 50,218 |
A weaker economic forecast, offset, in part, by the continued improvement in non-economic qualitative adjustments resulting from low levels of delinquencies and charge-offs as well as improved risk ratings have resulted in an allowance for credit losses to total loans ratio of 0.71% at September 30, 2022, three basis points higher than the levels at both September 30, 2021 and December 31, 2021. Included in the provision for credit losses for the three and nine months ended September 30, 2022 is $3.9 million of acquisition-related provision for credit losses recognized in connection with the Elmira acquisition.
Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $19.8 million at September 30, 2022 and is excluded from the estimate of credit losses and amortized cost basis of loans.
Under ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), also referred to as CECL,“CECL”, the Company utilizes the historical loss rate on its loan portfolio as the initial basis for the estimate of credit losses using the cumulative loss, vintage loss and line loss methods, which is derived from the Company’s historical loss experience from January 1, 2012 to December 31, 2020. Adjustments to historical loss experience were made for differences in current loan-specific risk characteristics and to address current period delinquencies, charge-off rates, risk ratings, lack of loan level data through an entire economic cycle, changes in loan sizes and underwriting standards, as well as the addition of acquired loans which were not underwritten by the Company. The Company considered historical losses immediately prior, through and following the Great Recession of 2008 compared to the historical period used for modeling to adjust the historical information to account for longer-term expectations for loan credit performance. Under CECL, the Company is required to consider future economic conditions to determine current expected credit losses. Management selected an eight quartereight-quarter reasonable and supportable forecast period using a two quartertwo-quarter lag adjustment for economic factors that are not dependent on collateral values, and no lag adjustment for factors that do utilize collateral values, with a four quarterfour-quarter reversion to the historical mean, to use as part of the economic forecast. Management determined that these qualitative adjustments were needed to adjust historical information for expected losses and to reflect changes as a result of current conditions.
For qualitative macroeconomic adjustments, the Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that wereare weighted, based on guidance from the third party provider, with forecasts available as of September 30, 2021.2022. These forecasts were factored into the qualitative portion of the calculation of the estimated credit losses and includedinclude the continued influence of supply chain constraints and inflationary pressures as well as their commensurate impact of COVID-19, including forecasted vaccine distribution progresson collateral values and current and future Federal stimulus packages.economic growth. The scenarios utilized outline a significant improvement in economic conditions with peak unemployment ranging from 2.9% to 9.1% in the third quarter of 2022, a general improvement inforecast stable unemployment levels, over the subsequent three quarters, and an improvementoffset by deterioration in GDP growth, auto values, residential real estate, and vehicle collateral values. In addition to the economic forecast, the Company also considered additional qualitative adjustments as a result of COVID-19 and the impact on all industries, loan deferrals, delinquencies and downgrades, and the risk that Paycheck Protection Program (“PPP”) loans will not be forgiven.median household income.
Management developed expected loss estimates considering factors for segments as outlined below:
● | Business lending – non real estate: The Company |
● | Business lending – real estate: The Company |
22
● | Consumer mortgages and home equity: The Company |
● | Consumer indirect: The Company |
● | Consumer direct: The Company |
The following table presents the carrying amounts of loans purchased and sold during the nine months ended September 30, 20212022 by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Business | | Consumer | | Consumer | | Consumer | | Home | | | | | Business | | Consumer | | Consumer | | Consumer | | Home | | | | ||||||||||
(000’s omitted) |
| lending |
| mortgage |
| indirect |
| direct |
| equity |
| Total |
| lending |
| mortgage |
| indirect |
| direct |
| equity |
| Total | ||||||||||||
Purchases | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 125,288 | | $ | 271,408 | | $ | 9,383 | | $ | 12,511 | | $ | 18,429 | | $ | 437,019 |
Sales | | | 848 | | | 16,955 | | | 0 | | | 0 | | | 0 | | | 17,803 | | | 0 | | | 4,541 | | | 0 | | | 0 | | | 0 | | | 4,541 |
All purchases of loans were from the acquisition of Elmira. All the sales of consumer mortgages during the nine months ended September 30, 20212022 were sales of secondary market eligible residential mortgage loans. The sales of business loans during the nine months ended September 30, 2021 includes two business lending loans under one relationship.
24
NOTE F: GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| December 31, 2020 | | September 30, 2022 |
| December 31, 2021 | ||||||||||||||||||||||||||||
| | Gross | | | | | Net | | Gross | | | | | Net | | Gross | | | | | Net | | Gross | | | | | Net | ||||||||
|
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying | ||||||||||||
(000’s omitted) | | Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | | Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | ||||||||||||
Amortizing intangible assets: | | |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Core deposit intangibles | | $ | 69,403 | | $ | (59,238) | | $ | 10,165 | | $ | 69,403 | | $ | (55,572) | | $ | 13,831 | | $ | 77,373 | | $ | (63,823) | | $ | 13,550 | | $ | 69,403 | | $ | (60,316) | | $ | 9,087 |
Other intangibles | |
| 116,799 | |
| (57,987) | |
| 58,812 | |
| 90,462 | |
| (51,353) | |
| 39,109 | |
| 119,263 | |
| (68,573) | |
| 50,690 | |
| 116,799 | |
| (60,660) | |
| 56,139 |
Total amortizing intangibles | | $ | 186,202 | | $ | (117,225) | | $ | 68,977 | | $ | 159,865 | | $ | (106,925) | | $ | 52,940 | | $ | 196,636 | | $ | (132,396) | | $ | 64,240 | | $ | 186,202 | | $ | (120,976) | | $ | 65,226 |
The estimated aggregate amortization expense for each of the five succeeding fiscal years ended December 31 is as follows:
| | | | | | |
|
| (000’s omitted) | ||||
Oct - Dec 2021 |
| $ | 3,751 | |||
2022 | |
| 13,668 | |||
(000’s omitted) | (000’s omitted) | |||||
Oct - Dec 2022 | | $ | 3,771 | |||
2023 | |
| 11,595 | | | 13,567 |
2024 | |
| 9,782 | |
| 11,482 |
2025 | |
| 8,349 | |
| 9,783 |
2026 | |
| 8,685 | |||
Thereafter | |
| 21,832 | |
| 16,952 |
Total | | $ | 68,977 | | $ | 64,240 |
Shown below are the components of the Company’s goodwill at December 31, 20202021 and September 30, 2021:2022:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | ||||
(000’s omitted) |
| December 31, 2020 |
| Activity |
| September 30, 2021 |
| December 31, 2021 |
| Activity |
| September 30, 2022 | ||||||
Goodwill, net | | $ | 793,708 | | $ | 5,419 | | $ | 799,127 | |||||||||
Goodwill | | $ | 799,109 | | $ | 45,875 | | $ | 844,984 |
23
NOTE G: MANDATORILY REDEEMABLE PREFERRED SECURITIES
As of September 30, 2021,2022, the Company does not sponsor any business trusts. The Company previously sponsored Community Capital Trust IV (“CCT IV”) until March 15, 2021 when the Company exercised its right to redeem all of the CCT IV debentures and associated preferred securities for a total of $77.3 million. The Company previously sponsored Steuben Statutory Trust II (“SST II”) until September 15, 2020 when the Company exercised its right to redeem all of the SST II debentures and associated preferred securities for a total of $2.1 million. The common stock of SST IItrust was acquired in the Steuben acquisition. The trusts were formed for the purpose of issuing company-obligated mandatorily redeemable preferred securities to third-party investors and investing the proceeds from the sale of such preferred securities solely in junior subordinated debt securities of the Company.
NOTE H: BENEFIT PLANS
The Company provides a qualified defined benefit pension to eligible employees and retirees, other post-retirement health and life insurance benefits to certain retirees, an unfunded supplemental pension plan for certain key executives, and an unfunded stock balance plan for certain of its nonemployee directors. The Company accrues for the estimated cost of these benefits through charges to expense during the years that employees earn these benefits. The service cost component of net periodic benefit income is included in the salaries and employee benefits line of the consolidated statements of income, while the other components of net periodic benefit income are included in other expenses. The Company made a $2.9$0.1 million contribution to its defined benefit pension plan in the first quarter of 2021.2022. The Company made a $3.9$2.8 million contribution to its defined benefit pension plan and a $0.09 million contribution to the Steuben Trust Company Pension Plan in the thirdfirst quarter of 2020.2021.
25
The net periodic benefit cost for the three and nine months ended September 30, 20212022 and 20202021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Post-retirement Benefits | | Pension Benefits | | Post-retirement Benefits | ||||||||||||||||||||||||||||||||||||||||
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||||||||||||||||||
(000’s omitted) |
| 2021 |
| 2020 |
| 2021 |
| | 2020 |
| 2021 |
| | 2020 |
| | 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | | 2022 |
| 2021 | ||||||||||||
Service cost | | $ | 1,480 | | $ | 1,438 | | $ | 4,440 | | $ | 4,313 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 1,240 | | $ | 1,480 | | $ | 3,720 | | $ | 4,440 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 |
Interest cost | | | 1,259 | | | 1,356 | | | 3,777 | | | 4,068 | | | 11 | | | 15 | | | 33 | | | 43 | | | 1,334 | | | 1,259 | | | 4,002 | | | 3,777 | | | 11 | | | 11 | | | 33 | | | 33 |
Expected return on plan assets | |
| (4,696) | |
| (3,932) | | | (14,087) | | | (11,796) | |
| 0 |
| | 0 | | | 0 |
| | 0 | |
| (4,756) | |
| (4,696) | | | (14,268) | | | (14,087) | |
| 0 |
| | 0 | | | 0 |
| | 0 |
Amortization of unrecognized net loss | |
| 900 | |
| 810 | | | 2,700 | | | 2,430 | |
| 11 |
| | 10 | | | 33 |
| | 30 | |
| 211 | |
| 900 | | | 633 | | | 2,700 | |
| 9 |
| | 11 | | | 27 |
| | 33 |
Amortization of prior service cost | |
| 95 | |
| 60 | | | 284 | | | 180 | |
| (45) |
| | (45) | | | (134) |
| | (134) | |
| 154 | |
| 95 | | | 462 | | | 284 | |
| (45) |
| | (45) | | | (135) |
| | (134) |
Net periodic benefit | | $ | (962) | | $ | (268) | | $ | (2,886) | | $ | (805) | | $ | (23) | | $ | (20) | | $ | (68) | | $ | (61) | | $ | (1,817) | | $ | (962) | | $ | (5,451) | | $ | (2,886) | | $ | (25) | | $ | (23) | | $ | (75) | | $ | (68) |
NOTE I: EARNINGS PER SHARE
The two class method is used in the calculations of basic and diluted earnings per share. Under the two class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared and participation rights in undistributed earnings. The Company has determined that all of its outstanding non-vested stock awards are participating securities as of September 30, 2021.2022.
Basic earnings per share are computed based on the weighted-average of the common shares outstanding for the period. Diluted earnings per share are based on the weighted-average of the shares outstanding and the assumed exercise of stock options during the year. The dilutive effect of options is calculated using the treasury stock method of accounting. The treasury stock method determines the number of common shares that would be outstanding if all the dilutive options were exercised and the proceeds were used to repurchase common shares in the open market at the average market price for the applicable time period. There were approximately 0.4 million and 0.3 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30, 2022, respectively, compared to approximately 0.2 million and 0.1 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30, 2021, respectively, compared to 0.5 million and 0.7 million weighted-average anti-dilutive stock options outstanding for the three months and nine months ended September 30, 2020, respectively, that were not included in the computation below.
24
The following is a reconciliation of basic to diluted earnings per share for the three and nine months ended September 30, 20212022 and 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
(000’s omitted, except per share data) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net income | | $ | 45,336 | | $ | 42,809 | | $ | 146,130 | | $ | 118,191 | | $ | 48,691 | | $ | 45,336 | | $ | 135,551 | | $ | 146,130 |
Income attributable to unvested stock-based compensation awards | |
| (110) | |
| (147) | |
| (340) | |
| (432) | |
| (142) | |
| (110) | |
| (386) | |
| (340) |
Income available to common shareholders | | $ | 45,226 | | $ | 42,662 | | $ | 145,790 | | $ | 117,759 | | $ | 48,549 | | $ | 45,226 | | $ | 135,165 | | $ | 145,790 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding – basic | |
| 54,025 | |
| 53,650 | |
| 53,960 | |
| 52,727 | |
| 53,830 | |
| 54,025 | |
| 53,915 | |
| 53,960 |
Basic earnings per share | | $ | 0.84 | | $ | 0.80 | | $ | 2.70 | | $ | 2.23 | | $ | 0.90 | | $ | 0.84 | | $ | 2.51 | | $ | 2.70 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 45,336 | | $ | 42,809 | | $ | 146,130 | | $ | 118,191 | | $ | 48,691 | | $ | 45,336 | | $ | 135,551 | | $ | 146,130 |
Income attributable to unvested stock-based compensation awards | |
| (110) | |
| (147) | |
| (340) | |
| (432) | |
| (142) | |
| (110) | |
| (386) | |
| (340) |
Income available to common shareholders | | $ | 45,226 | | $ | 42,662 | | $ | 145,790 | | $ | 117,759 | | $ | 48,549 | | $ | 45,226 | | $ | 135,165 | | $ | 145,790 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding – basic | |
| 54,025 | |
| 53,650 | |
| 53,960 | |
| 52,727 | |
| 53,830 | |
| 54,025 | |
| 53,915 | |
| 53,960 |
Assumed exercise of stock options | |
| 385 | |
| 324 | |
| 431 | |
| 356 | |
| 302 | |
| 385 | |
| 328 | |
| 431 |
Weighted-average common shares outstanding – diluted | |
| 54,410 | |
| 53,974 | |
| 54,391 | |
| 53,083 | |
| 54,132 | |
| 54,410 | |
| 54,243 | |
| 54,391 |
Diluted earnings per share | | $ | 0.83 | | $ | 0.79 | | $ | 2.68 | | $ | 2.22 | | $ | 0.90 | | $ | 0.83 | | $ | 2.49 | | $ | 2.68 |
26
Stock Repurchase Program
At its December 20192020 meeting, the Company’s Board of Directors (the “Board”) approved a stock repurchase program authorizing the repurchase of up to 2.602.68 million shares of the Company’s common stock, in accordance with securities and banking laws and regulations, through December 31, 2020.2021. At its December 20202021 meeting, the Board approved a similarnew stock repurchase program for 2021,2022, authorizing the repurchase of up to 2.682.70 million shares of the Company’s common stock, in accordance with securities and banking laws and regulations, through December 31, 2021.2022. Any repurchased shares will be used for general corporate purposes, including those related to stock plan activities. The timing and extent of repurchases will depend on market conditions and other corporate considerations as determined at the Company’s discretion. The Company repurchased 250,000 shares under the authorized plan during the first nine months of 2022 and did 0tnot repurchase any shares under the authorized plan during the first nine months of 2021 or 2020.2021. Refer to Part II, Item 2: Unregistered Sales of Equity Securities and Use of Proceeds for additional information regarding repurchases of the Company’s common stock.
NOTE J: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. These commitments consist principally of unused commercial and consumer credit lines. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to the Company’s normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness. The fair value of the standby letters of credit is immaterial for disclosure.
The contract amounts of commitments and contingencies are as follows:
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| September 30, |
| December 31, | ||||
(000’s omitted) | | 2021 | | 2020 | | 2022 | | 2021 | ||||
Commitments to extend credit | | $ | 1,357,244 | | $ | 1,313,568 | | $ | 1,561,281 | | $ | 1,443,879 |
Standby letters of credit | |
| 33,373 | |
| 39,213 | |
| 51,635 | |
| 42,684 |
Total | | $ | 1,390,617 | | $ | 1,352,781 | | $ | 1,612,916 | | $ | 1,486,563 |
25
The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of September 30, 2021,2022, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. The range of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is believed to be between $0 and $1 million in the aggregate. This estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. Although the Company does not believe that the outcome of pending or threatened litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
The Company recorded $3.0 million in litigation accrual in 2020 related to a settlement of a purported class action lawsuit regarding the Bank’s deposit account terms and overdraft disclosures. The Company executed a settlement agreement with respect to the lawsuit in the fourth quarter of 2020 providing for a release of all claims asserted by class members in the action, and the Company does not anticipate that additional amounts will be accrued for this matter in future periods. Notice of the settlement terms was provided to all class members and no objections to the settlement were received prior to expiration of the notice period. The hearing for final Court approval of the settlement took place on August 25, 2021 and the settlement was approved for $2.9 million which was paid in the third quarter of 2021, resulting in a $0.1 million adjustment to the Company’s litigation accrual.
27
NOTE K: FAIR VALUE
Accounting standards establish a framework for measuring fair value and require certain disclosures about such fair value instruments. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. exit price). Inputs used to measure fair value are classified into the following hierarchy:
● | Level 1 - | Quoted prices in active markets for identical assets or liabilities. |
● | Level 2 - | Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. |
● | Level 3 - | Significant valuation assumptions not readily observable in a market. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis. There were no transfersbetweenany of the levels for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | September 30, 2022 | ||||||||||||||||||||
| | | | | | | | | | | Total Fair | | | | | | | | | | | Total Fair | ||
(000’s omitted) |
| Level 1 |
| Level 2 |
| Level 3 |
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| Value | ||||||||
Available-for-sale investment securities: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
U.S. Treasury and agency securities | | $ | 3,293,134 | | $ | 100,126 | | $ | 0 | | $ | 3,393,260 | | $ | 4,206,653 | | $ | 68,787 | | $ | 0 | | $ | 4,275,440 |
Obligations of state and political subdivisions | |
| 0 | |
| 421,965 | |
| 0 | |
| 421,965 | |
| 0 | |
| 489,910 | |
| 0 | |
| 489,910 |
Government agency mortgage-backed securities | |
| 0 | |
| 510,676 | |
| 0 | |
| 510,676 | |
| 0 | |
| 384,891 | |
| 0 | |
| 384,891 |
Corporate debt securities | |
| 0 | |
| 8,078 | |
| 0 | |
| 8,078 | |
| 0 | |
| 7,033 | |
| 0 | |
| 7,033 |
Government agency collateralized mortgage obligations | |
| 0 | |
| 24,392 | |
| 0 | |
| 24,392 | |
| 0 | |
| 13,415 | |
| 0 | |
| 13,415 |
Total available-for-sale investment securities | |
| 3,293,134 | |
| 1,065,237 | |
| 0 | |
| 4,358,371 | |
| 4,206,653 | |
| 964,036 | |
| 0 | |
| 5,170,689 |
Equity securities | |
| 459 | |
| 0 | |
| 0 | |
| 459 | |
| 439 | |
| 0 | |
| 0 | |
| 439 |
Mortgage loans held for sale | | | 0 | | | 117 | | | 0 | | | 117 | ||||||||||||
Commitments to originate real estate loans for sale | | | 0 | | | 0 | | | 45 | | | 45 | | | 0 | | | 0 | | | (32) | | | (32) |
Forward sales commitments | | | 0 | | | 53 | | | 0 | | | 53 | | | 0 | | | 15 | | | 0 | | | 15 |
Interest rate swap agreements asset | |
| 0 | |
| 335 | |
| 0 | |
| 335 | |
| 0 | |
| 2 | |
| 0 | |
| 2 |
Interest rate swap agreements liability | |
| 0 | |
| (5) | |
| 0 | |
| (5) | |
| 0 | |
| (2) | |
| 0 | |
| (2) |
Total | | $ | 3,293,593 | | $ | 1,065,737 | | $ | 45 | | $ | 4,359,375 | | $ | 4,207,092 | | $ | 964,051 | | $ | (32) | | $ | 5,171,111 |
2826
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2021 | ||||||||||||||||||||
| | | | | | | | | | | Total Fair | | | | | | | | | | | Total Fair | ||
(000’s omitted) |
| Level 1 |
| Level 2 |
| Level 3 |
| Value |
| Level 1 |
| Level 2 |
| Level 3 |
| Value | ||||||||
Available-for-sale investment securities: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
U.S. Treasury and agency securities | | $ | 2,359,912 | | $ | 141,470 | | $ | 0 | | $ | 2,501,382 | | $ | 3,900,924 | | $ | 97,640 | | $ | 0 | | $ | 3,998,564 |
Obligations of state and political subdivisions | |
| 0 | |
| 475,660 | |
| 0 | |
| 475,660 | |
| 0 | |
| 430,289 | |
| 0 | |
| 430,289 |
Government agency mortgage-backed securities | |
| 0 | |
| 522,638 | |
| 0 | |
| 522,638 | |
| 0 | |
| 477,056 | |
| 0 | |
| 477,056 |
Corporate debt securities | |
| 0 | |
| 4,635 | |
| 0 | |
| 4,635 | |
| 0 | |
| 7,962 | |
| 0 | |
| 7,962 |
Government agency collateralized mortgage obligations | |
| 0 | |
| 43,577 | |
| 0 | |
| 43,577 | |
| 0 | |
| 20,339 | |
| 0 | |
| 20,339 |
Total available-for-sale investment securities | |
| 2,359,912 | |
| 1,187,980 | |
| 0 | |
| 3,547,892 | |
| 3,900,924 | |
| 1,033,286 | |
| 0 | |
| 4,934,210 |
Equity securities | |
| 445 | |
| 0 | |
| 0 | |
| 445 | |
| 463 | |
| 0 | |
| 0 | |
| 463 |
Mortgage loans held for sale | |
| 0 | |
| 1,622 | |
| 0 | |
| 1,622 | ||||||||||||
Commitments to originate real estate loans for sale | | | 0 | | | 0 | | | 14 | | | 14 | | | 0 | | | 0 | | | 51 | | | 51 |
Forward sales commitments | | | 0 | | | 2 | | | 0 | | | 2 | | | 0 | | | 32 | | | 0 | | | 32 |
Interest rate swap agreements asset | |
| 0 | |
| 1,572 | |
| 0 | |
| 1,572 | |
| 0 | |
| 296 | |
| 0 | |
| 296 |
Interest rate swap agreements liability | |
| 0 | |
| (1,074) | | | 0 | |
| (1,074) | |
| 0 | |
| (3) | | | 0 | |
| (3) |
Total | | $ | 2,360,357 | | $ | 1,190,102 | | $ | 14 | | $ | 3,550,473 | | $ | 3,901,387 | | $ | 1,033,611 | | $ | 51 | | $ | 4,935,049 |
The valuation techniques used to measure fair value for the items in the table above are as follows:
● | Available-for-sale investment securities and equity securities – The fair values of available-for-sale investment securities are based upon quoted prices, if available. If quoted prices are not available, fair values are measured using quoted market prices for similar securities or model-based valuation techniques. Level 1 securities include U.S. Treasury obligations and marketable equity securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include U.S. agency securities, mortgage-backed securities issued by government-sponsored entities, municipal securities and corporate debt securities that are valued by reference to prices for similar securities or through model-based techniques in which all significant inputs, such as reported trades, trade execution data, LIBOR swap yield curve, market prepayment speeds, credit information, market spreads, and security’s terms and conditions, are observable. See Note D for further disclosure of the fair value of investment securities. |
● | Forward sales commitments – The Company enters into forward sales commitments to sell certain residential real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated statements of condition. The fair value of these forward sales commitments is primarily measured by obtaining pricing from certain government-sponsored entities and reflects the underlying price the entity would pay the Company for an immediate sale on these mortgages. As such, these instruments are classified as Level 2 in the fair value hierarchy. |
● | Commitments to originate real estate loans for sale – The Company enters into various commitments to originate residential real estate loans for sale. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated statements of condition. The estimated fair value of these commitments is determined using quoted secondary market prices obtained from certain government-sponsored entities. Additionally, accounting guidance requires the expected net future cash flows related to the associated servicing of the loan to be included in the fair value measurement of the derivative. The expected net future cash flows are based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Such assumptions include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds. The determination of expected net cash flows is considered a significant unobservable input contributing to the Level 3 classification of commitments to originate real estate loans for sale. |
29
● | Interest rate swaps – The interest rate swaps are reported at their fair value utilizing Level 2 inputs from third parties. The fair value of the interest rate swaps are determined using prices obtained from a third party advisor. The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves. |
27
The changes in Level 3 assets measured at fair value on a recurring basis are immaterial.
The fair value information of assets and liabilities measured on a non-recurring basis presented below is not as of the period-end, but rather as of the date the fair value adjustment was recorded closest to the date presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
|
| | |
| | |
| | | | Total Fair |
| | |
| | |
| | | Total Fair |
| | |
| | |
| | | | Total Fair |
| | |
| | |
| | | Total Fair | ||||||
(000's omitted) | | Level 1 | | Level 2 | | Level 3 | | Value | | Level 1 | | Level 2 | | Level 3 | | Value | ||||||||||||||||||||||||||||||||
(000’s omitted) | | Level 1 | | Level 2 | | Level 3 | | Value | | Level 1 | | Level 2 | | Level 3 | | Value | ||||||||||||||||||||||||||||||||
Individually assessed loans | | $ | 0 | | $ | 0 | | $ | 18,794 |
| $ | 18,794 | | $ | 0 | | $ | 0 | | $ | 25,063 |
| $ | 25,063 | | $ | 0 | | $ | 0 | | $ | 0 |
| $ | 0 | | $ | 0 | | $ | 0 | | $ | 1,820 |
| $ | 1,820 |
Other real estate owned | |
| 0 | |
| 0 | |
| 891 |
|
| 891 | |
| 0 | |
| 0 | |
| 883 |
|
| 883 | |
| 0 | |
| 0 | |
| 527 |
|
| 527 | |
| 0 | |
| 0 | |
| 718 |
|
| 718 |
Mortgage servicing rights | |
| 0 | |
| 0 | |
| 794 |
|
| 794 | |
| 0 | |
| 0 | |
| 682 |
|
| 682 | |
| 0 | |
| 0 | |
| 1,844 |
|
| 1,844 | |
| 0 | |
| 0 | |
| 810 |
|
| 810 |
Contingent consideration | | | 0 | | | 0 | | | 2,900 | | | 2,900 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (3,500) | | | (3,500) | | | 0 | | | 0 | | | (3,100) | | | (3,100) |
Total | | $ | 0 | | $ | 0 | | $ | 23,379 |
| $ | 23,379 | | $ | 0 | | $ | 0 | | $ | 26,628 |
| $ | 26,628 | | $ | 0 | | $ | 0 | | $ | (1,129) |
| $ | (1,129) | | $ | 0 | | $ | 0 | | $ | 248 |
| $ | 248 |
Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain adjustmentsimpairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, adjusted for non-observable inputs. Thus, the resulting nonrecurring fair value measurements are generally classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and, therefore, such valuations classify as Level 3.
Other real estate owned (“OREO”) is valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less costs to sell. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the customer and customer’s business. Such discounts are significant, ranging from 9.0%23.2% to 46.7%73.5% at September 30, 20212022 and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company recovers the carrying value of OREO through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond the Company’s control and may impact the estimated fair value of a property.
Originated mortgage servicing rights are recorded at their fair value at the time of sale of the underlying loan, and are amortized in proportion to and over the estimated period of net servicing income. The fair value of mortgage servicing rights is based on a valuation model incorporating inputs that market participants would use in estimating future net servicing income. Such inputs include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds and are considered to be unobservable and contribute to the Level 3 classification of mortgage servicing rights. In accordance with GAAP, the Company must record impairment charges, on a nonrecurring basis, when the carrying value of a stratum exceeds its estimated fair value. Impairment is recognized through a valuation allowance. There was 0 valuation allowance at September 30, 2021. There wasis a valuation allowance of approximately $0.2$0.1 million at September 30, 2022 and there was no valuation allowance at December 31, 2020.2021.
The Company has recorded contingent consideration liabilities that arise from acquisition activity. The contingent consideration is recorded at fair value at the date of acquisition. The valuation of contingent consideration is calculated using an income approach method, which provides an estimation of the fair value of an asset orthe liability based on future cash flows over a discrete projection period, discounted to present value using an appropriate rate of return. The assumptions used in the valuation calculation are based on significant unobservable inputs, therefore such valuations classify as Level 3.
3028
The Company determines fair values based on quoted market values, where available, estimates of present values, or other valuation techniques. Those techniques are significantly affected by the assumptions used, including, but not limited to, the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Significant | | | | | | | | | | Significant | | ||
|
| | |
| |
| |
| Unobservable Input |
|
| | |
| |
| |
| Unobservable Input |
| ||
| | Fair Value at | | | | | | Range | | | Fair Value at | | | | | | Range | | ||||
(000's omitted, except per loan data) | | September 30, 2021 | | Valuation Technique | | Significant Unobservable Inputs |
| (Weighted Average) | | |||||||||||||
Individually assessed loans | | $ | 18,794 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 9.0% - 78.7% (53.5%) | | |||||||||||
(000’s omitted, except per loan data) | | September 30, 2022 | | Valuation Technique | | Significant Unobservable Inputs |
| (Weighted Average) | | |||||||||||||
Other real estate owned | |
| 891 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 9.0% - 46.7% (33.7%) | | | $ | 527 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 23.2% - 73.5% (39.9%) | |
Commitments to originate real estate loans for sale | |
| 45 |
| Discounted cash flow |
| Embedded servicing value |
| | 1.0 | % | |
| (32) |
| Discounted cash flow |
| Embedded servicing value |
| | 1.0 | % |
Mortgage servicing rights | |
| 794 |
| Discounted cash flow |
| Weighted average constant prepayment rate |
| | 15.2% - 24.9% (16.6%) | | |
| 1,844 |
| Discounted cash flow |
| Weighted average constant prepayment rate |
| | 3.5% - 4.1% (3.6%) | |
| | | | | | | Weighted average discount rate | | | 2.3% - 2.8% (2.7%) | | | | | | | | Weighted average discount rate | | | 4.6% - 4.8% (4.8%) | |
| | | | | | | Adequate compensation | | $ | 7/loan | | | | | | | | Adequate compensation | | $ | 7/loan | |
Contingent consideration | | | 2,900 | | Discounted cash flow | | Discount rate | | | 0.8% - 1.1% (1.0%) | | | | (3,500) | | Discounted cash flow | | Discount rate | | | 4.4% - 4.6% (4.5%) | |
| | | | | | | Probability adjusted level of retained | | | $2.3 million - $5.8 | | | | | | | | Probability adjusted level of retained revenue | | | $3.3 million - $5.4 million | |
| | | | | | | revenue | | | million | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| |
| |
| Significant |
|
| | |
| |
| |
| Significant |
| ||
| | | | | | | | | Unobservable Input | | | | | | | | | | Unobservable Input | | ||
| | Fair Value at | | | | | | Range | | | Fair Value at | | | | | | Range | | ||||
(000's omitted, except per loan data) | | December 31, 2020 | | Valuation Technique | | Significant Unobservable Inputs | | (Weighted Average) |
| | December 31, 2021 | | Valuation Technique | | Significant Unobservable Inputs | | (Weighted Average) |
| ||||
Individually assessed loans | | $ | 25,063 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 9.0% - 78.4% (52.7%) | | | $ | 1,820 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 9.0% - 43.1% (43.1%) | |
Other real estate owned | |
| 883 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 11.3% - 52.9% (34.0%) | | |
| 718 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 31.8% - 42.3% (33.3%) | |
Commitments to originate real estate loans for sale | | | 14 | | Discounted cash flow | | Embedded servicing value | | | 1.0 | % | | | 51 | | Discounted cash flow | | Embedded servicing value | | | 1.0 | % |
Mortgage servicing rights | |
| 682 |
| Discounted cash flow |
| Weighted average constant prepayment rate |
| | 9.8% - 18.8% (17.6%) | | |
| 810 |
| Discounted cash flow |
| Weighted average constant prepayment rate |
| | 6.4% - 15.2% (14.0%) | |
| |
|
|
|
|
| Weighted average discount rate |
| | 1.7% - 2.2% (2.1%) | | |
|
|
|
|
| Weighted average discount rate |
| | 2.3% - 2.7% (2.6%) | |
| | | | | |
| Adequate compensation | | $ | 7/loan | | | | | | |
| Adequate compensation | | $ | 7/loan | |
Contingent consideration | | | (3,100) | | Discounted cash flow | | Discount rate | | | 1.4% - 1.7% (1.5%) | | |||||||||||
| | | | | | | Probability adjusted level of retained revenue | | | $3.0 million - $5.8 million | |
The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that if changed could result in higher or lower fair value measurements of these assets as of the reporting date. The weighted average of the estimated cost of disposal/market adjustment for individually assessed loans was calculated by dividing the total of the book value of the collateral of the individually assessed loans classified as Level 3 by the total of the fair value of the collateral of the individually assessed loans classified as Level 3. The weighted average of the estimated cost of disposal/market adjustment for OREO was calculated by dividing the total of the differences between the appraisal values of the real estate and the book values of the real estate divided by the totals of the appraisal values of the real estate. The weighted average of the constant prepayment rate for mortgage servicing rights was calculated by adding the constant prepayment rates used in each loan pool weighted by the balance in each loan pool. The weighted average of the discount rate for mortgage servicing rights was calculated by adding the discount rates used in each loan pool weighted by the balance in each loan pool. The weighted average of the discount rate for the contingent consideration was calculated by adding the discount rates used for the calculation of the fair value of each payment of contingent consideration, weighted by the amount of the payment as part of the total fair value of contingent consideration.
3129
Certain financial instruments and all nonfinancial instruments are excluded from fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at September 30, 20212022 and December 31, 20202021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 | ||||||||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| Carrying |
| |
| Carrying |
| | ||||||||
(000's omitted) | | Value | | Value | | Value | | Value | ||||||||||||||||
(000’s omitted) | | Value | | Fair Value | | Value | | Fair Value | ||||||||||||||||
Financial assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Net loans | | $ | 7,233,083 | | $ | 7,608,456 | | $ | 7,355,083 | | $ | 7,655,044 | | $ | 8,483,244 | | $ | 8,192,522 | | $ | 7,323,770 | | $ | 7,523,024 |
Financial liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Deposits | |
| 12,723,821 | |
| 12,730,674 | |
| 11,224,974 | |
| 11,239,628 | |
| 13,486,321 | |
| 13,450,034 | |
| 12,911,168 | |
| 12,911,197 |
Overnight borrowings | |
| 119,800 | |
| 119,800 | |
| 0 | |
| 0 | ||||||||||||
Securities sold under agreement to repurchase, short-term | |
| 316,763 | |
| 316,763 | |
| 284,008 | |
| 284,008 | |
| 352,772 | |
| 352,772 | |
| 324,720 | |
| 324,720 |
Other Federal Home Loan Bank borrowings | |
| 2,912 | |
| 2,956 | |
| 6,658 | |
| 6,758 | |
| 19,472 | |
| 19,201 | |
| 1,888 | |
| 1,907 |
Subordinated notes payable | |
| 3,283 | |
| 3,283 | |
| 3,303 | |
| 3,303 | |
| 3,256 | |
| 3,256 | |
| 3,277 | |
| 3,277 |
Subordinated debt held by unconsolidated subsidiary trusts | |
| 0 | |
| 0 | |
| 77,320 | |
| 77,320 |
The following is a further description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments.
Loans have been classified as a Level 3 valuation. Fair values for variable rate loans that reprice frequently are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Deposits have been classified as a Level 2 valuation. The fair value of demand deposits, interest-bearing checking deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposit obligations are based on current market rates for similar products.
Borrowings and subordinated debt held by unconsolidated subsidiary trusts have been classified as a Level 2 valuation. The fair value of short-term borrowings and securities sold under agreement to repurchase, short-term, is the amount payable on demand at the reporting date. Fair values for long-term debt and subordinated debt held by unconsolidated subsidiary trusts are estimated using discounted cash flows and interest rates currently being offered on similar securities. The difference between the carrying values of long-term borrowings and subordinated debt held by unconsolidated subsidiary trusts, and their fair values, are not material as of the reporting dates.
Other financial assets and liabilities – Cash and cash equivalents have been classified as a Level 1 valuation, while accrued interest receivable and accrued interest payable have been classified as a Level 2 valuation. The fair values of each approximate the respective carrying values because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.
NOTE L: DERIVATIVE INSTRUMENTS
The Company is party to derivative financial instruments in the normal course of its business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments have been limited to interest rate swap agreements, commitments to originate real estate loans held for sale and forward sales commitments. The Company does not hold or issue derivative financial instruments for trading or other speculative purposes.
The Company enters into forward sales commitments for the future delivery of residential mortgage loans, and interest rate lock commitments to fund loans at a specified interest rate. The forward sales commitments are utilized to reduce interest rate risk associated with interest rate lock commitments and loans held for sale. Changes in the estimated fair value of the forward sales commitments and interest rate lock commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time. At inception and during the life of the interest rate lock commitment, the Company includes the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of the interest rate lock commitments. These derivatives are recorded at fair value, which were immaterial at September 30, 2021 and December 31, 2020. The effect of the changes to these derivatives for the three and nine months then ended was also immaterial.
3230
The Company acquired interest rate swaps in 2017 with notional amounts with certain commercial customers which totaled $0.6 million at September 30, 2021 and $14.4 million at December 31, 2020. In order to minimize the Company’s risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps (pay fixed/receive floating swaps) with the Company’s counterparty totaling $0.6 million at September 30, 2021 and $14.4 million at December 31, 2020. At September 30, 2021, the weighted average receive rate of these interest rate swaps was 2.33%, the weighted average pay rate was 3.54% and the weighted average maturity was 1.5 years. At December 31, 2020, the weighted average receive rate of these interest rate swaps was 2.10%, the weighted average pay rate was 4.44% and the weighted average maturity was 5.2 years. Hedge accounting has not been applied for these derivatives. Since the terms of the swaps with the Company’s customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s results of operations.
The Company also acquired interest rate swaps in 2017 with notional amounts totaling $5.3 million at September 30, 2021, and $5.7 million at December 31, 2020, that were designated as fair value hedges of certain fixed rate loans with municipalities which are recorded in loans in the consolidated statements of condition. At September 30, 2021, the weighted average receive rate of these interest rate swaps was 1.38%, the weighted average pay rate was 3.11% and the weighted average maturity was 11.8 years. At December 31, 2020, the weighted average receive rate of these interest rate swaps was 1.42%, the weighted average pay rate was 3.11% and the weighted average maturity was 12.5 years. The Company includes the gain or loss on the hedged items in interest and fees on loans, the same line item as the offsetting gain or loss on the related interest rate swaps. The effects of fair value accounting in the consolidated statements of income for the three and nine months ended September 30, 2021 are immaterial.
As of September 30, 2021 and December 31, 2020, the following amounts were recorded in the consolidated statement of condition related to cumulative basis adjustments for fair value hedges:
| | | | | | | | | | | | |
(000’s omitted) | | | | | | | | Cumulative Amount of Fair Value | ||||
| | Carrying Amount of the Hedged | | Hedging Adjustment Included in the | ||||||||
Line Item in the Consolidated | | Assets | | Carrying Amount of the Hedged Assets | ||||||||
Statement of Condition in Which | | September 30, | | December 31, | | September 30, | | December 31, | ||||
the Hedged Item Is Included |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Loans | | $ | 5,363 | | $ | 5,675 | | $ | (330) | | $ | (498) |
Fair values of derivative instruments as of September 30, 2021 and December 31, 2020 are as follows:
| | | | | | | | | | |
(000’s omitted) | | September 30, 2021 | ||||||||
| | Derivative Assets | | Derivative Liabilities | ||||||
| | Consolidated Statement | | Fair | | Consolidated Statement of | | Fair | ||
|
| of Condition Location |
| Value |
| Condition Location |
| Value | ||
Derivatives designated as hedging instruments under Subtopic 815-20 |
|
|
| |
|
|
|
| |
|
Interest rate swaps |
| Other assets | | $ | 330 |
|
|
| |
|
| | | | | | | | | | |
Derivatives not designated as hedging instruments under Subtopic 815-20 |
|
| |
| |
|
|
| |
|
Interest rate swaps |
| Other assets | |
| 5 |
| Accrued interest and other liabilities | | $ | 5 |
Commitments to originate real estate loans for sale |
| Other assets | |
| 45 |
|
| |
| |
Forward sales commitments |
| Other assets | |
| 53 |
|
| |
| |
Total derivatives |
|
| | $ | 433 |
|
| | $ | 5 |
33
| | | | | | | | | | |
(000’s omitted) | | December 31, 2020 | ||||||||
| | Derivative Assets | | Derivative Liabilities | ||||||
| | Consolidated Statement | | Fair | | Consolidated Statement of | | Fair | ||
|
| of Condition Location |
| Value |
| Condition Location |
| Value | ||
Derivatives designated as hedging instruments under Subtopic 815-20 |
|
|
| |
|
|
|
| |
|
Interest rate swaps |
| Other assets | | $ | 498 |
|
|
| |
|
| | | | | | | | | | |
Derivatives not designated as hedging instruments under Subtopic 815-20 |
| | |
| |
|
|
| |
|
Interest rate swaps |
| Other assets | |
| 1,074 |
| Accrued interest and other liabilities | | $ | 1,074 |
Commitments to originate real estate loans for sale | | Other assets | | | 14 | | | | | |
Forward sales commitments | | Other assets | | | 2 | | | | | |
Total derivatives |
| | | $ | 1,588 |
|
| | $ | 1,074 |
The Company assessed its counterparty risk at September 30, 2021 and December 31, 2020 and determined any credit risk inherent in our derivative contracts was not material. Further information about the fair value of derivative financial instruments can be found in Note K to these consolidated financial statements.
NOTE M:L: SEGMENT INFORMATION
Operating segments are components of an enterprise, which are evaluated regularly by the “chief operating decision maker” in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is the President and Chief Executive Officer of the Company. The Company has identified Banking, Employee Benefit Services and All Other as its reportable operating business segments. Community Bank, N.A. (the “Bank” or “CBNA”) operates the Banking segment that provides full-service banking to consumers, businesses, and governmental units in Upstate New York as well as Northeastern Pennsylvania, Vermont and Western Massachusetts. Employee Benefit Services, which includes the operating subsidiaries Benefit Plans Administrative Services, LLC, BPAS Actuarial and Pension Services, LLC, BPAS Trust Company of Puerto Rico, Fringe Benefits Design of Minnesota, Inc. (“FBD”), Northeast Retirement Services, LLC (“NRS”), Global Trust Company, Inc. (“GTC”), and Hand Benefits & Trust Company, provides employee benefit trust, collective investment fund, retirement plan administration, fund administration, transfer agency, actuarial, VEBA/HRA, and health and welfare consulting services. The All Other segment is comprised of: (a) wealth management services including trust services provided by the personal trust unit within the Bank, broker-dealer and investment advisory services provided by Community Investment Services, Inc., The Carta Group, Inc. and OneGroup Wealth Partners, Inc. as well as asset management provided by Nottingham Advisors, Inc., and (b) full-service insurance, risk management and employee benefit services provided by OneGroup NY, Inc. The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies (See Note A, Summary of Significant Accounting Policies of the most recent Form 10-K for the year ended December 31, 20202021 filed with the SEC on March 1, 2021)2022).
Information about reportable segments and reconciliation of the information to the consolidated financial statements follows:
| | | | | | | | | | | | | | | |
| | | | | Employee | | | | | | | | Consolidated | ||
(000’s omitted) |
| Banking |
| Benefit Services |
| All Other |
| Eliminations |
| Total | |||||
Three Months Ended September 30, 2022 |
| |
|
| |
|
| |
|
| |
|
| |
|
Net interest income | | $ | 110,311 | | $ | 75 | | $ | 8 | | $ | 0 | | $ | 110,394 |
Provision for credit losses | |
| 5,061 | |
| 0 | |
| 0 | |
| 0 | |
| 5,061 |
Noninterest revenues | |
| 19,427 | |
| 28,451 | |
| 19,210 | |
| (1,839) | |
| 65,249 |
Amortization of intangible assets | |
| 1,266 | |
| 1,633 | |
| 938 | |
| 0 | |
| 3,837 |
Acquisition expenses | |
| 409 | |
| 0 | |
| 0 | |
| 0 | |
| 409 |
Other operating expenses | |
| 73,554 | |
| 17,711 | |
| 14,513 | |
| (1,839) | |
| 103,939 |
Income before income taxes | | $ | 49,448 | | $ | 9,182 | | $ | 3,767 | | $ | 0 | | $ | 62,397 |
Assets | | $ | 15,373,021 | | $ | 250,784 | | $ | 102,883 | | $ | (132,141) | | $ | 15,594,547 |
Goodwill | | $ | 735,680 | | $ | 85,381 | | $ | 23,923 | | $ | 0 | | $ | 844,984 |
Core deposit intangibles & Other intangibles | | $ | 13,550 | | $ | 35,045 | | $ | 15,645 | | $ | 0 | | $ | 64,240 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Three Months Ended September 30, 2021 | |
| | |
| | |
| | |
| | |
| |
Net interest income | | $ | 92,539 | | $ | 65 | | $ | 7 | | $ | 0 | | $ | 92,611 |
Provision for credit losses | |
| (944) | |
| 0 | |
| 0 | |
| 0 | |
| (944) |
Noninterest revenues | |
| 17,696 | |
| 30,473 | |
| 17,885 | |
| (1,745) | |
| 64,309 |
Amortization of intangible assets | |
| 1,102 | |
| 1,675 | |
| 926 | |
| 0 | |
| 3,703 |
Acquisition expenses | |
| 102 | |
| 0 | |
| 0 | |
| 0 | |
| 102 |
Other operating expenses | |
| 67,980 | |
| 17,212 | |
| 13,184 | |
| (1,745) | |
| 96,631 |
Income before income taxes | | $ | 41,995 | | $ | 11,651 | | $ | 3,782 | | $ | 0 | | $ | 57,428 |
Assets | | $ | 15,102,077 | | $ | 246,033 | | $ | 99,721 | | $ | (116,733) | | $ | 15,331,098 |
Goodwill | | $ | 689,868 | | $ | 85,336 | | $ | 23,923 | | $ | 0 | | $ | 799,127 |
Core deposit intangibles & Other intangibles | | $ | 10,165 | | $ | 41,695 | | $ | 17,117 | | $ | 0 | | $ | 68,977 |
3431
Information about reportable segments and reconciliation of the information to the consolidated financial statements follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Employee | | | | | | | | Consolidated |
| | |
| Employee |
| | |
| | |
| Consolidated | ||||
(000's omitted) |
| Banking |
| Benefit Services |
| All Other |
| Eliminations |
| Total | ||||||||||||||||||||
Three Months Ended September 30, 2021 |
| |
|
| |
|
| |
|
| |
|
| |
| |||||||||||||||
(000’s omitted) | | Banking | | Benefit Services | | All Other | | Eliminations | | Total | ||||||||||||||||||||
Nine Months Ended September 30, 2022 |
| |
|
| |
|
| |
|
| |
|
| |
| |||||||||||||||
Net interest income | | $ | 308,177 | | $ | 210 | | $ | 20 | | $ | 0 | | $ | 308,407 | |||||||||||||||
Provision for credit losses | |
| 12,005 | |
| 0 | |
| 0 | |
| 0 | |
| 12,005 | |||||||||||||||
Noninterest revenues | |
| 55,634 | |
| 88,093 | |
| 57,065 | |
| (5,773) | |
| 195,019 | |||||||||||||||
Amortization of intangible assets | |
| 3,506 | |
| 4,974 | |
| 2,940 | |
| 0 | |
| 11,420 | |||||||||||||||
Acquisition expenses | |
| 4,665 | |
| 3 | |
| 0 | |
| 0 | |
| 4,668 | |||||||||||||||
Acquisition-related contingent consideration adjustment | |
| 0 | |
| (100) | |
| 500 | |
| 0 | |
| 400 | |||||||||||||||
Other operating expenses | |
| 212,616 | |
| 53,026 | |
| 42,059 | |
| (5,773) | |
| 301,928 | |||||||||||||||
Income before income taxes | | $ | 131,019 | | $ | 30,400 | | $ | 11,586 | | $ | 0 | | $ | 173,005 | |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
Nine Months Ended September 30, 2021 | |
| | |
| | |
| | |
|
| |
| | |||||||||||||||
Net interest income | | $ | 92,539 | | $ | 65 | | $ | 7 | | $ | 0 | | $ | 92,611 | | $ | 278,411 | | $ | 224 | | $ | 35 | | $ | 0 | | $ | 278,670 |
Provision for credit losses | |
| (944) | |
| 0 | |
| 0 | |
| 0 | |
| (944) | |
| (11,001) | |
| 0 | |
| 0 | |
| 0 | |
| (11,001) |
Noninterest revenues | |
| 17,696 | |
| 30,473 | |
| 17,885 | |
| (1,745) | |
| 64,309 | |
| 50,507 | |
| 85,616 | |
| 51,518 | |
| (5,341) | |
| 182,300 |
Amortization of intangible assets | |
| 1,102 | |
| 1,675 | |
| 926 | |
| 0 | |
| 3,703 | |
| 3,666 | |
| 4,356 | |
| 2,278 | |
| 0 | |
| 10,300 |
Acquisition expenses | |
| 102 | |
| 0 | |
| 0 | |
| 0 | |
| 102 | |
| 133 | |
| 0 | |
| 0 | |
| 0 | |
| 133 |
Other operating expenses | |
| 67,980 | |
| 17,212 | |
| 13,184 | |
| (1,745) | |
| 96,631 | |
| 198,145 | |
| 47,063 | |
| 36,925 | |
| (5,341) | |
| 276,792 |
Income before income taxes | | $ | 41,995 | | $ | 11,651 | | $ | 3,782 | | $ | 0 | | $ | 57,428 | | $ | 137,975 | | $ | 34,421 | | $ | 12,350 | | $ | 0 | | $ | 184,746 |
Assets | | $ | 15,102,077 | | $ | 246,033 | | $ | 99,721 | | $ | (116,733) | | $ | 15,331,098 | |||||||||||||||
Goodwill | | $ | 689,868 | | $ | 85,336 | | $ | 23,923 | | $ | 0 | | $ | 799,127 | |||||||||||||||
Core deposit intangibles & Other intangibles | | $ | 10,165 | | $ | 41,695 | | $ | 17,117 | | $ | 0 | | $ | 68,977 | |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
Three Months Ended September 30, 2020 | |
| | |
| | |
| | |
| | |
| | |||||||||||||||
Net interest income | | $ | 92,642 | | $ | 256 | | $ | 67 | | $ | 0 | | $ | 92,965 | |||||||||||||||
Provision for credit losses | |
| 1,945 | |
| 0 | |
| 0 | |
| 0 | |
| 1,945 | |||||||||||||||
Noninterest revenues | |
| 19,756 | |
| 25,651 | |
| 15,706 | |
| (1,454) | |
| 59,659 | |||||||||||||||
Amortization of intangible assets | |
| 1,379 | |
| 1,409 | |
| 793 | |
| 0 | |
| 3,581 | |||||||||||||||
Acquisition expenses | |
| 796 | |
| 0 | |
| 0 | |
| 0 | |
| 796 | |||||||||||||||
Other operating expenses | |
| 67,193 | |
| 15,078 | |
| 11,772 | |
| (1,454) | |
| 92,589 | |||||||||||||||
Income before income taxes | | $ | 41,085 | | $ | 9,420 | | $ | 3,208 | | $ | 0 | | $ | 53,713 | |||||||||||||||
Assets | | $ | 13,674,995 | | $ | 210,679 | | $ | 80,528 | | $ | (120,877) | | $ | 13,845,325 | |||||||||||||||
Goodwill | | $ | 690,162 | | $ | 83,275 | | $ | 20,312 | | $ | 0 | | $ | 793,749 | |||||||||||||||
Core deposit intangibles & Other intangibles | | $ | 15,186 | | $ | 33,461 | | $ | 7,818 | | $ | 0 | | $ | 56,465 |
| | | | | | | | | | | | | | | |
|
| | |
| Employee |
| | |
| | |
| Consolidated | ||
(000's omitted) | | Banking | | Benefit Services | | All Other | | Eliminations | | Total | |||||
Nine Months Ended September 30, 2021 |
| |
|
| |
|
| |
|
| |
|
| |
|
Net interest income | | $ | 278,411 | | $ | 224 | | $ | 35 | | $ | 0 | | $ | 278,670 |
Provision for credit losses | |
| (11,001) | |
| 0 | |
| 0 | |
| 0 | |
| (11,001) |
Noninterest revenues | |
| 50,507 | |
| 85,616 | |
| 51,518 | |
| (5,341) | |
| 182,300 |
Amortization of intangible assets | |
| 3,666 | |
| 4,356 | |
| 2,278 | |
| 0 | |
| 10,300 |
Acquisition expenses | |
| 133 | |
| 0 | |
| 0 | |
| 0 | |
| 133 |
Other operating expenses | |
| 198,145 | |
| 47,063 | |
| 36,925 | |
| (5,341) | |
| 276,792 |
Income before income taxes | | $ | 137,975 | | $ | 34,421 | | $ | 12,350 | | $ | 0 | | $ | 184,746 |
| | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2020 | |
| | |
| | |
| | |
| | |
| |
Net interest income | | $ | 274,051 | | $ | 742 | | $ | 177 | | $ | 0 | | $ | 274,970 |
Provision for credit losses | |
| 17,313 | |
| 0 | |
| 0 | |
| 0 | |
| 17,313 |
Noninterest revenues | |
| 53,428 | |
| 76,080 | |
| 46,058 | |
| (4,347) | |
| 171,219 |
Amortization of intangible assets | |
| 4,160 | |
| 4,314 | |
| 2,298 | |
| 0 | |
| 10,772 |
Acquisition expenses | |
| 4,537 | |
| 0 | |
| 0 | |
| 0 | |
| 4,537 |
Other operating expenses | |
| 190,523 | |
| 45,157 | |
| 34,890 | |
| (4,347) | |
| 266,223 |
Income before income taxes | | $ | 110,946 | | $ | 27,351 | | $ | 9,047 | | $ | 0 | | $ | 147,344 |
3532
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Bank System, Inc. (the “Company” or “CBSI”) as of and for the three and nine months ended September 30, 20212022 and 2020,2021, although in some circumstances the second and first quarters of 20212022 are also discussed in order to more fully explain recent trends. The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that appear on pages 3 through 35.32. All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole. Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2021,2022, “last year” and equivalent terms refer to calendar year 2020,2021, “third quarter” refers to the three months ended September 30, 2021,2022, “YTD” refers to the nine months ended September 30, 2021,2022, and earnings per share (“EPS”) figures refer to diluted EPS.
This MD&A contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption, “Forward-Looking Statements,” on page 57.53.
Critical Accounting Policies
As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could meaningfully differ from these estimates. Management believes that the critical accounting estimates include the allowance for credit losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation, the carrying value of goodwill and other intangible assets, and acquired loan valuations. A summary of the accounting policies used by management is disclosed in Note A, “Summary of Significant Accounting Policies” on pages 79-9276-88 of the most recent Form 10-K (fiscal year ended December 31, 2020)2021) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2021.2022. A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on pages 13-1412-13 of this Form 10-Q.
Supplemental Reporting of Non-GAAP Results of Operations
The Company also provides supplemental reporting of its results on an “operating,” “adjusted” and “tangible” basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), accretion on non-impaired purchasedacquired non-purchased credit deteriorated (“PCD”) loans, acquisition expenses, associated with acquisitions,acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions. In addition, the Company provides supplemental reporting for “adjusted pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities from income before income taxes. Although adjusted pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the adoption of CECLthe Current Expected Credit Losses (“CECL”) model and the economic uncertainty caused by the COVID-19 pandemic. Earnings per share were $0.83$0.90 in the third quarter of 2021,2022, up $0.04,$0.07, or 5.1%8.4%, from the third quarter of 2020.2021. Diluted adjusted net earnings per share, a non-GAAP measure, were $0.94 in the third quarter of 2022, compared to $0.87 in the third quarter of 2021, compared to $0.88 in the third quarter of 2020, a $0.01$0.07 per share, or 1.1%8.0%, decrease.increase. Adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, was $1.04$1.25 per weighted average diluted share in the third quarter of 2021, down $0.06,2022, up $0.21, or 5.5%20.2%, from the third quarter of 2020.2021. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 11.10.
3633
Executive Summary
The Company’s business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services to retail, commercial and municipal customers. The Company’s banking subsidiary is Community Bank, N.A. (the “Bank” or “CBNA”). The Company’s Benefit Plans Administrative Services, Inc. (“BPAS”) subsidiary is a leading provider of employee benefits administration, trust services, collective investment fund administration and actuarial consulting services to customers on a national scale. In addition, the Company offers comprehensive financial planning, insurance and wealth management services through its Community Bank Wealth Management Group and OneGroup NY, Inc. (“OneGroup”) operating units.
The Company’s core operating objectives are: (i) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies and divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and optimize interest rate risk, yield and liquidity, (iv) increase the noninterest component of total revenues through development of banking-related fee income, growth in existing financialbanking, employee benefit, insurance and wealth management services business units, and the acquisition of additional financial services and banking businesses, and (v) utilize technology to deliver customer-responsive products and services and improve efficiencies.
Significant factors reviewed by management to evaluate achievement of the Company’s operating objectives and its operating results and financial condition include, but are not limited to: net income and earnings per share; return on assets and equity; components of net interest margin; noninterest revenues; noninterest expenses; asset quality; loan and deposit growth; capital management; performance of individual banking and financial services units; performance of specific product lines and customers; liquidity and interest rate sensitivity; enhancements to customer products and services and their underlying performance characteristics; technology advancements; market share; peer comparisons; and the performance of recently acquired businesses.
On August 2, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of Thomas Gregory Associates Insurance Brokers, Inc. (“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area for $13.1 million, including $11.6 million in cash and contingent consideration valued at $1.5 million. The Company recorded a $10.9 million customer list intangible asset and $2.2 million of goodwill in conjunction with the acquisition.
On July 1, 2021, the Company, through its subsidiary Benefit Plans Administrative Services, Inc., completed its acquisition of Fringe Benefits Design of Minnesota, Inc. (“FBD”), a provider of retirement plan administration and benefit consulting services with offices in Minnesota and South Dakota, for $16.7 million, including $15.3 million in cash and contingent consideration valued at $1.4 million. The Company recorded a $14.0 million customer list intangible asset and $2.1 million of goodwill in conjunction with the acquisition.
On June 1, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of NuVantage Insurance Corp. (“NuVantage”), an insurance agency headquartered in Melbourne, Florida. The Company paid $2.9 million in cash and recorded a $1.4 million customer list intangible asset and $1.5 million of goodwill in conjunction with the acquisition.
On June 12, 2020,May 13, 2022, the Company completed its merger with Steuben Trust CorporationElmira Savings Bank (“Steuben”Elmira”), parent company of Steuben Trust Company, a New York State chartered savings bank headquartered in Hornell,Elmira, New York, for $98.6$82.2 million in Company stock and cash, comprised of $21.6 million in cash and the issuance of 1.36 million shares of common stock.cash. The merger extended the Company’s footprint into two new counties in Western New York State, and enhanced the Company’s presence in four Western New York Statefive counties in which it had already operated.New York’s Southern Tier and Finger Lakes regions. In connection with the merger, the Company added 11eight full-service offices to its branch service network and acquired $607.8approximately $579.0 million of identifiable assets, including $339.7$437.0 million of loans, and $180.5$11.3 million of investment securities and $8.0 million of core deposit intangibles, as well as $516.3$522.3 million of deposits. GoodwillPreliminary goodwill of $20.0$45.8 million a $2.9 million core deposit intangible asset and a $1.2 million customer list intangible asset werewas recognized as a result of the merger.
Third quarter and YTD net income increased compared to last year’s third quarter by $3.4 million, or 7.4%, while YTD net income decreased compared to the equivalent 2020 timeframes2021 timeframe by $2.5$10.6 million, or 5.9%, and $27.9 million, or 23.6%, respectively.7.2%. Earnings per share of $0.83$0.90 for the third quarter of 20212022 was $0.04$0.07 more than the third quarter of 2020, and 2021, whereas 2022 YTD earnings per share of $2.68$2.49 was $0.46 higher$0.19 lower than 20202021 YTD earnings per share. The increases in net income and earnings per share between the quarters were drivendue to increases in net interest income and noninterest revenues and a decrease in fully-diluted average shares outstanding, offset, in part, by a significant decreasehigher noninterest expenses and increases in the provision for credit losses reflective of a more favorable economic outlook, improvementsand income taxes. The decreases in asset quality metricsnet income and a significant increaseearnings per share between the YTD periods were due to increases in noninterest revenues.expenses and the provision for credit losses, including the impacts from the Elmira acquisition, partially offset by increases in net interest income and noninterest revenues and decreases in income taxes and fully-diluted shares outstanding.
37
Third quarter and YTD net income adjusted to exclude acquisition expenses, associated with acquisitions,acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, litigation accrual expenses and the unrealized gain (loss) on equity securities (“operating net income”), a non-GAAP measure, decreased $0.5increased $3.7 million, or 1.0%8.1%, as compared to the third quarter of 20202021 and increased $19.4decreased $3.5 million, or 15.3%2.4%, compared to September YTD 2020.2021. Earnings per share adjusted to exclude acquisition expenses, associated with acquisitions,acquisition-related contingent consideration adjustments, acquisition-related provision for credit losses, litigation accrual expenses and the unrealized gain (loss) on equity securities (“operating earnings per share”), a non-GAAP measure, of $0.83$0.90 for the third quarter decreased $0.02of 2022 increased $0.07 compared to the third quarter of 2020.2021. Operating earnings per share of $2.68$2.62 for the first nine months of 2021 increased $0.302022 decreased $0.06 compared to the prior year period. 2021 results were enhanced by a net benefit recorded in the provision for credit losses and higher Paycheck Protection Program (“PPP”)-related revenues than the comparable periods of 2022, which, net of tax, were responsible for a $0.14 decrease in fully-diluted operating earnings per share between the comparable quarters and a $0.45 decrease between the comparable YTD periods. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 11.10.
34
Net income adjusted to exclude income taxes, provision for credit losses, acquisition expenses, associated with acquisitions,acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue”), a non-GAAP measure, of $56.5$67.9 million for the third quarter decreased $2.9increased $11.4 million, or 4.9%20.1%, as compared to the third quarter of 2020.2021. Adjusted pre-tax, pre-provision net revenue of $173.8$190.1 million for the first nine months of 20212022 increased $1.6$16.3 million, or 0.9%9.4%, as compared to the first nine months of 2020.2021. Earnings per share adjusted to exclude income taxes, provision for credit losses, acquisition expenses, associated with acquisitions,acquisition-related contingent consideration adjustments, litigation accrual expenses and the unrealized gain (loss) on equity securities (“adjusted pre-tax, pre-provision net revenue per share”), a non-GAAP measure, of $1.04$1.25 for the third quarter of 20212022 was $0.06 lower$0.21 higher than the third quarter of 2020,2021, and 20212022 YTD adjusted pre-tax, pre-provision net revenue per share of $3.19$3.49 was $0.04 lower$0.30 higher than the prior YTD period. The decreaseperiod as the increases in adjusted pre-tax, pre-provision net revenue per share compared torevenues outpaced the third quarter of 2020 was driven by an increase in operating expenses an increase in diluted weighted average common shares and a decrease in net interest income, partially offset by an increase in noninterest revenues.between the periods. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 11.10.
Loans decreasedand deposits increased on both an ending and average basis as compared to the prior year third quarter, primarily due to decreases in U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)reflective of large net inflows of funds from government stimulus programs and PPP lending, along with the Company’s continued enhanced focus on organic loan balances driven by forgiveness granted bygeneration and the SBA, while depositssecond quarter 2022 acquisition of Elmira. The yield on average interest-earning assets increased on an ending and average35 basis aspoints compared to the prior year third quarter primarily due to large inflows of funds from government stimulus and PPP lending programs. Interest ratesas the yields on loans,average investments and deposits have decreased over the past year primarily due to low short-term market interest rates as well as medium and longer-term market interest rates being below the average levels that existed over the past several years. In connection with these lower rates, coupled with a higher proportion of earnings assets held inincluding cash equivalents and average loans both increased, while on a YTD basis the Company’syield on average interest-earning assetassets increased four basis points as the yield on average investments including cash equivalents increased while the yield on average loans decreased. The yield on average investments, including cash equivalents, increased 50 basis points compared to the prior year’s third quarter and increased 33 basis points compared to the prior YTD, as the Company meaningfully shifted the composition of earning assets away from cash equivalents that were earning a low yield in the prior year to higher yielding investment securities between the periods. The yield on average loans for the first nine monthsthird quarter increased by seven basis points compared to the third quarter of 2021 and decreased 6214 basis points fromon a YTD basis. The yield on average loans included a decline in PPP-related interest income between the year-earlier period.periods, which declined $3.9 million on a quarterly basis and $11.9 million on a YTD basis. The Company’s total cost of funds for the first nine months of 2021 decreased 11 basis points from2022 remained consistent with the year earlier period, as the decrease in the Company’s deposit funding cost andwas offset by an increase in the rate on borrowings both decreased from the prior year period. The majority of borrowings are customer repurchase agreements, rather than wholesale borrowings obtained through capital markets and correspondent banks. Customer repurchase agreements have deposit-like features and typically bearhave lower rates of interest than other types of wholesale borrowings.
The net benefit recognized in the provision for credit losses of $0.9$5.1 million for the third quarter and $11.0$12.0 million for YTD 2021 resulted in a $2.92022 were up $6.0 million and $28.3$23.0 million lower provision for credit losses thanfrom the comparable prior year periods, respectively. These decreases areThe third quarter and YTD 2022 provision for credit losses was reflective of a weaker economic forecast and an improving economic outlook givenincrease in loans outstanding, partially offset by continued low levels of net charge-offs, delinquent loans and nonperforming loans. The second quarter provision for credit losses included $3.9 million of acquisition-related provision for credit losses due to the stateElmira acquisition. Comparatively, at the end of the third quarter of 2021, economic forecasts reflected a post-vaccine economic recovery and included the continuation of elevated real estate and vehicle collateral values, resulting in a decrease in individually assessedrelease of reserves for the quarter and solid asset quality metrics, including continued low levels of net charge-offs and declining delinquent loan balances. Additionally, $3.2 million of provision for credit losses was recorded in the second quarter of 2020 related to acquired non-purchased credit deteriorated loans associated with the Steuben acquisition.on a YTD basis. Net charge-offs were $0.4 million for the third quarter and $1.3 million for the first nine months of 2022, compared to net charge-offs of $1.4 million for the prior year third quarter and $1.1 million for the first nine months of 2021, compared to net charge-offs of $1.3 million for the prior year third quarter and $3.7 million for the first nine months of 2020.2021. Third quarter 20212022 nonperforming and delinquent loan ratios increasedimproved in comparison to the third quarter of 20202021 largely attributable to the Company’s decisionupgrade of several large business loans, primarily customers operating in the hospitality industry whose operations were negatively impacted during the height of the pandemic, from nonaccrual status to reclassify certain loans under extended pandemic-related forbearance to nonperformingaccruing status induring the fourth quarter of 2020. Third quarter 2021 nonperforming loan ratios generally improved in comparison to their levels at the end of the fourthand first quarter of 2020.2022.
3835
Net Income and Profitability
As shown in Table 1, net income for the third quarter and September YTD of $45.3$48.7 million and $146.1$135.6 million, respectively, increased $2.5$3.4 million, or 5.9%7.4%, as compared to the third quarter of 20202021 and increased $27.9decreased $10.6 million, or 23.6%7.2%, compared to September YTD 2020.2021. Earnings per share of $0.83$0.90 for the third quarter was $0.04$0.07 higher than the third quarter of 2020,2021, while earnings per share for the first nine months of 20212022 of $2.68$2.49 was $0.46 higher$0.19 lower than the first nine months of 2020.2021. The increaseincreases in net income and earnings per share forbetween the quarter was primarily the result ofquarters were due to increases in net interest income and noninterest revenues and a decrease in fully-diluted average shares outstanding, partially offset by higher noninterest revenues, lower litigation accrual expenses a lowerand increases in the provision for credit losses and lower acquisition expenses, partially offset by higher core noninterest expenses, a higher effective tax rate, lower net interest income and an increase in diluted shares outstanding.taxes. The increasedecreases in net income and earnings per share forbetween the YTD period was primarilyperiods were due to increases in noninterest expenses and the result of a lower provision for credit losses, higher noninterest revenues, lowerincluding the impacts from the Elmira acquisition, expenses, higherpartially offset by increases in net interest income and lower litigation accrual expenses, partially offset by higher noninterest expenses, a higher effective tax raterevenues and an increasedecreases in dilutedincome taxes and fully-diluted shares outstanding. Operating net income, a non-GAAP measure, of $45.3$49.0 million and $146.1$142.6 million for the third quarter and September YTD, respectively, decreased $0.5increased $3.7 million, or 1.0%8.1%, as compared to the third quarter of 20202021 and increased $19.4decreased $3.5 million, or 15.3%2.4%, compared to September YTD 2020.2021. Operating earnings per share, a non-GAAP measure, of $0.83$0.90 for the third quarter was down $0.02up $0.07 compared to the third quarter of 2020,2021, while operating earnings per share of $2.68$2.62 for the first nine months of 20212022 was up $0.30down $0.06 compared to the first nine months of 2020. The decreases in operating2021. 2021 results were enhanced by a net income and earnings per share for the quarter are primarily due to an increase in operating expenses, partially offset by higher noninterest revenues and a lower provision for credit lossesbenefit recorded in the current quarter. The increases in operating net income and earnings per share for the YTD period are primarily due to the lower provision for credit losses and higher noninterestPPP-related revenues recordedthan the comparable periods of 2022, which, net of tax, were responsible for a $0.14 decrease in fully-diluted operating earnings per share between the currentcomparable quarters and a $0.45 decrease between the comparable YTD period.periods. See Table 1110 for Reconciliation of GAAP to Non-GAAP Measures.
As reflected in Table 1, third quarter net interest income of $92.6$110.4 million was down $0.4up $17.8 million, or 0.4%19.2%, from the comparable prior year period. Net interest income for the first nine months of 20212022 increased $3.7$29.7 million, or 1.3%10.7%, versus the first nine months of 2020.2021. The quarterly decreaseand year-over-year improvements resulted from a decreasean increase in the yield on interest-earning assets and an increase in interest-bearing liabilities that was onlyinterest-earning asset balances, partially offset by an increase in interest-earning asset balances and a decrease in the average rate paid on interest-bearing liabilities. The YTD year-over-year improvement resulted from an increase in interest-earning asset balances and a decrease in the average rate paid on interest-bearing liabilities partially offset by a decrease in the yield on interest-earning assets and an increase in interest-bearing liability balances.
The provision for credit losses for the third quarter and September YTD decreased $2.9increased $6.0 million and $28.3$23.0 million as compared to the third quarter and first nine months of 2020,2021, respectively. These decreases areThe third quarter and YTD 2022 provision for credit losses was reflective of a weaker economic forecast and an improving economic outlook given the state of the post-vaccine economic recovery, elevated real estate and vehicle collateral values, a decreaseincrease in individually assessed reserves and solid asset quality metrics, includingloans outstanding, partially offset by continued low levels of net charge-offs, delinquent loans and stable delinquent loan balances. Additionally, there was $3.2 million ofnonperforming loans. The second quarter provision for credit losses recorded inincluded $3.9 million of acquisition-related provision for credit losses due to the second quarter of 2020 related to acquired non-purchased credit deteriorated loans associated with the SteubenElmira acquisition.
Third quarter and year-to-date noninterest revenues were $64.3$65.2 million and $182.3$195.0 million, respectively, up $4.6$0.9 million, or 7.8%1.5%, from the third quarter of 20202021 and up $11.1$12.7 million, or 6.5%7.0%, from the first nine months of 2020.2021. The increase compared to the prior year’s third quarter was primarily a result of increases in employee benefit services revenue, wealth managementinsurance services revenue, deposit service charges and fees, insurance services revenue, debit interchange and ATM fees other banking revenue and unrealized gains and losses on equity securities, partially offset by a decrease in mortgage banking revenue. The YTD increase was due to increases in employee benefit services revenue, wealth management services revenue, debit interchange and ATM fees, insurance services revenue, other banking revenue and unrealized gains and losses on equity securities, partially offset by decreases in employee benefit services revenue, wealth management services revenue, mortgage banking revenue and other banking revenue. The YTD increase was due to increases in insurance services revenue, deposit service charges and fees.fees, employee benefit services revenue and debit interchange and ATM fees, partially offset by decreases in mortgage banking revenue, wealth management services revenue, other banking revenue and unrealized gains and losses on equity securities.
Noninterest expenses of $100.4$108.2 million and $287.2$318.4 million for the third quarter and September YTD periods, respectively, reflected an increase of $3.5$7.8 million, or 3.6%7.7%, from the third quarter of 20202021 and an increase of $5.7$31.2 million, or 2.0%10.9%, from the first nine months of 2020.2021. The increase in noninterest expenses for the quarter was due to increases in salaries and benefits, legalbusiness development and professional fees,marketing expenses, data processing and communications expenses, other expenses, occupancy and equipment expenses, acquisition expenses, amortization of intangible assets and the absence of a litigation accrual expense adjustment, partially offset by decreasesa decrease in litigation accrual expenses, business developmentlegal and marketing expenses, acquisition-related expenses and occupancy and equipment expenses.professional fees. The YTD increase in noninterest expenses was due to increases in salaries and benefits, acquisition expenses, other expenses, business development and marketing expenses, data processing and communications expenses, legal and professional fees, amortization of intangible assets, acquisition-related contingent consideration adjustments, occupancy and equipment expenses and legal and professional fees, partially offset by decreases in acquisition-related expenses,the absence of a negative litigation accrual expense adjustment. Excluding acquisition expenses, amortization of intangible assets, other expenses and business development and marketing expenses. Excluding acquisition-related expensescontingent consideration adjustments and litigation accrual expenses, 20212022 operating expenses were $7.2$7.3 million, or 7.7%7.3%, higher for the third quarter and $13.1$26.2 million, or 4.8%9.1%, higher for the year-to-date timeframe.timeframe, in part due to the acquisition of Elmira Savings Bank in the second quarter of 2022 and financial services acquisitions.
3936
The effective income tax rates were 21.1%22.0% and 20.9%21.6% for the third quarter and YTD 2021,2022, respectively, as compared to 20.3%21.1% and 19.8%20.9% for the comparable prior year periods. The effective tax rate in the third quarter of 2021 was driven down by a decrease in the Company’s full year effective tax rate projection. The increase in the YTD effective tax rate was fully attributable to lower levels of tax benefits related to stock-based compensation activity. The effective tax rates comparedadjusted to the prior yearexclude stock-based compensation tax benefits for both YTD periods was primarily attributable to an increase in certain state income tax rates that were enacted in the second quarter of 2021.22.0%.
A condensed income statement is as follows:
Table 1: Condensed Income Statements
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
(000’s omitted, except per share data) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net interest income | | $ | 92,611 | | $ | 92,965 | | $ | 278,670 | | $ | 274,970 | | $ | 110,394 | | $ | 92,611 | | $ | 308,407 | | $ | 278,670 |
Provision for credit losses | | | (944) | | | 1,945 | | | (11,001) | | | 17,313 | | | 5,061 | | | (944) | | | 12,005 | | | (11,001) |
Noninterest revenues | |
| 64,309 | |
| 59,659 | |
| 182,300 | |
| 171,219 | |
| 65,249 | |
| 64,309 | |
| 195,019 | |
| 182,300 |
Noninterest expenses | | | 100,436 | | | 96,966 | | | 287,225 | | | 281,532 | | | 108,185 | | | 100,436 | | | 318,416 | | | 287,225 |
Income before income taxes | |
| 57,428 | |
| 53,713 | |
| 184,746 | |
| 147,344 | |
| 62,397 | |
| 57,428 | |
| 173,005 | |
| 184,746 |
Income taxes | |
| 12,092 | |
| 10,904 | |
| 38,616 | |
| 29,153 | |
| 13,706 | |
| 12,092 | |
| 37,454 | |
| 38,616 |
Net income | | $ | 45,336 | | $ | 42,809 | | $ | 146,130 | | $ | 118,191 | | $ | 48,691 | | $ | 45,336 | | $ | 135,551 | | $ | 146,130 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted weighted average common shares outstanding | |
| 54,541 | |
| 54,159 | |
| 54,516 | |
| 53,276 | |
| 54,290 | |
| 54,541 | |
| 54,396 | |
| 54,516 |
Diluted earnings per share | | $ | 0.83 | | $ | 0.79 | | $ | 2.68 | | $ | 2.22 | | $ | 0.90 | | $ | 0.83 | | $ | 2.49 | | $ | 2.68 |
Net Interest Income
Net interest income is the amount by which interest and fees on earninginterest-earning assets (loans, investments and cash equivalents) exceeds the cost of funds, which consists primarily of interest paid to the Company'sCompany’s depositors and on customer and external borrowings. Net interest margin is the difference between the yield on earninginterest-earning assets and the cost of interest-bearing fundsliabilities as a percentage of earninginterest-earning assets.
As shown in Table 2a, net interest income (with nontaxable income converted to a fully tax-equivalent basis) for the third quarter was $93.4$111.5 million, $0.5an increase of $18.1 million, or 0.5%19.4%, less thancompared to the same period last year. This was driven by a 4535 basis point decreaseincrease in the average yield on interest-earninginterest-earnings assets and a $987.1 million increase in average interest-bearing liabilities, partially offset by a $1.57$1.08 billion increase in average interest-earning assets, andpartially offset by a nine basis point decreaseincrease in the average rate paid on interest-bearing liabilities and a $724.5 million increase in average interest-bearing liabilities in comparison to the third quarter of 2020.2021. As reflected in Table 3, net interest income was unfavorablyfavorably impacted by $14.1$12.5 million due to the decreaseincrease in the average yield on interest-earning assets and $0.5 million due to the volume increase in interest-bearing liabilities, partially offset by favorable impacts on net interest income of $12.1$8.1 million due to the volume increase in interest-earning assets, and $2.0partially offset by the unfavorable impacts on net interest income of $2.2 million due to a decreasean increase in the average rate paid on interest-bearing liabilities and $0.3 million due to the volume increase in interest-bearing liabilities. September YTD net interest income (with nontaxable income converted to a fully tax-equivalent basis), as reflected in Table 2b, of $281.2$311.4 million, increased $3.3$30.1 million, or 1.2%10.7%, from the year-earlier period. The September YTD increase resulted from a $2.17$1.24 billion increase in average interest-earning assets and a 15four basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a 62 basis point decreaseincrease in the average yield on interest-earning assets, and a $1.28 billionpartially offset by an $825.3 million increase in average interest-bearing liabilities and a one basis point increase in the average rate paid on interest-bearing liabilities. As reflected in Table 3, for September YTD, the volume increase in interest-earning assets and the decreaseincrease in the average yield on interest-earning assets had favorable impacts on net interest income of $27.6 million and $3.8 million, respectively, partially offset by the volume increase in interest-bearing liabilities and the increase in the average rate paid on interest-bearing liabilities had favorablehaving unfavorable impacts on net interest income of $52.5$0.9 million and $9.2$0.4 million, respectively, partially offset by the decrease in the average yield on interest-earning assets having an unfavorable impact on net interest income of $55.9 million and the volume increase in interest-bearing liabilities having a negative impact of $2.5 million.respectively.
The net interest margin of 2.74%3.03% for the third quarter of 20212022 was 3829 basis points lower thanhigher as compared to the third quarter of 2020.2021. The decreaseincrease was the result of a 4535 basis point decreaseincrease in the interest-earning asset yield, partially offset by a nine basis point decreaseincrease in the average rate on interest-bearing liabilities. The net interest margin of 2.85%2.88% for the first nine months of 20212022 was 51three basis points lowerhigher than the comparable period of 2020.2021. The yield on interest-earning assets decreased 62increased four basis points, while the rate on interest-bearing liabilities decreasedincreased by 15one basis pointspoint for the first nine months of 20212022 as compared to the prior year period.
4037
The 4535 basis point decreaseincrease in the average yield on interest-earning assets for the quarter was the result of a decreaseincreases in the average yield on loansinvestments and investments.cash equivalents and the average yield on loans. For the third quarter, the average yield on loans decreased by eightinvestments, including cash equivalents, increased 50 basis points and the average yield on investments, including cash equivalents, decreased 37loans increased by seven basis points compared to the prior year. The 62four basis point decreaseincrease in the yield on interest-earning assets for the first nine months of 20212022 was the result of an 18a 33 basis point increase in the average yield on investments, including cash equivalents, partially offset by a 14 basis point decrease in the average yield on loans and a 64 basis point decrease in the average yield on investments, including cash equivalents,as compared to the prior year. The decreasechanges in the loan andyields included declines in PPP-related interest income between the periods. During the third quarter of 2022, the Company recorded $0.5 million of PPP-related interest income, a decrease of $3.9 million from the prior year’s third quarter, while during the first nine months of 2022, the Company recorded $3.2 million of PPP-related interest income, a decrease of $11.9 million from the first nine months of 2021. The increase in investment yields were primarily driven by the comparatively low market rates overCompany meaningfully shifting the past 12 months, a significant increase in the proportioncomposition of lower yieldingearning assets away from cash equivalents and includedthat were earning a low yield at the impact of a $9.2 million YTD increase in loan income recognized on PPP loans.time to higher yielding investment securities between the periods.
The average rate on interest-bearing liabilities decreasedincreased by nine basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits decreased sixincreased four basis points and the average rate paid on external borrowings decreased 80increased 95 basis points from the comparable prior year quarter.period. For the first nine months of 2021,2022, the average rate on interest-bearing liabilities decreasedincreased by 15one basis pointspoint from the comparable prior year period as the average rate on interest-bearing deposits decreased 11one basis points andpoint, while the average rate on external borrowings decreased 89increased 27 basis points. The decreasechanges in the average raterates paid on interest-bearing deposits waswere driven by a decreaseincreases in the interest rates paid on interest checking and money market rates for deposits.deposits, while the interest rate paid on time deposits decreased. The decreaseincreases in the average cost of borrowings waswere primarily the result of a decrease in the variable rates paid on external borrowings due to decreases inhigher market interest rates and the redemption ofCompany entering into an overnight borrowing position during in the Community Capital Trust IV (“CCT IV”) debentures and associated preferred securities during the firstsecond quarter of 2021.2022.
The third quarter and YTD average balance of investments, including cash equivalents, increased $1.81 billion$16.0 million and $2.05 billion,$742.7 million, respectively, as compared to the corresponding prior year periods. Investment securitiessecurity maturities, calls and principal payments outpaced purchases during the third quarter while investment security purchases outpaced maturities, calls and principal payments during third quarter and YTD.the YTD period. The cash equivalents component of average earning assets increased $777.1 milliondecreased $2.05 billion and $1.19$1.47 billion for the third quarter and YTD periods, respectively, compared to the prior year periods. The increasedecrease in cash equivalents was primarily due to large inflows relatedthe Company meaningfully shifting the composition of earning assets away from cash equivalents that at the time were earning a low yield to government stimulus-related deposit fundinghigher yielding investment securities and PPP lending.loans. Average loan balances decreased $240.2 millionincreased $1.06 billion for the quarter primarily driven by decreases in the average balances of PPP loans and increased $119.8$496.7 million YTD as compared to the prior year, primarily driven by organic and acquired growth during both periods, including the SteubenElmira acquisition in June 2020May 2022, despite declines in average PPP loan balances. The change in average loan balances for the quarter and an increaseYTD periods included a $215.4 million and $300.1 million decrease in the average balance of PPP loans.loans, respectively.
Average interest-bearing deposits increased $1.04 billion$479.9 million compared to the prior year quarter and $1.31 billion$733.7 million compared to the prior YTD period. The quarterly increase in average interest-bearing deposits for the quarterly period was due to increases in interest checking, savings and money market deposits due primarily to large inflows of government stimulus-relatedall deposit funding, partially offset by a decrease in time deposits. The increase in average interest-bearing deposits for the YTD period was due to increases in interest checking, savings, money market, and time depositscategories, due primarily to large inflows of government stimulus-related deposit funding and the SteubenElmira acquisition in June 2020.May 2022. The YTD increase in average interest-bearing deposits was due to increases in savings, interest checking and money market deposits, while time deposits declined. The average borrowing balance, including borrowings at the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), overnight borrowings at the Federal Reserve Bank of New York (“Federal Reserve”) and FHLB, subordinated notes payable, subordinated debt held by unconsolidated subsidiary trusts and securities sold under agreement to repurchase (customer repurchase agreements), decreased $54.1increased $244.5 million and $32.9$91.5 million for the quarter and YTD periods, respectively. The decreasesincreases in average borrowings from the prior year quarter and YTD periods waswere primarily due to the redemption of $77.3 million of trust preferred subordinated debt held by CCT IV, an unconsolidated subsidiary trust, during the first quarter of 2021 and a decreaseincreases in average FHLBovernight borrowings partially offset by an increase in averageand customer repurchase agreements.
Tables 2a and 2b below setsset forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent basis (“FTE”) using a marginal income tax ratesrate of 24.1% and 24.2% in 2022 and 24.0% in 2021, and 2020, respectively. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include amortization of deferred loan income and costs, loan origination, prepayment and other fees and the accretion of acquired loan marks. Average loan balances include nonaccrual loans and loans held for sale.
4138
Table 2a: Quarterly Average Balance Sheet
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Three Months Ended |
| | Three Months Ended | | | Three Months Ended |
| ||||||||||||||||||||||||
| | September 30, 2021 | | | September 30, 2020 |
| | September 30, 2022 | | | September 30, 2021 |
| ||||||||||||||||||||||||
| | |
|
| |
|
| Avg. |
| | |
|
| |
|
| Avg. | | | |
|
| |
|
| Avg. |
| | |
|
| |
|
| Avg. | |
| | Average | | | |
| Yield/Rate |
| | Average | | | |
| Yield/Rate | | | Average | | | |
| Yield/Rate |
| | Average | | | |
| Yield/Rate | | ||||
(000's omitted except yields and rates) |
| Balance |
| Interest |
| Paid |
| | Balance |
| Interest |
| Paid | | ||||||||||||||||||||||
(000’s omitted except yields and rates) |
| Balance |
| Interest |
| Paid |
| | Balance |
| Interest |
| Paid | | ||||||||||||||||||||||
Interest-earning assets: | | |
|
| |
|
|
|
| | |
|
| |
|
|
| | | |
|
| |
|
|
|
| | |
|
| |
|
|
| |
Cash equivalents | | $ | 2,077,996 | | $ | 794 |
| 0.15 | % | | $ | 1,300,981 | | $ | 332 |
| 0.10 | % | | $ | 25,730 | | $ | 114 |
| 1.76 | % | | $ | 2,077,996 | | $ | 794 |
| 0.15 | % |
Taxable investment securities (1) | |
| 3,800,978 | |
| 16,567 |
| 1.73 | % | |
| 2,686,120 | |
| 14,549 |
| 2.15 | % | |
| 5,701,691 | |
| 23,623 |
| 1.64 | % | |
| 3,800,978 | |
| 16,567 |
| 1.73 | % |
Nontaxable investment securities (1) | |
| 384,053 | |
| 3,137 |
| 3.24 | % | |
| 461,963 | |
| 3,747 |
| 3.23 | % | |
| 551,610 | |
| 4,681 |
| 3.37 | % | |
| 384,053 | |
| 3,137 |
| 3.24 | % |
Loans (net of unearned discount) (2) | |
| 7,268,659 | |
| 75,973 |
| 4.15 | % | |
| 7,508,895 | |
| 79,825 |
| 4.23 | % | |
| 8,333,148 | |
| 88,575 |
| 4.22 | % | |
| 7,268,659 | |
| 75,973 |
| 4.15 | % |
Total interest-earning assets | |
| 13,531,686 | |
| 96,471 |
| 2.83 | % | |
| 11,957,959 | |
| 98,453 | | 3.28 | % | |
| 14,612,179 | |
| 116,993 |
| 3.18 | % | |
| 13,531,686 | |
| 96,471 | | 2.83 | % |
Noninterest-earning assets | |
| 1,495,792 | |
| |
| | | |
| 1,585,501 | |
| |
| | | |
| 941,117 | |
| |
| | | |
| 1,495,792 | |
| |
| | |
Total assets | | $ | 15,027,478 | |
| |
| | | | $ | 13,543,460 | |
| |
| | | | $ | 15,553,296 | |
| |
| | | | $ | 15,027,478 | |
| |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | |
Interest checking, savings, and money market deposits | | $ | 7,701,717 | |
| 792 |
| 0.04 | % | | $ | 6,658,778 | |
| 966 |
| 0.06 | % | | $ | 8,179,556 | |
| 2,206 |
| 0.11 | % | | $ | 7,701,717 | |
| 792 |
| 0.04 | % |
Time deposits | |
| 960,670 | |
| 2,030 |
| 0.84 | % | |
| 962,428 | |
| 2,689 |
| 1.11 | % | |
| 962,777 | |
| 1,649 |
| 0.68 | % | |
| 960,670 | |
| 2,030 |
| 0.84 | % |
Customer repurchase agreements | |
| 230,906 | |
| 177 |
| 0.30 | % | |
| 190,781 | |
| 250 |
| 0.52 | % | |
| 269,958 | |
| 216 |
| 0.32 | % | |
| 230,906 | |
| 177 |
| 0.30 | % |
Overnight borrowings | | | 188,975 | | | 1,226 | | 2.57 | % | | | 0 | | | 0 | | 0.00 | % | ||||||||||||||||||
FHLB borrowings | |
| 2,920 | |
| 18 |
| 2.45 | % | |
| 7,689 | |
| 42 |
| 2.14 | % | |
| 19,463 | |
| 146 |
| 2.97 | % | |
| 2,920 | |
| 18 |
| 2.45 | % |
Subordinated notes payable | |
| 3,288 | |
| 38 |
| 4.63 | % | |
| 13,748 | |
| 184 |
| 5.33 | % | |
| 3,261 | |
| 38 |
| 4.63 | % | |
| 3,288 | |
| 38 |
| 4.63 | % |
Subordinated debt held by unconsolidated subsidiary trusts | |
| 0 | |
| 0 |
| 0.00 | % | |
| 79,023 | |
| 394 |
| 1.98 | % | ||||||||||||||||||
Total interest-bearing liabilities | |
| 8,899,501 | |
| 3,055 |
| 0.14 | % | |
| 7,912,447 | |
| 4,525 |
| 0.23 | % | |
| 9,623,990 | |
| 5,481 |
| 0.23 | % | |
| 8,899,501 | |
| 3,055 |
| 0.14 | % |
Noninterest-bearing liabilities: | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | |
Noninterest checking deposits | |
| 3,841,646 | |
| |
| | | |
| 3,312,841 | |
| |
| | | |
| 4,192,615 | |
| |
| | | |
| 3,841,646 | |
| |
| | |
Other liabilities | |
| 182,167 | |
| |
| | | |
| 222,961 | |
| |
| | | |
| 56,166 | |
| |
| | | |
| 182,167 | |
| |
| | |
Shareholders' equity | |
| 2,104,164 | |
| |
| | | |
| 2,095,211 | |
| |
| | | ||||||||||||||||||
Total liabilities and shareholders' equity | | $ | 15,027,478 | |
| |
| | | | $ | 13,543,460 | |
| |
| | | ||||||||||||||||||
Shareholders’ equity | |
| 1,680,525 | |
| |
| | | |
| 2,104,164 | |
| |
| | | ||||||||||||||||||
Total liabilities and shareholders’ equity | | $ | 15,553,296 | |
| |
| | | | $ | 15,027,478 | |
| |
| | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest earnings | |
| | | $ | 93,416 |
| | | |
| | | $ | 93,928 |
| | | |
| | | $ | 111,512 |
| | | |
| | | $ | 93,416 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest spread | |
| | |
| |
| 2.69 | % | |
| | |
| |
| 3.05 | % | |
| | |
| |
| 2.95 | % | |
| | |
| |
| 2.69 | % |
Net interest margin on interest-earning assets | |
| | |
| |
| 2.74 | % | |
| | |
| |
| 3.12 | % | |
| | |
| |
| 3.03 | % | |
| | |
| |
| 2.74 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fully tax-equivalent adjustment (3) | |
| | | $ | 805 |
| | | |
| | | $ | 963 |
|
| | |
| | | $ | 1,118 |
| | | |
| | | $ | 805 |
|
| |
(1) | Averages for investment securities are based on |
(2) | Includes nonaccrual loans. The impact of interest and fees not recognized on nonaccrual loans was immaterial. |
(3) | The fully-tax equivalent adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable. The adjustment attempts to enhance the comparability of the performance of assets that have different tax liabilities. |
4239
Table 2b: Year-to-Date Average Balance Sheet
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | Nine Months Ended |
| | Nine Months Ended | | Nine Months Ended |
| ||||||||||||||||||||||||||
| | September 30, 2021 | | September 30, 2020 |
| | September 30, 2022 | | September 30, 2021 |
| ||||||||||||||||||||||||||
| | | | | | | | Avg. | | | | | | | | Avg. |
| | |
|
| |
| | Avg. |
| | |
|
| |
|
| Avg. | | |
| | Average | | | | | Yield/Rate | | Average | | | | | Yield/Rate |
| | Average | | |
| | Yield/Rate |
| Average | | | |
| Yield/Rate | | ||||||
(000's omitted except yields and rates) | | Balance | | Interest | | Paid | | Balance | | Interest | | Paid |
| |||||||||||||||||||||||
(000’s omitted except yields and rates) |
| Balance |
| Interest | | Paid |
| Balance |
| Interest |
| Paid | | |||||||||||||||||||||||
Interest-earning assets: |
| |
|
| |
|
|
|
| |
|
| |
|
|
| | | | | | | | | | | | | | | | | | | | |
Cash equivalents | | $ | 1,941,329 | | $ | 1,772 |
| 0.12 | % | $ | 748,236 | | $ | 794 |
| 0.14 | % | | $ | 473,112 | | $ | 1,306 | | 0.37 | % | $ | 1,941,329 | | $ | 1,772 | | | 0.12 | % | |
Taxable investment securities (1) | |
| 3,531,272 | |
| 47,553 |
| 1.80 | % |
| 2,627,302 | |
| 44,839 |
| 2.28 | % | | | 5,655,745 | | | 69,921 | | 1.65 | % | | 3,531,272 | | | 47,553 | | | 1.80 | % | |
Nontaxable investment securities (1) | |
| 406,835 | |
| 10,018 |
| 3.29 | % |
| 458,617 | |
| 11,520 |
| 3.36 | % | | | 493,302 | | | 12,153 | | 3.29 | % | | 406,835 | | | 10,018 | | | 3.29 | % | |
Loans (net of unearned discount) (2) | |
| 7,322,581 | |
| 231,920 |
| 4.23 | % |
| 7,202,830 | |
| 237,534 |
| 4.41 | % | | | 7,819,306 | | | 239,322 | | 4.09 | % | | 7,322,581 | | | 231,920 | | | 4.23 | % | |
Total interest-earning assets | |
| 13,202,017 | |
| 291,263 |
| 2.95 | % |
| 11,036,985 | |
| 294,687 |
| 3.57 | % | | | 14,441,465 | | | 322,702 | | 2.99 | % | | 13,202,017 | | | 291,263 | | | 2.95 | % | |
Noninterest-earning assets | |
| 1,436,252 | |
| |
|
| |
| 1,527,615 | |
| |
|
| | | | 1,092,450 | | | | | | | | 1,436,252 | | | | | | | | |
Total assets | | $ | 14,638,269 | |
| |
|
| | $ | 12,564,600 | |
| |
|
| | | $ | 15,533,915 | | | | | | | $ | 14,638,269 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | |
| | |
| |
|
| |
| | |
| |
|
| | | | | | | | | | | | | | | | | | | | |
Interest checking, savings, and money market deposits | | $ | 7,474,811 | |
| 2,309 |
| 0.04 | % | $ | 6,187,919 | |
| 4,672 |
| 0.10 | % | | $ | 8,230,007 | | | 4,037 | | 0.07 | % | $ | 7,474,811 | | | 2,309 | | | 0.04 | % | |
Time deposits | |
| 962,559 | |
| 6,588 |
| 0.92 | % |
| 935,783 | |
| 8,701 |
| 1.24 | % | | | 941,094 | | | 5,074 | | 0.72 | % | | 962,559 | | | 6,588 | | | 0.92 | % | |
Customer repurchase agreements | |
| 250,638 | |
| 641 |
| 0.34 | % |
| 208,317 | |
| 1,108 |
| 0.71 | % | | | 292,411 | | | 642 | | 0.29 | % | | 250,638 | | | 641 | | | 0.34 | % | |
Overnight borrowings | | | 64,204 | | | 1,233 | | 2.57 | % | | 0 | | | 0 | | | 0.00 | % | ||||||||||||||||||
FHLB borrowings | |
| 4,634 | |
| 75 |
| 2.15 | % |
| 11,988 | |
| 172 |
| 1.92 | % | | | 10,890 | | | 238 | | 2.93 | % | | 4,634 | | | 75 | | | 2.15 | % | |
Subordinated notes payable | |
| 3,294 | |
| 115 |
| 4.69 | % |
| 13,767 | |
| 553 |
| 5.37 | % | | | 3,268 | | | 115 | | 4.69 | % | | 3,294 | | | 115 | | | 4.69 | % | |
Subordinated debt held by unconsolidated subsidiary trusts | |
| 20,675 | |
| 293 |
| 1.89 | % |
| 78,027 | |
| 1,501 |
| 2.57 | % | | | 0 | | | 0 | | 0.00 | % | | 20,675 | | | 293 | | | 1.89 | % | |
Total interest-bearing liabilities | |
| 8,716,611 | |
| 10,021 |
| 0.15 | % |
| 7,435,801 | |
| 16,707 |
| 0.30 | % | | | 9,541,874 | | | 11,339 | | 0.16 | % | | 8,716,611 | | | 10,021 | | | 0.15 | % | |
Noninterest-bearing liabilities: | |
| | |
| |
|
| |
| | |
| |
|
| | | | | | | | | | | | | | | | | | | | |
Noninterest checking deposits | |
| 3,685,556 | |
| |
|
| |
| 2,913,492 | |
| |
|
| | | | 4,075,005 | | | | | | | | 3,685,556 | | | | | | | | |
Other liabilities | |
| 178,402 | |
| |
|
| |
| 212,510 | |
| |
|
| | | | 96,763 | | | | | | | | 178,402 | | | | | | | | |
Shareholders' equity | |
| 2,057,700 | |
| |
|
| |
| 2,002,797 | |
| |
|
| | |||||||||||||||||||
Total liabilities and shareholders' equity | | $ | 14,638,269 | |
| |
|
| | $ | 12,564,600 | |
| |
|
| | |||||||||||||||||||
Shareholders’ equity | | | 1,820,273 | | | | | | | | 2,057,700 | | | | | | | | ||||||||||||||||||
Total liabilities and shareholders’ equity | | $ | 15,533,915 | | | | | | | $ | 14,638,269 | | | | | | | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest earnings | |
|
| | $ | 281,242 |
|
| |
|
| | $ | 277,980 |
|
| | | | | | $ | 311,363 | | | | | | | $ | 281,242 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest spread | |
|
| |
| |
| 2.80 | % |
|
| |
| |
| 3.27 | % | | | | | | | | 2.83 | % | | | | | | | | 2.80 | % | |
Net interest margin on interest-earning assets | |
|
| |
| |
| 2.85 | % |
|
| |
| |
| 3.36 | % | | | | | | | | 2.88 | % | | | | | | | | 2.85 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fully tax-equivalent adjustment (3) | |
|
| | $ | 2,572 |
|
| |
|
| | $ | 3,010 |
|
| | | | | | $ | 2,956 | | | | | | | $ | 2,572 | | | | |
(1) | Averages for investment securities are based on |
(2) | Includes nonaccrual loans. The impact of interest and fees not recognized on nonaccrual loans was immaterial. |
(3) | The fully-tax equivalent adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable. The adjustment attempts to enhance the comparability of the performance of assets that have different tax liabilities. |
As discussed above and disclosed in Table 3 below, the change in net interest income (fully tax-equivalent(FTE basis) may be analyzed by segregating the volume and rate components of the changes in interest income and interest expense for each underlying category.
4340
Table 3: Rate/Volume
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2021 | | | Nine months ended September 30, 2021 | | Three months ended September 30, 2022 | | | Nine months ended September 30, 2022 | ||||||||||||||||||||||||||
| | versus September 30, 2020 | | | versus September 30, 2020 | | versus September 30, 2021 | | | versus September 30, 2021 | ||||||||||||||||||||||||||
| | Increase (Decrease) Due to Change in (1) | |
| Increase (Decrease) Due to Change in (1) | | Increase (Decrease) Due to Change in (1) | |
| Increase (Decrease) Due to Change in (1) | ||||||||||||||||||||||||||
| | |
|
| |
|
| Net | | |
|
| |
|
| Net | ||||||||||||||||||||
(000's omitted) |
| Volume |
| Rate |
| Change |
| Volume |
| Rate |
| Change | ||||||||||||||||||||||||
(000’s omitted) |
| Volume |
| Rate |
| Net Change |
| Volume |
| Rate |
| Net Change | ||||||||||||||||||||||||
Interest earned on: | | |
|
| |
|
| |
| | |
|
| |
|
| |
| | |
|
| |
|
| |
| | |
|
| |
|
| |
|
Cash equivalents | | $ | 251 | | $ | 211 | | $ | 462 | | $ | 1,102 | | $ | (124) | | $ | 978 | | $ | (1,493) | | $ | 813 | | $ | (680) | | $ | (2,078) | | $ | 1,612 | | $ | (466) |
Taxable investment securities | |
| 5,237 | |
| (3,219) | |
| 2,018 | |
| 13,410 | |
| (10,696) | |
| 2,714 | |
| 7,912 | |
| (856) | |
| 7,056 | |
| 26,545 | |
| (4,177) | |
| 22,368 |
Nontaxable investment securities | |
| (636) | |
| 26 | |
| (610) | |
| (1,279) | |
| (223) | |
| (1,502) | |
| 1,417 | |
| 127 | |
| 1,544 | |
| 2,130 | |
| 5 | |
| 2,135 |
Loans | |
| (2,526) | |
| (1,326) | |
| (3,852) | |
| 3,903 | |
| (9,517) | |
| (5,614) | |
| 11,295 | |
| 1,307 | |
| 12,602 | |
| 15,378 | |
| (7,976) | |
| 7,402 |
Total interest-earning assets (2) | |
| 12,096 | |
| (14,078) | |
| (1,982) | |
| 52,481 | |
| (55,905) | |
| (3,424) | |
| 8,076 | |
| 12,446 | |
| 20,522 | |
| 27,652 | |
| 3,787 | |
| 31,439 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest paid on: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Interest checking, savings and money market deposits | |
| 136 | |
| (310) | |
| (174) | |
| 822 | |
| (3,185) | |
| (2,363) | |
| 52 | |
| 1,362 | |
| 1,414 | |
| 253 | |
| 1,475 | |
| 1,728 |
Time deposits | |
| (5) | |
| (654) | |
| (659) | |
| 243 | |
| (2,356) | |
| (2,113) | |
| 4 | |
| (385) | |
| (381) | |
| (144) | |
| (1,370) | |
| (1,514) |
Customer repurchase agreements | |
| 46 | |
| (119) | |
| (73) | |
| 192 | |
| (659) | |
| (467) | |
| 31 | |
| 8 | |
| 39 | |
| 98 | |
| (97) | |
| 1 |
Overnight borrowings | | | 1,226 | | | 0 | | | 1,226 | | | 1,233 | | | 0 | | | 1,233 | ||||||||||||||||||
FHLB borrowings | |
| (29) | |
| 5 | |
| (24) | |
| (116) | |
| 19 | |
| (97) | |
| 123 | |
| 5 | |
| 128 | |
| 129 | |
| 34 | |
| 163 |
Subordinated notes payable | |
| (125) | |
| (21) | |
| (146) | |
| (375) | |
| (63) | |
| (438) | ||||||||||||||||||
Subordinated debt held by unconsolidated subsidiary trusts | |
| (394) | |
| 0 | |
| (394) | |
| (888) | |
| (320) | |
| (1,208) | |
| 0 | |
| 0 | |
| 0 | |
| (293) | |
| 0 | |
| (293) |
Total interest-bearing liabilities (2) | |
| 514 | |
| (1,984) | |
| (1,470) | |
| 2,523 | |
| (9,209) | |
| (6,686) | |
| 255 | |
| 2,171 | |
| 2,426 | |
| 922 | |
| 396 | |
| 1,318 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest earnings (2) | | $ | 11,581 | | $ | (12,093) | | $ | (512) | | $ | 49,822 | | $ | (46,560) | | $ | 3,262 | | $ | 7,798 | | $ | 10,298 | | $ | 18,096 | | $ | 26,686 | | $ | 3,435 | | $ | 30,121 |
(1) | The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of such change in each component. |
(2) | Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components. |
Exclusive of the impact of PPP loans, the Company expects its fourth quarter 2021 net interest margin to remain below results in the comparable prior year quarter due to the significant and precipitous drop in the overnight Federal Funds and Prime interest rates in early 2020 that have remained into 2021. In the near term, expected decreases in average earning asset yields are unlikely to be fully offset by expected decreases in the average cost of funds. Although the stated interest rate on PPP loans is fixed at 1.00%, the Company’s recognition of the interest income on origination fees, net of deferred origination costs, on PPP loans will likely cause earning asset yield volatility as loans are forgiven by the SBA. While the Company expects to recognize the majority of its remaining first draw net deferred PPP fees totaling $0.1 million through interest income during the fourth quarter of 2021 and the majority of its second draw net deferred PPP fees totaling $6.2 million over the next few quarters, the eligibility of the borrowers’ forgiveness requests and the SBA’s ability to provide loan forgiveness in a timely manner remains uncertain at this time.
Noninterest Revenues
The Company’s sources of noninterest revenues are of four primary types: 1) general banking services related to loans, including mortgage banking, deposits and other core customer activities typically provided through the branch network and digital banking channels (performed by CBNA); 2) employee benefit trust, collective investment fund, transfer agency, actuarial and benefit plan administration services (performed by BPAS and its subsidiaries); 3) wealth management services, comprised of trust services (performed by the trust unit within CBNA), broker-dealer and investment advisory products and services (performed by Community Investment Services Inc. (“CISI”), OneGroup Wealth Partners, Inc. and The Carta Group, Inc.) and asset management services (performed by Nottingham Advisors, Inc.); and 4) insurance and risk management products and services (performed by OneGroup). Additionally, the Company periodically generateshas other transactions that impact noninterest revenues, from investment and borrowing activities, including unrealized gains or losses on equity securities.
4441
Table 4: Noninterest Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended |
| ||||||||||||||||
| | September 30, | | September 30, | | | September 30, | | September 30, |
| ||||||||||||||||
(000's omitted) |
| 2021 |
| 2020 | | 2021 | | 2020 |
| |||||||||||||||||
(000’s omitted) |
| 2022 |
| 2021 | | 2022 |
| 2021 | | |||||||||||||||||
Employee benefit services | | $ | 29,923 | | $ | 25,159 | | $ | 83,933 | | $ | 74,593 | | | $ | 27,884 | | $ | 29,923 | | $ | 86,385 | | $ | 83,933 | |
Deposit service charges and fees | |
| 8,816 | |
| 7,899 | |
| 24,305 | |
| 25,318 | | |||||||||||||
Mortgage banking | | | 460 | | | 3,908 | | | 1,479 | | | 6,199 | | |||||||||||||
Debit interchange and ATM fees | |
| 6,626 | |
| 6,361 | |
| 19,453 | |
| 17,404 | | |||||||||||||
Insurance services | |
| 9,176 | |
| 8,531 | |
| 25,538 | |
| 24,772 | | |
| 11,332 | |
| 9,176 | |
| 31,521 | |
| 25,538 | |
Wealth management services | |
| 8,322 | |
| 6,889 | |
| 24,748 | |
| 20,389 | | | | 7,502 | | | 8,322 | | | 24,276 | | | 24,748 | |
Deposit service charges and fees | |
| 10,755 | |
| 8,816 | |
| 29,715 | |
| 24,305 | | |||||||||||||
Debit interchange and ATM fees | |
| 6,697 | |
| 6,626 | |
| 20,030 | |
| 19,453 | | |||||||||||||
Mortgage banking | |
| 171 | |
| 460 | |
| 595 | |
| 1,479 | | |||||||||||||
Other banking revenues | |
| 996 | |
| 924 | |
| 2,830 | |
| 2,574 | | |
| 912 | |
| 996 | |
| 2,521 | |
| 2,830 | |
Subtotal | |
| 64,319 | | | 59,671 | | | 182,286 | | | 171,249 | | |
| 65,253 | | | 64,319 | | | 195,043 | | | 182,286 | |
Unrealized (loss) gain on equity securities | |
| (10) | |
| (12) | |
| 14 | |
| (30) | | |
| (4) | |
| (10) | |
| (24) | |
| 14 | |
Total noninterest revenues | | $ | 64,309 | | $ | 59,659 | | $ | 182,300 | | $ | 171,219 | | | $ | 65,249 | | $ | 64,309 | | $ | 195,019 | | $ | 182,300 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest revenues/operating revenues (FTE basis) (1) | |
| 41.0 | % |
| 39.2 | % | | 39.6 | % | | 38.5 | % | |
| 37.2 | % |
| 41.0 | % |
| 38.8 | % |
| 39.6 | % |
(1) | For purposes of this ratio noninterest revenues excludes unrealized gains and losses on equity securities. Operating revenues, a non-GAAP measure, is defined as net interest income on a |
As displayed in Table 4, noninterest revenues, excluding unrealized gain (loss) gain on equity securities, were $64.3$65.3 million for the third quarter of 20212022 and $182.3$195.0 million for the first nine months of 2021.2022. This represents an increase of $4.6$0.9 million, or 7.8%1.5%, for the quarter and an increase of $11.0$12.8 million, or 6.4%7.0%, for the YTD period in comparison to the equivalent 20202021 periods. The increase for the quarterly and YTD periods wereperiod was driven by increases in insurance services revenue and banking noninterest revenue, partially offset by declines in employee benefit services revenue and wealth management services revenue. The increase for the YTD period was due to increases in insurance services revenue, banking noninterest revenue and insuranceemployee benefit services revenue, partially offset by a decreasedecline in banking noninterestwealth management services revenue.
Banking noninterest revenue of $16.9$18.5 million for the third quarter and $48.1$52.9 million for the first nine months of 2021 decreased $2.22022 increased $1.6 million, or 11.5%9.7%, and decreased $3.4increased $4.8 million, or 6.7%10.0%, respectively, as compared to the corresponding prior year periods. The quarterly decrease was primarilyand YTD increases were driven by a decrease in mortgage banking revenues as the Company is currently holding almost all of its new consumer mortgage production in portfolio due to a change in its strategy, partially offset by increases in deposit service charges and fees and debit interchange and ATM fees, and other banking revenues, reflective of increased transaction activity. The YTD decline was primarily drivenpartially offset by decreases in mortgage banking revenues due to the aforementioned changeand other banking revenues. The increases in strategy and deposit service charges and fees including decreases in overdraft fees in part due to the higher average deposit balances resulting from government stimulus program inflows, partially offset by increases in debit interchange and ATM fees,were reflective of increased post-pandemic transaction activity, including the impact from the addition of new deposit relationships from the SteubenElmira acquisition in May 2022. The Company expects to make modifications to its deposit service charges and higher otherfees over the next several quarters in order to better align with industry trends and to ensure the Company continues to provide customers with affordable and competitive banking revenues.options.
Employee benefit services revenue increased $4.8decreased $2.0 million, or 18.9%6.8%, and $9.3but increased $2.5 million, or 12.5%2.9%, for the three and nine months ended September 30, 2021,2022, respectively, as compared to the equivalent prior year periods. This growth primarily related to increasesThe decline in quarterly revenues was driven by decreases in employee benefit trust and custodial fees, as well asreflecting the adverse impact from market-related headwinds, while the growth on a YTD basis was primarily driven by incremental revenues from the acquisition of FBDFringe Benefits Design of Minnesota, Inc. (“FBD”) during the third quarter.quarter of 2021. Insurance services revenue was up $0.6$2.2 million, or 7.6%23.5%, and up $0.8$6.0 million, or 3.1%23.4%, for the third quarter and YTD periods, respectively. These increases were primarilyrespectively, driven by incremental revenues fromorganic expansion, as well as the acquisitionssecond quarter 2021 acquisition of TGA duringa Florida-based personal lines insurance agency, the third quarter 2021 acquisition of a Boston-based specialty-lines insurance broker and NuVantage during the second quarter.first quarter 2022 acquisitions of three other insurance agencies. Wealth management services revenue was up $1.4down $0.8 million, or 20.8%9.9%, for the third quarter of 20212022 and was up $4.4$0.5 million, or 21.4%1.9%, for September 20212022 YTD as compared to the same time periods of 2020,2021, primarily driven by increases inmore challenging investment management and trust services revenues due to the additionmarket conditions.
42
The ratio of noninterest revenues to operating revenues (FTE basis), as defined in footnote 1 of Table 4 above, was 41.0%37.2% for the quarter and 39.6%38.8% for the nine months ended September 30, 2021,2022, respectively, versus 39.2%41.0% and 38.5%39.6% for the comparable periods of 2020.2021. The increasedecrease for the year-to-date period is a function of a 6.4%7.0% increase in adjusted noninterest revenues while adjusted net interest income (FTE basis) increased at10.7%. The decrease for the quarterly periods is reflective of a slower 1.2% pace.
45
The Company expects its full-year mortgage banking1.5% increase in adjusted noninterest revenues in 2021 to continue to be below 2020 as the Company reduced the amount of sales of secondary market eligible residential mortgage loans beginning in the fourth quarter of 2020.while adjusted net interest income (FTE basis) increased 19.2%.
Noninterest Expenses
Table 5 below sets forth the quarterly results of the major noninterest expense categories for the current and prior year, as well as efficiency ratios (defined below), a standard measure of expense utilization effectiveness commonly used in the banking industry.
Table 5: Noninterest Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended |
| ||||||||||||||||
| | September 30, | | September 30, | | | September 30, | | September 30, |
| ||||||||||||||||
(000's omitted) | | 2021 |
| 2020 | | 2021 | | 2020 |
| |||||||||||||||||
(000’s omitted) | | 2022 |
| 2021 | | 2022 |
| 2021 | | |||||||||||||||||
Salaries and employee benefits |
| $ | 62,883 |
| $ | 57,280 |
| $ | 178,407 |
| $ | 170,252 | |
| $ | 66,190 |
| $ | 62,883 |
| $ | 193,236 | | $ | 178,407 | |
Occupancy and equipment | |
| 9,867 | |
| 10,134 | | | 31,437 | | | 30,627 | | |
| 10,364 | |
| 9,867 | |
| 31,740 | |
| 31,437 | |
Data processing and communications | |
| 12,966 | |
| 12,096 | | | 38,123 | | | 33,342 | | |
| 14,184 | |
| 12,966 | |
| 40,454 | |
| 38,123 | |
Amortization of intangible assets | |
| 3,703 | |
| 3,581 | | | 10,300 | | | 10,772 | | |
| 3,837 | |
| 3,703 | |
| 11,420 | |
| 10,300 | |
Legal and professional fees | |
| 3,352 | |
| 2,365 | | | 8,885 | | | 8,577 | | |
| 3,194 | |
| 3,352 | |
| 10,196 | |
| 8,885 | |
Business development and marketing | |
| 2,383 | |
| 3,145 | | | 7,071 | | | 7,162 | | |
| 3,616 | |
| 2,383 | |
| 9,975 | |
| 7,071 | |
Litigation accrual | | | (100) | | | 2,950 | | | (100) | | | 2,950 | | | | 0 | | | (100) | | | 0 | | | (100) | |
Acquisition expenses | |
| 102 | |
| 796 | | | 133 | | | 4,537 | | |
| 409 | |
| 102 | |
| 4,668 | |
| 133 | |
Acquisition-related contingent consideration adjustment | | | 0 | | | 0 | | | 400 | | | 0 | | |||||||||||||
Other | |
| 5,280 | |
| 4,619 | | | 12,969 | | | 13,313 | | |
| 6,391 | |
| 5,280 | |
| 16,327 | |
| 12,969 | |
Total noninterest expenses | | $ | 100,436 | | $ | 96,966 | | $ | 287,225 | | $ | 281,532 | | | $ | 108,185 | | $ | 100,436 | | $ | 318,416 | | $ | 287,225 | |
| | | | | | | | | | | | | | |||||||||||||
Operating expenses(1)/average assets | |
| 2.55 | % |
| 2.63 | % | | 2.53 | % | | 2.80 | % | |
| 2.65 | % |
| 2.55 | % |
| 2.60 | % |
| 2.53 | % |
Efficiency ratio(2) | |
| 61.7 | % |
| 58.9 | % | | 60.1 | % | | 59.2 | % | |
| 59.3 | % |
| 61.7 | % |
| 60.0 | % |
| 60.1 | % |
(1) | Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual |
(2) | Efficiency ratio, a non-GAAP measure, is calculated as operating expenses as defined in (1)above divided by net interest income on a |
43
As shown in Table 5, the Company recorded noninterest expenses of $100.4$108.2 million and $287.2$318.4 million for the third quarter and YTD periods of 2021,2022, respectively, representing an increaseincreases of $3.5$7.8 million, or 3.6%7.7%, and an increase of $5.7$31.2 million, or 2.0%10.9%, from the respective prior year periods. Combined acquisition-relatedperiods, respectively. Acquisition expenses and litigation accrual expensesacquisition-related contingent consideration adjustments of $3.7$0.4 million and $7.5$5.1 million are included in third quarter 2020 and YTD 20202022 noninterest expenses, respectively. Salaries and employee benefits increased $5.6$3.3 million, or 9.8%5.3%, and $8.2$14.8 million, or 4.8%8.3%, for the third quarter and YTD periods of 2021,2022, respectively, as compared to the corresponding periods of 2020.2021. The increase in salaries and benefits expense was driven by increases in merit and incentive-relatedmerit-related employee wages, acquisition-related additions to staffing, higher payroll taxes including increases in state-related unemployment taxes,and higher employee benefit-related expenses and staffing increases due to recent acquisitions.expenses. The remaining change to noninterest expenses can beare attributed to occupancy and equipment (down $0.3(up $0.5 million for the quarter driven by branch consolidation activities between the periods and up $0.8$0.3 million YTD driven by the Steuben acquisition)YTD), data processing and communications (up $0.9$1.2 million for the quarter and $4.8$2.3 million YTD driven by the Steuben acquisition and the Company’s implementation of new customer-facing digital technologies and back office systems)YTD), amortization of intangible assets (up $0.1 million for the quarter due to recent acquisitions and down $0.5$1.1 million YTD), legal and professional fees (up $1.0(down $0.2 million for the quarter and $0.3up $1.3 million YTD due to the general increase in the level of business activities)YTD), business development and marketing (down $0.8(up $1.2 million for the quarter and $0.1$2.9 million YTD) and other expenses (up $0.7$1.1 million for the quarter and $3.4 million YTD). Noninterest expenses were generally up due to the general increase in the level of business activities and down $0.3 million YTD). Includedincremental expenses due to the end of most pandemic-related restrictions as well as the costs associated with operating an expanded franchise subsequent to the Elmira and financial services acquisitions, including increases in otherbusiness development and marketing expenses, insurance and travel-related expenses. The increase in data processing and communications expenses was andue to the Company’s continued investment in customer-facing and back office digital technologies between the comparable periods. The slight increase in non-service related components ofoccupancy and equipment expense was driven by inflationary pressures, partially offset by branch office consolidations between the net periodic pension benefit credit (up $0.6 million for the quarter and $2.0 million YTD).periods.
46
The Company’s efficiency ratio (as defined in Table 5the table above) was 61.7%59.3% for the third quarter, 2.8% unfavorable2.4 percentage points favorable to the comparable quarter of 2020.2021. This resulted from operating expenses (as described in footnote 1 of Table 5 above) increasing 7.9%7.5%, while operating revenues (as described in footnote 2 of Table 5 above) increased a lesser 3.0%11.8%. The efficiency ratio of 60.1%60.0% for the first nine months of 20212022 was 0.9% unfavorable0.1 percentage point favorable compared to the first nine months of 20202021 due to 5.2%9.0% higher operating expenses (as described in footnote 1 of Table 5 above), while operating revenues (as described footnote 2 of Table 5 above) increased by 3.4%9.3%. Current year operating expenses, excluding amortization of intangible amortization,assets, acquisition expenses, acquisition-related contingent consideration adjustments and litigation accrual expenses and acquisition expenses, as a percentage of average assets decreased eight basisincreased 0.10 percentage points versus the prior year quarter and was 27 basisincreased 0.07 percentage points lower thanversus the prior year-to-date period as operating expenses (as defined above) increased at a slower pacefaster rate than average assets. Operating expenses (as defined above) increased 7.9%7.5% for the quarter and increased 5.2%9.0% for the year-to-date period, while average assets increased 11.0%3.5% for the quarter and increased 16.5%6.1% for the year-to-date period.period as the strong growth of the book value of earning assets was partially offset by a significant decline in the pre-tax market value adjustment on the investment portfolio.
Income Taxes
The third quarter and YTD 20212022 effective income tax rates were 21.1%22.0% and 20.9%21.6%, respectively, as compared to the 20.3%21.1% and 19.8%20.9% for the comparable periods of 2020.2021. The effective tax rate in the third quarter of 2021 was driven down by a decrease in the Company’s full year effective tax rate projection. The increase in the third quarter and YTD 2021 effective income tax rates is primarilyrate was fully attributable to an increase in certain state incomelower levels of tax rates that were enacted in the second quarter of 2021. Partially offsetting this was a higher level of benefit derived from stock basedbenefits related to stock-based compensation activity for YTD 2021.activity. The Company recorded a $2.0$0.6 million and $1.3$2.0 million reduction in income tax expense associated with stock-based compensation tax benefits for YTD 20212022 and YTD 2020,2021, respectively. The effective tax rates adjusted to exclude stock-based compensation tax benefits for the third quarter and YTD 20212022 were both 22.0%, as compared to 21.1% and 22.0%, respectively, as compared to 20.4% and 20.7% for the comparable periods of 2020.2021, respectively.
Investment Securities
The carrying value of investment securities (including unrealized gains and losses) was $4.40$5.23 billion at the end of the third quarter, an increase of $808.1$248.2 million from December 31, 20202021 and $1.13 billion$823.9 million higher than September 30, 2020.2021. The balancecarrying value of cash equivalents was $2.10 billion$30.0 million at the end of the third quarter, an increasea decrease of $629.4 million$1.69 billion from December 31, 20202021 and $461.7 million higher than$2.07 billion from September 30, 2020.2021. The book value of investment securities (excluding unrealized gains and losses) of $4.45$6.19 billion at the end of the third quarter increased $976.7 million$1.17 billion from December 31, 20202021 and increased $1.34$1.74 billion from September 30, 2020.2021. During the first nine months of 2021,2022, the Company purchased $1.16$1.14 billion of U.S. Treasury and agency securities with an average yield of 1.28%1.62%, $102.4$34.6 million of government agency mortgage-backed securities with an average yield of 1.77%2.75%, $13.8and $182.0 million of obligations of state and political subdivisions with an average yield of 2.44% and $5.03.96%. Additionally, the Company acquired $11.3 million of corporate debt securities with an average yieldinvestments from Elmira during the second quarter of 3.25%.2022. These additions were partially offset by $313.9$212.4 million of investment maturities, calls and principal payments during the first nine months of 2021.2022. Additionally, there was $8.5$14.8 million of net accretion on investment securities during the first nine months of 2021.2022. The effective duration of the investment securities portfolio was 6.5 years at the end of the third quarter of 2022, as compared to 7.5 years at the end of 2021 and 7.6 years at the end of the third quarter of 2021, as compared to 7.7 years at the end2021.
44
The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At September 30, 2021,2022, the portfolio had a $964.9 million net unrealized loss, as compared to a $44.9 million net unrealized loss at December 31, 2021 and a $47.5 million net unrealized loss a decrease of $168.6 million from the net unrealized gain at December 31, 2020 and a $202.8 million decrease from the net unrealized gain at September 30, 2020.2021. These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases and maturities that have occurred over the past 12 months.
47
TableThe following table sets forth the fair value of Contentsthe Company’s investment securities portfolio:
Table 6: Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| December 31, 2020 |
| September 30, 2020 | |
| September 30, |
| December 31, |
| | September 30, | ||||||||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair | | |||||||||||||||
(000's omitted) | | Cost | | Value | | Cost | | Value | | Cost | | Value | | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||
(000’s omitted) | | 2022 | | 2021 | | | 2021 | |||||||||||||||||||||
Available-for-Sale Portfolio: | | |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | |
|
| |
| | | |
U.S. Treasury and agency securities | | $ | 3,467,053 | | $ | 3,393,260 | | $ | 2,423,236 | | $ | 2,501,382 | | $ | 2,034,512 | | $ | 2,149,170 | | | $ | 4,275,440 | | $ | 3,998,564 | | $ | 3,393,260 |
Obligations of state and political subdivisions | |
| 404,531 | |
| 421,965 | |
| 451,028 | |
| 475,660 | |
| 470,518 | |
| 493,496 | | |
| 489,910 | |
| 430,289 | | | 421,965 |
Government agency mortgage-backed securities | |
| 503,548 | |
| 510,676 | |
| 506,540 | |
| 522,638 | |
| 508,738 | |
| 523,974 | | |
| 384,891 | |
| 477,056 | | | 510,676 |
Corporate debt securities | |
| 8,000 | |
| 8,078 | |
| 4,499 | |
| 4,635 | |
| 4,504 | |
| 4,602 | | |
| 7,033 | |
| 7,962 | | | 8,078 |
Government agency collateralized mortgage obligations | |
| 23,746 | |
| 24,392 | |
| 42,476 | |
| 43,577 | |
| 50,134 | |
| 51,480 | | |
| 13,415 | |
| 20,339 | | | 24,392 |
Total available-for-sale portfolio | | | 4,406,878 | |
| 4,358,371 | |
| 3,427,779 | |
| 3,547,892 | |
| 3,068,406 | |
| 3,222,722 | | | | 5,170,689 | |
| 4,934,210 | | | 4,358,371 |
| |
| | |
| | |
| | |
| | |
| | |
| | | |
| | |
| | | | |
Equity and other Securities: | |
| | | | | | | | | | | | | | | | | | |||||||||
Equity and Other Securities: | |
| | | | | | | | |||||||||||||||||||
Equity securities, at fair value | |
| 251 | |
| 459 | |
| 251 | |
| 445 | |
| 251 | |
| 423 | | |
| 439 | |
| 463 | | | 459 |
Federal Home Loan Bank common stock | |
| 7,251 | |
| 7,251 | |
| 7,468 | |
| 7,468 | |
| 7,545 | |
| 7,545 | | |
| 18,438 | |
| 7,188 | | | 7,251 |
Federal Reserve Bank common stock | |
| 33,916 | |
| 33,916 | |
| 33,916 | |
| 33,916 | |
| 33,916 | |
| 33,916 | | |
| 33,568 | |
| 33,916 | | | 33,916 |
Other equity securities, at adjusted cost | | | 2,651 | | | 3,401 | | | 4,876 | | | 5,626 | | | 4,707 | | | 5,457 | | | | 4,158 | | | 3,312 | | | 3,401 |
Total equity and other securities | |
| 44,069 | |
| 45,027 | |
| 46,511 | |
| 47,455 | |
| 46,419 | |
| 47,341 | | |
| 56,603 | |
| 44,879 | | | 45,027 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total investments | | $ | 4,450,947 | | $ | 4,403,398 | | $ | 3,474,290 | | $ | 3,595,347 | | $ | 3,114,825 | | $ | 3,270,063 | | | $ | 5,227,292 | | $ | 4,979,089 | | $ | 4,403,398 |
Loans
As shown in Table 7, loansLoans ended the third quarter at $7.28$8.54 billion, down $176.1 million,an increase of $1.26 billion, or 2.4%17.3%, from one year earlier and down $133.4 million,an increase of $1.17 billion, or 1.8%15.9%, from the end of 2020.2021. The declineincrease during the last twelve months occurred primarilywas driven by increases in theall loan categories, including consumer mortgage, business lending, portfolio, reflective of a net decrease in PPP loans, along with lesser declines in theconsumer indirect, home equity and consumer direct portfolios, partially offset by increases inloans, due to the consumer indirectElmira acquisition and consumer mortgage portfolios. The decline from the end of 2020 was also primarily in the business lending portfolio, reflective ofnet organic growth, despite a net$156.2 million decrease in PPP loans along with a lesser decline in the home equity portfolio, partially offset by increases in the consumer indirect, consumer mortgage and consumer direct portfolios.due to loan forgiveness activities.
Table 7: Loans
| | | | | | | | | | | | | | | | |
(000's omitted) | | September 30, 2021 |
| December 31, 2020 |
| September 30, 2020 |
| |||||||||
Business lending |
| $ | 3,092,177 |
| 42.5 | % | $ | 3,440,077 |
| 46.4 | % | $ | 3,433,565 |
| 46.0 | % |
Consumer mortgage | |
| 2,470,974 |
| 33.9 | % |
| 2,401,499 |
| 32.4 | % |
| 2,410,249 |
| 32.3 | % |
Consumer indirect | |
| 1,168,378 |
| 16.1 | % |
| 1,021,885 |
| 13.8 | % |
| 1,039,925 |
| 13.9 | % |
Consumer direct | |
| 155,602 |
| 2.1 | % |
| 152,657 |
| 2.0 | % |
| 161,639 |
| 2.2 | % |
Home equity | |
| 395,451 |
| 5.4 | % |
| 399,834 |
| 5.4 | % |
| 413,265 |
| 5.6 | % |
Total loans | | $ | 7,282,582 |
| 100.0 | % | $ | 7,415,952 |
| 100.0 | % | $ | 7,458,643 |
| 100.0 | % |
The business lending portfolio consists of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and vehicle dealer floor plan financing. The business lending portfolio decreased $341.4increased $402.2 million, or 9.9%13.0%, from September 30, 2020, primarily2021 and increased $418.5 million, or 13.6%, from December 31, 2021, including $125.3 million of loans acquired from Elmira in the second quarter of 2022. The increase in the business lending portfolio was driven by a $336.8 million net decreasethe Elmira acquisition and organic growth despite decreases in PPP loans as a result of forgiveness granted by the SBA. The portfolio decreased $347.9$156.2 million from September 30, 2021 and $82.0 million from December 31, 2020, primarily attributable to a $302.6 million net decrease in PPP loans. Highly competitive2021. Competitive conditions for business lending continue to prevail in both the digital marketplace and geographic regions in which the Company operates. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category.
48
The Company participated in both rounds of the PPP, a specialized low-interest loan program funded by the U.S. Treasury Department and administered by the SBA, including lending pursuant to the 2020 Coronavirus Aid, Relief, and Security Act’s (“CARES Act”), now known as first draw loans. In addition, the Company participated in the 2021 Consolidated Appropriations Act’s (“CAA”) PPP loan program, now known as second draw loans. As of September 30, 2021, the Company’s business lending portfolio included 45 first draw PPP loans with a total balance of $14.4 million and 1,341 second draw PPP loans with a total balance of $151.0 million. This compares to 3,417 first draw PPP loans with a total balance of $470.7 million at December 31, 2020 and 3,473 first draw PPP loans with a total balance of $507.2 million at September 30, 2020.
Consumer mortgages increased $60.7$504.5 million, or 2.5%20.4%, from one year ago and increased $69.5$419.4 million, or 2.9%16.4%, from December 31, 20202021, including $271.4 million of loans acquired from Elmira in the second quarter of 2022. In addition to the Elmira acquisition, the increase in consumer mortgages was driven by refinance activities late last year and early this year, the Company’s competitive product offerings and business development efforts, in addition to strong housing demand.demand throughout the past twelve months. Interest rate levels, secondary market premiums, expected duration and ALCO strategies continue to be the most significant factors in determining whether the Company chooses to retain, versus sell and service, portions of its new mortgage production. During the fourth quarter of 2020, the Company sold $42.3 million of its secondary market eligible consumer mortgages, which offset a portion of the increase in outstanding balances between the comparable annual periods. The Company changed its strategy to hold the majority of its secondary market eligible consumer mortgages during the fourth quarter of 2020 and is currently holding almost all of its new consumer mortgage production in portfolio, with only $17.0 million of consumer mortgages sold in the first nine months of 2021.portfolio. Home equity loans decreased $17.8increased $37.6 million, or 4.3%9.5%, from one year ago, and decreased $4.4increased $35.0 million, or 1.1%8.8%, from December 31, 2020. The Company continues to experience paydowns2021, including $18.4 million of loans acquired from Elmira in its home equity portfolio due in part to some consumers using stimulus funds to reduce debt levels and balances being rolled into re-financed first lien consumer mortgages that offer attractive attributes to customers.the second quarter of 2022.
45
Consumer installment loans, both those originated directly in the branches (referred to as “consumer direct”) and indirectly in automobile, marine and other recreational vehicle dealerships (referred to as “consumer indirect”), increased $122.4$316.7 million, or 10.2%23.9%, from one year ago and increased $149.4$297.1 million, or 12.7%22.1%, from December 31, 2020 due2021, including $21.9 million of loans acquired from Elmira in large part to high demand driven by lowthe second quarter of 2022. Despite national vehicle supply shortages, the Company’s market interest ratesarea and added personal liquidity to fund larger down payments. Strained suppliesdealer network have experienced robust sales activity, which, combined with higher sales prices, have resulted in all categories, while not impactful enough thus far to substantially stuntsignificant growth opportunities, will continue to prop up pricing in allthe Company’s consumer indirect collateral categories.portfolio. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer direct loans provide attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.
The ultimate impact the COVID-19 pandemic will have on loan demand and the Company’s loan balances for the rest of 2021 remains uncertain at this time. The Company’s business lending balances will be unfavorably impacted as first draw and second draw PPP loans continue to be forgiven by the SBA. The Company anticipates assisting the remainder of the Company’s first draw PPP borrowers with forgiveness requests during the fourth quarter of 2021 and the majority of the Company’s second draw PPP borrowers with forgiveness requests over the next few quarters. The longer-term implications that COVID-19 and the repayment of PPP loans will have on business lending loan demand are presently difficult to predict.
Asset Quality
The following table sets forth the allocation of the allowance for credit losses by loan category as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes when the risk factors of each component part change. The allocation is not indicative of either the specific amounts of the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table 8 below exhibits7, the major componentstotal allowance for credit losses at the end of nonperformingthe third quarter was $60.4 million, an increase of $10.9 million, or 21.9%, from one year earlier and an increase of $10.5 million, or 21.0%, from the end of 2021, driven primarily by significant loan growth during the intervening period.
Table 7: Allowance for Credit Losses by Loan Type
| | | | | | | | | | | | | | | | |
|
| September 30, 2022 |
| December 31, 2021 |
| September 30, 2021 |
| |||||||||
(000’s omitted except for ratios) | | Allowance | | Loan Mix | | Allowance | | Loan Mix | | Allowance | | Loan Mix | | |||
Business lending | | $ | 23,931 | | 40.9 | % | $ | 22,995 | | 41.7 | % | $ | 22,319 | | 42.5 | % |
Consumer mortgage | |
| 13,818 |
| 34.8 | % |
| 10,017 |
| 34.7 | % |
| 9,745 |
| 33.9 | % |
Consumer indirect | |
| 17,018 |
| 17.1 | % |
| 11,737 |
| 16.1 | % |
| 12,045 |
| 16.1 | % |
Consumer direct | |
| 3,015 |
| 2.1 | % |
| 2,306 |
| 2.1 | % |
| 2,670 |
| 2.1 | % |
Home equity | |
| 1,581 |
| 5.1 | % |
| 1,814 |
| 5.4 | % |
| 1,720 |
| 5.4 | % |
Unallocated | | | 1,000 | | 0.0 | % | | 1,000 | | 0.0 | % | | 1,000 | | 0.0 | % |
Total loans | | $ | 60,363 |
| 100.0 | % | $ | 49,869 |
| 100.0 | % | $ | 49,499 |
| 100.0 | % |
As demonstrated in Table 7 and discussed previously, business lending and consumer installment carry higher credit risk than residential real estate, and as a result, these loans and assets and key asset quality metricscarry allowance for credit losses that cover a higher percentage of their total portfolio balances. The unallocated allowance is maintained for potential inherent losses in the periods endingspecific portfolios that are not captured due to model imprecision. The unallocated allowance of $1.0 million at September 30, 2022 was consistent with December 31, 2021 and 2020September 30, 2021. The changes in allowance allocations reflect management’s continued refinement of its loss estimation techniques. However, given the inherent imprecision in the many estimates used in the determination of the allocated portion of the allowance, management remained conservative in the approaches used to establish the overall allowance for credit losses. Management considers the allocated and December 31, 2020.unallocated portions of the allowance for credit losses to be prudent and reasonable. Furthermore, the Company’s allowance for credit losses is general in nature and is available to absorb losses from any loan category.
4946
Allowance for credit losses and loan net charge-off ratios are as follows:
Table 8: Nonperforming AssetsLoan Ratios
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | | September 30, | | December 31, | | September 30, | | ||||||
(000’s omitted) |
| 2021 |
| 2020 |
| 2020 |
| |||||||||||||
Nonaccrual loans | | | | | | | | | | | ||||||||||
|
| 2022 |
| 2021 |
| 2021 |
| |||||||||||||
Allowance for credit losses/total loans | |
| 0.71 | % |
| 0.68 | % |
| 0.68 | % | ||||||||||
Allowance for credit losses/nonperforming loans | |
| 186 | % |
| 110 | % |
| 73 | % | ||||||||||
Nonaccrual loans/total loans | |
| 0.33 | % |
| 0.57 | % |
| 0.91 | % | ||||||||||
Allowance for credit losses/nonaccrual loans | |
| 215 | % |
| 120 | % |
| 75 | % | ||||||||||
Net charge-offs (annualized) to average loans outstanding (quarterly): | | | | |
| | |
| | | ||||||||||
Business lending | | $ | 47,820 | | $ | 55,709 | | $ | 11,750 | | | | (0.03) | % |
| 0.10 | % |
| 0.08 | % |
Consumer mortgage | |
| 15,605 | |
| 14,970 | |
| 14,821 | | | | 0.01 | % | | 0.00 | % | | 0.02 | % |
Consumer indirect | |
| 0 | |
| 1 | |
| 1 | | | | 0.09 | % | | 0.24 | % | | 0.14 | % |
Consumer direct | |
| 1 | |
| 3 | |
| 3 | | | | 0.32 | % | | 0.53 | % | | 0.34 | % |
Home equity | |
| 2,541 | |
| 2,246 | |
| 2,181 | | | | 0.02 | % | | 0.01 | % | | 0.02 | % |
Total nonaccrual loans | |
| 65,967 | |
| 72,929 | |
| 28,756 | | ||||||||||
Accruing loans 90+ days delinquent | |
| | |
| | |
| | | ||||||||||
Business lending | |
| 148 | |
| 59 | |
| 39 | | ||||||||||
Consumer mortgage | |
| 1,288 | |
| 3,051 | |
| 3,182 | | ||||||||||
Consumer indirect | |
| 131 | |
| 219 | |
| 12 | | ||||||||||
Consumer direct | |
| 19 | |
| 28 | |
| 34 | | ||||||||||
Home equity | |
| 288 | |
| 565 | |
| 220 | | ||||||||||
Total accruing loans 90+ days delinquent | |
| 1,874 | |
| 3,922 | |
| 3,487 | | ||||||||||
Nonperforming loans | |
| | | | | | | | | ||||||||||
Business lending | |
| 47,968 | |
| 55,768 | |
| 11,789 | | ||||||||||
Consumer mortgage | |
| 16,893 | |
| 18,021 | |
| 18,003 | | ||||||||||
Consumer indirect | |
| 131 | |
| 220 | |
| 13 | | ||||||||||
Consumer direct | |
| 20 | |
| 31 | |
| 37 | | ||||||||||
Home equity | |
| 2,829 | |
| 2,811 | |
| 2,401 | | ||||||||||
Total nonperforming loans | |
| 67,841 | |
| 76,851 | |
| 32,243 | | ||||||||||
Other real estate owned (OREO) | |
| 891 | |
| 883 | |
| 1,209 | | ||||||||||
Total nonperforming assets | | $ | 68,732 | | $ | 77,734 | | $ | 33,452 | | ||||||||||
| |
| | | | | | | | | ||||||||||
Nonperforming loans / total loans | |
| 0.93 | % |
| 1.04 | % |
| 0.43 | % | ||||||||||
Nonperforming assets / total loans and other real estate | |
| 0.94 | % |
| 1.05 | % |
| 0.45 | % | ||||||||||
Delinquent loans (30 days old to nonaccruing) to total loans | |
| 1.28 | % |
| 1.50 | % |
| 0.79 | % | ||||||||||
Net charge-offs to average loans outstanding (quarterly) | | | 0.07 | % |
| 0.07 | % |
| 0.07 | % | ||||||||||
Provision for credit losses to net charge-offs (quarterly) | | | (70) | % |
| (246) | % |
| 155 | % | ||||||||||
Total loans | | | 0.02 | % | | 0.09 | % | | 0.07 | % |
As displayed in Table 8, nonperforming assets at September 30, 2021Net charge-offs during the third quarter of 2022 were $68.7$0.4 million, a $9.0decrease of $1.0 million decrease versuscompared to the level atthird quarter of 2021. The business lending, consumer indirect and consumer mortgage portfolios experienced lower net charge-offs during the endthird quarter of 2020 and a $35.3 million increase2022 as compared to one year earlier. Nonperforming loans decreased $9.0 million from year-end 2020 and increased $35.6 million from September 30, 2020. Nonperforming loans were 0.93% of total loans outstanding at the end of the third quarter 11of 2021, while the consumer direct portfolio experienced higher net charge-offs as compared to the prior year third quarter, and the net charge-offs in the home equity portfolio were consistent with the equivalent prior year period. The total net charge-off ratio (net charge-offs annualized as a percentage of average loans outstanding for the quarter) for the third quarter was 0.02%, seven and five basis points lower than the level at December 31, 2020ratios for the fourth and 50 basis points higher thanthird quarters of 2021, respectively. Net charge-off ratios for the level at September 30, 2020.
With respect tothird quarter of 2022 for the business lending, consumer indirect and consumer mortgage portfolios were below the Company’s lending activities,average for the Company continues to consider customer forbearance requests to assist borrowers that may be experiencing financial hardship due to COVID-19 related challenges, but such requests diminished significantly intrailing eight quarters, while the first nine months of 2021. As of September 30, 2021,net charge-off ratios for the Company had 4 borrowers in forbearance due to COVID-19 related financial hardship, representing $3.9 million in outstanding loan balances, or 0.01% of total loans outstanding. This compares to 74 borrowersconsumer direct and $66.5 million in loans outstanding in forbearance at December 31, 2020 and 216 borrowers and $192.7 million in loans outstanding in forbearance at September 30, 2020. Consistent with industry regulatory guidance, borrowers thathome equity portfolios were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period. Borrowers that were delinquent in their payments to the Bank prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case-by-case basis for troubled debt restructure classification and nonperforming loan status.
50
The increase in nonperforming assets and loans over the prior year was primarily driven byabove the Company’s decision to reclassify loans under extended pandemic-related forbearance to nonperforming status. More specifically, duringaverage for the fourth quarter of 2020, several commercial borrowers, which primarily operate in the hospitality, travel and entertainment industries, requested extended loan repayment forbearance due to the continued pandemic-related financial hardship they were experiencing. Although the Company’s management granted these forbearance requests, it also reclassified the majority of these loan relationships from accruing to nonaccrual status, unless the borrower clearly demonstrated current repayment capacity or sufficient cash reserves to service their pre-forbearance payment obligations.trailing eight quarters.
Other real estate owned (“OREO”) at September 30, 2022 was $0.5 million. This compares to $0.7 million at December 31, 2021 ofand $0.9 million was consistent with December 31, 2020 and decreased $0.3 million fromat September 30, 2020.2021. At September 30, 2021,2022, OREO consisted of fiveeight residential properties with a total value of $0.3$0.5 million. This compares to two residential properties with a total value of $0.1 million and one commercial property with a value of $0.6 million. This compares tomillion at December 31, 2021, and five residential properties with a total value of $0.3 million and one commercial property with a value of $0.6 million at December 31, 2020, and nine residential properties with a total value of $0.6 million and one commercial property with a value of $0.6 million at September 30, 2020.2021.
Approximately 71%15% of the nonperforming loans at September 30, 20212022 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type. The level of nonperforming business loans increaseddecreased significantly from the prior year as the economic environment improved and businesses resumed normal operations. The Company upgraded several large business loans for customers in the hospitality industry that had previously requested extended loan repayment forbearance due to pandemic-related hardship from nonaccrual to accruing status during the continued pandemic-related financial hardship experienced by certainfirst quarter of 2022 and fourth quarter of 2021. These borrowers as described previously. had successfully restored all past due payment to current status, resumed their pre-forbearance payment obligations for a period of at least nine months, and demonstrated sufficient repayment capacity and cash reserves to be reclassified to accruing status.
Approximately 25%77% of nonperforming loans at September 30, 20212022 were comprised of consumer mortgages. Collateral values of residential properties within the Company’s market areageographic footprint have generally remained stable or have increased over the past several years. Additionally, strong economic conditions prior to COVID-19 and the generally positive economic recovery following, including lowerlow unemployment levels, have positively impacted consumers and had resulted in generally more favorable nonperforming consumer mortgage ratios. Economic conditions impacted by COVID-19, including increased unemployment rates, travel restrictions and state government shutdowns of certain business activities, as well as COVID-19 related delays in foreclosure processes have improved overratios throughout the past few quarters, contributing to a modest decrease in nonperforming loans in the consumer mortgage portfolio as compared to one year earlier. The Company will continue to closely monitor the impact that economic conditions associated with the COVID-19 pandemic could have on its level of delinquent loans, nonperforming assets and ultimately credit-related losses and proactively engage with our customers to strive to limit the potential losses.years. The remaining 4%8% of nonperforming loans relate to consumer installment and home equity loans, with home equity nonperforming loan levels being driven by the same factors that were identified for consumer mortgages. The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 73%186% at the end of the third quarter, as compared to 79%110% at year-end 20202021 and 201%73% at September 30, 2020.2021. The decreaseincrease in this ratio between the annual quarterly periods was primarily driven by the increasedecrease in nonperforming business loans as mentioned previously.noted above combined with a $10.9 million increase in the allowance for credit losses.
47
The Company will continue to closely monitor the impact that forecasted weakening economic conditions could have on its level of delinquent loans, nonperforming assets and ultimately credit-related losses and proactively engage with our customers to strive to limit the potential losses.
The Company’s senior management, special asset officers and lenders review all delinquent and nonaccrual loans and OREO regularly in order to identify deteriorating situations, monitor known problem credits and discuss any needed changes to collection efforts, if warranted. Based on the group’s consensus,this analysis, a relationship may be assigned a special assets officer or other senior lending officer to review the loan, meet with the borrowers, assess the collateral and recommend an action plan. This plan could include foreclosure, restructuring loans, issuing demand letters or other actions. The Company’s larger criticized credits are also reviewed on a quarterly basis by senior credit administration management, special assets officers and commercialbusiness lending management to monitor their status and discuss relationship management plans. CommercialBusiness lending management reviews the criticized business loan portfolio on a monthly basis.
Delinquent loans (30 days past due through nonaccruing) as a percent of total loans was 1.28%0.71% at the end of the third quarter, 2229 basis points below the 1.50%1.00% at year-end 20202021 and 4957 basis points abovebelow the 0.79%1.28% at September 30, 2020.2021. The business lending delinquency ratio at the end of the third quarter of 0.17% was four80 basis points below the level of 0.97% at December 31, 20202021 and 128155 basis points abovebelow the level of 1.72% at September 30, 2020,2021, largely attributable to the aforementioned pandemic-related hardship experienced byreclassification of certain loan customers.business loans’ status from nonaccrual to accruing during the fourth quarter of 2021 and first quarter of 2022. The delinquency rates for the consumer mortgage, consumer indirect and consumer direct portfolios all decreased as compared to the levels at December 31, 2020 and September 30, 2020, while the delinquency rateratio for the home equity portfolio decreased as compared to the levellevels at both December 31, 20202021 and increased as compared to the level at September 30, 2020. The Company believes the decreases in2021, while consumer delinquent loan levels was supported by the extraordinary Federalinstallment and State Government financial assistance that has been providedconsumer mortgage increased slightly relative to consumers throughout the pandemic.those same periods.
51
Prediction of future delinquency and credit loss performance is extremely difficult, given the uncertainties centering around the evolutionbecause although, until recently, economic growth had been above average for most of the virus, the efficacy of vaccination programs, the related pace of the full resumption of business activities,2021 and the trajectory ofunemployment rate remains low, there continues to be uncertainty regarding the economic recoveryfallout created by supply chain constraints and inflationary pressures, as government assistance programs are phased out.well as a rising interest rate environment. Due to the Company’s continued focus on maintaining strict underwriting standards and the effective utilization of its collection capabilities, the Company expects that its credit performance will eventually return to levels consistent with its average long-term historical results once public health, government intervention, and economic conditions return to a more normalized state.
Table 9: AllowanceThe Company recorded a $5.1 million provision for Credit Losses Activity
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
(000’s omitted) |
| 2021 |
| 2020 | | 2021 |
| 2020 |
| ||||
Allowance for credit losses at beginning of period | | $ | 51,750 | | $ | 64,437 |
| $ | 60,869 | | $ | 49,911 | |
Impact of adopting ASC 326 | | | 0 | |
| 0 |
| | 0 | |
| 1,357 | |
Charge-offs: | | | | |
| |
| | | |
| | |
Business lending | | | 872 | |
| 827 |
| | 925 | |
| 1,010 | |
Consumer mortgage | | | 127 | |
| 248 |
| | 369 | |
| 668 | |
Consumer indirect | | | 1,365 | |
| 1,281 |
| | 3,514 | |
| 4,791 | |
Consumer direct | | | 309 | |
| 340 |
| | 822 | |
| 1,214 | |
Home equity | | | 30 | |
| 24 |
| | 145 | |
| 178 | |
Total charge-offs | | | 2,703 | |
| 2,720 |
| | 5,775 | |
| 7,861 | |
Recoveries: | | | | |
| |
| | | |
| | |
Business lending | | | 204 | |
| 99 |
| | 586 | |
| 369 | |
Consumer mortgage | | | 3 | |
| 23 |
| | 22 | |
| 67 | |
Consumer indirect | | | 973 | |
| 1,111 |
| | 3,402 | |
| 3,107 | |
Consumer direct | | | 163 | |
| 225 |
| | 607 | |
| 578 | |
Home equity | | | 10 | |
| 5 |
| | 19 | |
| 23 | |
Total recoveries | | | 1,353 | |
| 1,463 |
| | 4,636 | |
| 4,144 | |
| | | | | | | | | | | | | |
Net charge-offs | | | 1,350 | |
| 1,257 |
| | 1,139 | |
| 3,717 | |
Allowance for credit losses on acquired PCD loans | | | 0 | |
| 0 |
| | 0 | |
| 528 | |
Provision for credit losses related to loans | | | (901) | |
| 1,782 |
| | (10,231) | |
| 13,749 | |
Provision for credit losses related to acquisition | | | 0 | |
| 0 |
| | 0 | |
| 3,134 | |
| | | | | | | | | | | | | |
Allowance for credit losses at end of period | | $ | 49,499 | | $ | 64,962 | | $ | 49,499 | | $ | 64,962 | |
| | | | | | | | | | | | | |
Liabilities for off-balance-sheet credit exposures at beginning of period | | $ | 762 | | $ | 1,452 | | $ | 1,489 | | $ | 0 | |
Impact of adopting ASC 326 | | | 0 | | | 0 | | | 0 | | | 1,185 | |
Provision for credit losses related to off-balance-sheet credit exposures from acquisition | | | 0 | |
| 0 |
| | 0 | |
| 67 | |
Provision for credit losses related to off-balance-sheet credit | | | (43) | | | 163 | | | (770) | | | 363 | |
Liabilities for off-balance-sheet credit exposures at end of period | | $ | 719 | | $ | 1,615 |
| $ | 719 | | $ | 1,615 | |
Allowance for credit losses / total loans | | | 0.68 | % |
| 0.87 | % | | 0.68 | % |
| 0.87 | % |
Allowance for credit losses / nonperforming loans | | | 73 | % |
| 201 | % | | 73 | % |
| 201 | % |
Net charge-offs (annualized) to average loans outstanding: | | | | | | | | | | | | | |
Business lending | | | 0.08 | % |
| 0.08 | % | | 0.01 | % |
| 0.03 | % |
Consumer mortgage | | | 0.02 | % |
| 0.04 | % | | 0.02 | % |
| 0.03 | % |
Consumer indirect | | | 0.14 | % |
| 0.07 | % | | 0.01 | % |
| 0.21 | % |
Consumer direct | | | 0.34 | % |
| 0.26 | % | | 0.17 | % |
| 0.47 | % |
Home equity | | | 0.02 | % |
| 0.02 | % | | 0.04 | % |
| 0.05 | % |
Total loans | | | 0.07 | % |
| 0.07 | % | | 0.02 | % |
| 0.07 | % |
52
As displayedcredit losses in Table 9, net charge-offs during the third quarter of 2021 were $1.4 million,2022, including a $0.1 million higher thannet benefit related to off-balance sheet credit exposures. The third quarter of 2020 net charge-offs of $1.3 million. Net charge-offsprovision for the nine months ended September 30, 2021 were $1.1credit losses was $6.0 million $2.6 million below the $3.7 million of net charge-offs during the first nine months of 2020. All portfolios experienced lower levels of net charge-offs for the YTD periods of 2021 as compared to the corresponding period of 2020. The consumer indirect, consumer direct and home equity portfolio experienced slightly higher levels of net charge-offs during the third quarter as compared to the corresponding period of 2020, while the consumer mortgage and business lending portfolios experienced slightly lower levels of net charge-offs as compared to the same period. The annualized net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the third quarter of 2021 was 0.07%, consistent with the third quarter of 2020. Net charge-off ratios for the third quarter of 2021 for the consumer direct, consumer indirect, home equity and consumer mortgage portfolios were below the Company’s average for the trailing eight quarters, while the net charge-off ratio for the business lending portfolio was above the Company’s average for the trailing eight quarters. The September YTD annualized net charge-off ratio of 0.02% for total loans was five basis points lower than it was for the equivalent prior year period.
The Company recorded a $0.9 millionperiod’s net benefit in the provision for credit losses in the third quarter andof $0.9 million, which was reflective of an $11.0 million net benefit in the provision for credit losses for the YTD period. The third quarter provision for credit losses was $2.9 million less than the $2.0 million provision for credit losses recorded in the prior year’s third quarter. Exclusive of the $3.2 million of acquisition-related provision dueeconomic recovery related to the Steuben transaction recorded incessation of most pandemic-related restrictions and included the second quartercontinuation of 2020, the YTD provision for credit losses was $25.1 million lower than the equivalent prior year period. The allowance for credit losses of $49.5 million as of September 30, 2021 decreased $15.5 million from the level one year ago. At the end of the third quarter of 2020, unemployment was high and economic forecasts reflected continued weakness due to the state of the COVID-19 pandemic. Conversely, during the third quarter of 2021, economic forecasts remained comparatively favorable given the state of the post-vaccine economic recovery, which, in combination with elevated real estate and vehicle collateral values, drove down expected life of loan losses, resulting in ana release of reserves in that quarter. The allowance for credit losses of $60.4 million as of September 30, 2022 increased $10.5 million compared to December 31, 2021 and increased $10.9 million compared to September 30, 2021, due in part to increases in non-PPP loans outstanding, including $437.0 million of loans acquired from Elmira in the second quarter of 2022, combined with weaker economic forecasts during the third quarter of 2022. The allowance for credit losses to total loans ratio of 0.68%was 0.71% at September 30, 2021, 192022, an increase of three basis points lower thanfrom the levellevels at both December 31, 2021 and September 30, 2020 and 14 basis points lower than the level at December 31, 2020.
2021. Refer to Note E: Loans of the Consolidated Financial Statements for a discussion of management’s methodology used to estimate the allowance for credit losses.
As of September 30, 2021,2022, the net purchase discount related to the $1.10$1.28 billion of remaining non-PCD acquired loan balances acquired from prior period acquisitions was approximately $8.8$25.6 million, or 0.80%1.99% of that portfolio.
48
Deposits
As shown in Table 10,9, average deposits of $12.50$13.33 billion in the third quarter were $1.57 billion,$830.9 million, or 14.4%6.6%, higher than the third quarter of 2020,2021, primarily due to the larger than anticipated net inflows and retention of funds related to government stimulus and PPP programs.programs in 2021 and the addition of acquired Elmira deposit liabilities during the second quarter of 2022. The Company acquired $522.3 million of deposits in the Elmira acquisition, including $356.5 million of non-time deposits and $165.8 million of time deposits. Total average deposit balances increased $1.29 billion,$502.8 million, or 11.5%3.9%, from the fourth quarter of last year, primarily due to continued net inflowsthe addition of deposits, including those associated with additional stimulus payments and a second round of PPP lending.acquired Elmira deposit liabilities between the periods. Average noninterest checking deposits as a percentage of average total deposits was 30.7%31.4% in the third quarter compared to 30.3%30.7% in the third quarter of 20202021 and 29.9% in the fourth quarter of last year. Non-maturity deposits (noninterest checking, interest checking, savings and money markets) represent 92.3%92.8% of the Company’s average deposit funding base (up from 91.2% one year earlier),during the third quarter of 2022, while time deposits represent 7.7%7.2% of total average third quarter deposits (down from 8.8% one year earlier).deposits. The quarterly average cost of deposits was 0.09%0.11% for the third quarter of 2021,2022, compared to 0.12%0.08% for the fourth quarter of 20202021 and 0.13%0.09% in the third quarter of 2020,2021, reflective of market-driven decreasesincreases in depositthe interest rates betweenpaid on interest checking and money market deposits, while the periods and an increase in the proportion of average noninterest checking deposits.interest rate paid on time deposits decreased. The Company continues to focus on expanding its core deposit relationship base through its proactive marketing efforts, competitive product offerings and high quality customer service.
Average nonpublic fund deposits for the third quarter of 20212022 increased $1.14 billion,$839.6 million, or 11.6%7.5%, versus the fourth quarter of 20202021 and increased $1.24 billion,$983.5 million, or 12.7%8.9%, versus the year-earlier period. Average public fund deposits for the third quarter increased $151.1decreased $336.8 million, or 11.4%20.2%, from the fourth quarter of 20202021 and increased $328.8decreased $152.6 million, or 28.5%10.3%, from the third quarter of 2020.2021. Average public fund deposits as a percentage of total average deposits increaseddecreased from 10.5% in the third quarter of 2020 to 11.9% in the third quarter of 2021 impacted by federal and state stimulus program-related support to municipalities to cover COVID-19 expenditures and investments that cover multi-year timeframes.
53
Table 10:9: Quarterly Average Deposits
| | | | | | | | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| September 30, | | September 30, | | December 31, | | September 30, | ||||||
(000's omitted) | | 2021 | | 2020 | | 2020 | ||||||||||||
(000’s omitted) |
| 2022 |
| 2021 |
| 2021 | ||||||||||||
Noninterest checking deposits | | $ | 3,841,646 | | $ | 3,356,156 | | $ | 3,312,841 | | $ | 4,192,615 | | $ | 3,935,586 |
| $ | 3,841,646 |
Interest checking deposits | |
| 3,147,360 | |
| 2,791,708 | |
| 2,676,279 | | | 3,299,612 | |
| 3,215,815 |
| | 3,147,360 |
Savings deposits | |
| 2,197,592 | |
| 1,916,715 | |
| 1,859,544 | | | 2,460,915 | |
| 2,227,776 |
| | 2,197,592 |
Money market deposits | |
| 2,356,765 | |
| 2,209,455 | |
| 2,122,955 | | | 2,419,029 | |
| 2,510,766 |
| | 2,356,765 |
Time deposits | |
| 960,670 | |
| 935,886 | |
| 962,428 | | | 962,777 | | | 942,205 |
| | 960,670 |
Total deposits | | $ | 12,504,033 | | $ | 11,209,920 | | $ | 10,934,047 | | $ | 13,334,948 | | $ | 12,832,148 |
| $ | 12,504,033 |
| |
| | |
| | |
| | |||||||||
Nonpublic fund deposits | | $ | 11,022,010 | | $ | 9,878,990 | | $ | 9,780,843 | | $ | 12,005,491 | | $ | 11,165,894 |
| $ | 11,022,010 |
Public fund deposits | |
| 1,482,023 | |
| 1,330,930 | |
| 1,153,204 | | | 1,329,457 | | | 1,666,254 |
| | 1,482,023 |
Total deposits | | $ | 12,504,033 | | $ | 11,209,920 | | $ | 10,934,047 | | $ | 13,334,948 | | $ | 12,832,148 |
| $ | 12,504,033 |
Borrowings
Borrowings, excluding securities sold under agreement to repurchase, at the end of the third quarter of 20212022 totaled $6.2$142.5 million. This was $81.1$137.4 million or 92.9%, lowerhigher than borrowings at December 31, 20202021 and $92.5$136.3 million or 93.7%, belowabove the level at the end of the third quarter of 2020.2021. The decrease from the prior year third quarter wasincreases were primarily due to an increase in overnight borrowings of $119.8 million to support the redemptionfunding of $77.3strong loan growth and $17.6 million of trust preferred subordinated debt held by Community Capital Trust IV (“CCT IV”), an unconsolidated subsidiary trust, during the first quarter of 2021, the redemption of $10.4 million of subordinated notes payableFHLB borrowings acquired from the Kinderhook Bank Corp.Elmira acquisition during the fourthsecond quarter of 2020 and a decrease in other FHLB borrowings. The decrease from the fourth quarter of 2020 was primarily related to the aforementioned redemption of the trust preferred subordinated debt held by CCT IV and a decrease in other FHLB borrowings.2022.
Securities sold under agreement to repurchase, also referred to as customer repurchase agreements, represent collateralized municipal and commercial customer accounts that price and operate similar to a deposit instrument. Customer repurchase agreements were $316.8$352.8 million at the end of the third quarter of 2021,2022, an increase of $32.8$28.1 million and $36.0 million from their levels at December 31, 2020 due primarily to the seasonal characteristics of this portfolio,2021 and were $36.0 million above their level at September 30, 2020, impacted by federal and state stimulus program-related support to municipalities to cover COVID-19 expenditures and investments that cover multi-year timeframes.2021, respectively.
49
Shareholders’ Equity and Regulatory Capital
Total shareholders’ equity was $2.07$1.46 billion at the end of the third quarter, down $34.2$639.6 million from the balance at December 31, 2020.2021. The decrease was driven by $125.9$695.7 million of other comprehensive loss, net of tax, and dividends declared of $68.4$70.2 million and common stock repurchased of $16.4 million, partially offset by net income of $146.1$135.6 million, net activity under the Company’s employee stock plan of $9.2$1.6 million, and $4.8$5.5 million recognized from employee stock options earned. The other comprehensive loss, net of tax, was comprised of a $128.1$696.5 million decrease in the after-tax market value adjustment on the available-for-sale investment portfolio asdue to a significant amount of securities being purchased and a meaningful upward movement in market interest rates increased between the periods, partially offset by a positive $2.2$0.8 million adjustment to the funded status of the Company’s retirement plans. Over the past 12 months, total shareholders’ equity decreased $28.7$608.8 million, as a decrease in the market value adjustment on investments, and dividends declared and common stock repurchase activity more than offset net income, the issuance of common stock in association with the employee stock plan and the Company’s benefit plans, and the change in the funded status of the Company’s defined benefit pension and other postretirement plans.
The dividend payout ratio (dividends declared divided by net income) for the first nine months of 2022 was 51.8%, compared to 46.8% for the nine months ended September 30, 2021. Dividends declared for the first nine months of 2022 increased 2.7% compared to the first nine months of 2021, as the Company’s quarterly dividend per share was raised from $0.43 to $0.44 in the third quarter of 2022, while net income decreased 7.2% versus the equivalent year-to-date period due to increases in the provision for credit losses, acquisition-related provision for credit losses and noninterest expenses, including a $4.9 million increase in acquisition-related noninterest expenses, partially offset by increases in net interest income and noninterest revenues. The 2022 dividend increase marked the Company’s 30th consecutive year of increased dividend payouts to common shareholders. Additionally, the number of common shares outstanding decreased 0.4% over the last twelve months, as common stock repurchases outweighed issuance activity in the Company’s employee stock plans.
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Company and the Bank are required to maintain a “capital conservation buffer,” composed entirely of common equity Tier 1 capital, in addition to minimum risk-based capital ratios. The required capital conservation buffer is 2.5% as of September 30, 2022 and December 31, 2021. Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer as of September 30, 2022 and December 31, 2021, the Company and the Bank must maintain:
(i) Common equity Tier 1 capital to total risk-weighted assets (“Common equity tier 1 capital ratio”) of at least 7.0%,
(ii) Tier 1 capital to total risk-weighted assets (“Tier 1 risk-based capital ratio”) of at least 8.5%, and
(iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets (“Total risk-based capital ratio”) of at least 10.5%.
In addition, the Company and Bank must maintain a ratio of ending Tier 1 capital to adjusted quarterly average assets (“Tier 1 leverage ratio”) of at least 5.0% to be considered “well capitalized” under the regulatory framework for prompt corrective action.
As of September 30, 2022 and December 31, 2021, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”. As of September 30, 2022 and December 31, 2021, the regulatory capital ratios for the Company and Bank are presented below.
| | | | | | | | | |
| | September 30, 2022 |
| December 31, 2021 |
| ||||
| | Community Bank | | Community | | Community Bank | | Community |
|
|
| System, Inc. |
| Bank, N.A. |
| System, Inc. |
| Bank, N.A. | |
Tier 1 leverage ratio | | 8.78 | % | 7.03 | % | 9.09 | % | 7.26 | % |
Tier 1 risk-based capital ratio |
| 15.50 | % | 12.44 | % | 18.60 | % | 14.92 | % |
Total risk-based capital ratio |
| 16.19 | % | 13.14 | % | 19.28 | % | 15.62 | % |
Common equity Tier 1 capital ratio |
| 15.50 | % | 12.44 | % | 18.60 | % | 14.92 | % |
5450
The Company’s Tier 1 leverage ratio a primary measure of regulatory capital for which 5% is the requirement to be “well-capitalized”, was 9.22%8.78% at the end of the third quarter, down 9431 basis points from year-end 20202021 and 9944 basis points below its level one year earlier. The decrease in the Tier 1 leverage ratio in comparison to December 31, 20202021 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income, items, decreasing 0.4%increasing 1.2%, primarilyas the impact of net earnings retention outweighed the intangible assets added from the redemption of $75.0 million of junior subordinated debt partially offset by net earnings retention,Elmira acquisition and share repurchases, while average assets, excluding intangibles and the market value adjustment on investments, increased 9.7%4.8%, primarily due to continued inflows of customer deposits as a result of government stimulus programs.strong organic loan growth and the Elmira acquisition. The Tier 1 leverage ratio decreased compared to the prior year’s third quarter as shareholders’ equity, excluding intangibles and other comprehensive income, increased 2.0% primarily due to2.9%, as the impact of earnings retention partially offset by the redemption of $75.0 million of junior subordinated debt,outweighed Elmira acquisition-related intangible assets and share repurchases, while average assets excluding intangibles and the market value adjustment on investments, increased 12.9%8.1% primarily due to government stimulus programcontinued inflows of customer deposits, organic loan growth and PPP lending-related funding inflows.the acquisition of Elmira. The net tangible equity-to-assets ratio (a non-GAAP measure) of 8.59%4.08% decreased 133 basis4.61 percentage points from both December 31, 20202021 and decreased 4.51 percentage points versus September 30, 20202021 (See Table 1110 for Reconciliation of Quarterly GAAP to Non-GAAP Measures). The decrease in the net tangible equity to net tangible assets ratio over the past 12 months(non-GAAP) from one year prior was primarily driven by a $1.47 billion,$644.8 million, or 11.2%51.8%, decrease in tangible equity due to the decline in the after-tax market value adjustment on available-for-sale investment securities and a $41.1 million net increase in intangible assets due primarily to the Elmira acquisition and a $227.5 million, or 1.6%, increase in tangible assets due to the aforementioned government stimulus-related fundingElmira acquisition and net inflows as well asof deposits. The decrease in the net tangible equity to net tangible assets ratio (non-GAAP) from the fourth quarter of 2021 was driven by a $154.1$679.8 million declinedecrease in tangible equity due to the impact of the Elmira acquisition, the purchase of securities in late 2021 and early 2022 and higher market interest rates on the after-tax market value adjustment on the Company’s available-for-sale investment securities, portfolio due to higher market interest rates and changes in the composition of the portfolio.
The dividend payout ratio (dividends declared divided by net income) for the first nine months of 2021 was 46.8%, compared to 55.8% for the nine months ended September 30, 2020. Dividends declared for the first nine months of 2021while tangible assets increased 3.7% compared to the first nine months of 2020, as the Company’s quarterly dividend per share was raised from $0.41 to $0.42 in the third quarter of 2020 and from $0.42 to $0.43 in the third quarter of 2021, while net income increased 23.6% versus the equivalent year-to-date period due in most part to a significantly lower provision for credit losses. The 2021 dividend increase marked the Company’s 29th consecutive year of increased dividend payouts to common shareholders. Additionally, the number of common shares outstanding increased 0.7% over the last twelve months, primarily related to activity in the Company’s employee stock plans.$1.7 million.
Liquidity
Liquidity risk is a measure of the Company’s ability to raise cash when needed at a reasonable cost and minimize any loss. The Company maintains appropriate liquidity levels in both normal operating environmentsconditions as well as stressed environments. The Company must be capable of meeting all obligations to its customers at any time and, therefore, the active management of its liquidity position remains an important management objective. The Bank has appointed the Asset Liability Committee (“ALCO”) to manage liquidity risk using policy guidelines and limits on indicators of potential liquidity risk. The indicators are monitored using a scorecard with three risk level limits. These risk indicators measure core liquidity and funding needs, capital at risk and change in available funding sources. The risk indicators are monitored using such statisticsmetrics as the core basic surplus ratio, unencumbered securities to average assets, free loan collateral to average assets, loans to deposits, deposits to total funding and borrowings to total funding ratios.
Given the uncertain nature of the Company’s customers'customers’ demands, as well as the Company'sCompany’s desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on and off-balance sheet funds available that can be utilized in time of need.when needed. Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity must be supplemented with additional sources such as credit lines from correspondent banks and borrowings from the FHLB and the Federal Reserve Bank of New York (“Federal Reserve”).Reserve. Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements, large certificates of deposit and the brokered CD market. The primary source of non-deposit funds isare FHLB or Federal Reserve overnight advances, of which there were no$119.8 million of outstanding borrowings at September 30, 2021.2022.
The Company’s primary sources of liquidity are its liquid assets, as well as unencumbered loans and securities that can be used to collateralize additional funding. At September 30, 2021,2022, the Bank had $2.32 billion$247.4 million of cash and cash equivalents of which $2.10 billion$30.0 million are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks. The Company also had $1.66$1.76 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels and maintained $248.9had $487.7 million of funding availability at the Federal Reserve Bank’sReserve’s discount window. Additionally, the Company has $2.03$2.57 billion of unencumbered securities that could be pledged at the FHLB or Federal Reserve to obtain additional funding. There iswas $25.0 million available in unsecured lines of credit with other correspondent banks at quarter-end.quarter end.
55
The Company’s primary approach to measuring short-term liquidity is known as the Basic Surplus/Deficit model. It is used to calculate liquidity over two time periods: first, the amount of cash that could be made available within 30 days (calculated as liquid assets less short-term liabilities as a percentage of average assets); and second, a projection of subsequent cash availability over an additional 60 days. As of September 30, 2021,2022, this ratio was 24.9%15.1% for 30-days and 25.1%15.3% for 90-days, excluding the Company'sCompany’s capacity to borrow additional funds from the FHLB and other sources. This is considered to be a sufficient amount of liquidity based on the Company’s internal policy requirement of 7.5%.
51
A sources and uses statement is used by the Company to measure intermediate liquidity risk over the next twelve months. As of September 30, 2021,2022, there is more than enough liquidity available during the next year to cover projected cash outflows. In addition, stress tests on the cash flows are performed in various scenarios ranging from high probability events with a low impact on the liquidity position to low probability events with a high impact on the liquidity position. The results of the stress tests as of September 30, 20212022 indicate the Company has sufficient sources of funds for the next year in all simulated stressed scenarios.
To measure longer-term liquidity, a baseline projection of loan and deposit growth for five years is made to reflect how liquidity levels could change over time. This five-year measure reflects ample liquidity for loan and other asset growth over the next five years.
Though remote, the possibility of a funding crisis exists at all financial institutions. Accordingly, management has addressed this issue by formulating a Liquidity Contingency Plan, which has been reviewed and approved by both the Company’s Board of Directors (the “Board”) and the Company’s ALCO. The plan addresses the actions that the Company would take in response to both a short-term and long-term funding crisis.
A short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly short-term funding operations. Such a crisis would likely be temporary in nature and would not involve a change in credit ratings. A long-term funding crisis would most likely be the result of drastic credit deterioration at the Company. Management believes that both potential circumstances have been fully addressed through detailed action plans and the establishment of trigger points for monitoring such events.events and detailed action plans that would be initiated if those trigger points are reached.
5652
Forward-Looking Statements
This report contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Forward-looking statements often use words such as “anticipate,” “could,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “forecast,” “believe,” or other words of similar meaning. These statements are based on the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. Moreover, the Company’s plans, objectives and intentions are subject to change based on various factors (some of which are beyond the Company’s control). Factors that could cause actual results to differ from those discussed in the forward-looking statements include: (1) the macroeconomic and other challenges and uncertainties related to the COVID-19 pandemic, variants of COVID-19, and related vaccine rollout and efficacy,booster rollouts and efficacies, and government measures taken in response thereto, including the negative impacts and disruptions on public health, the Company’s corporate and consumer customers, the communities the Company serves, and the domestic and global economy, which may have an adverse effect on the Company’s business; (2) current and future economic and market conditions, including the effects of a declinechanges in housing or vehicle prices, higher unemployment rates, labor shortages, supply chain disruption, inability to obtain raw materials and supplies, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth; (3) changes to the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (the “PPP”), including to the rules under which the PPP is administered, with respect to the origination, servicing, or forgiveness of PPP loans, whether now existing or originated in the future, or the terms and conditions of any guaranteed payments due to the Company from the SBA with respect to PPP loans; (4) the effect of, and changes in, monetary and fiscal policies and laws, including future changes in Federal or Stateand state statutory income tax rates and interest rate and other policy actions of the Board of Governors of the Federal Reserve System; (5)(4) the effect of changes in the level of checking or savings account deposits on the Company’s funding costs and net interest margin; (6)(5) future provisions for credit losses on loans and debt securities; (7)(6) changes in nonperforming assets; (8)(7) the effect of a fall in stock market or bond prices on the Company’s fee income businesses, including its employee benefit services, wealth management, and insurance businesses; (9)(8) risks related to credit quality; (10)(9) inflation, interest rate, liquidity, market and monetary fluctuations; (11)(10) the strength of the U.S. economy in general and the strength of the local economies where the Company conducts its business; (12)(11) the timely development of new products and services and customer perception of the overall value thereof (including features, pricing and quality) compared to competing products and services; (13)(12) changes in consumer spending, borrowing and savings habits; (14)(13) technological changes and implementation and financial risks associated with transitioning to new technology-based systems involving large multi-year contracts; (15)(14) the ability of the Company to maintain the security of its financial, accounting, technology, data processing and other operating systems and facilities; (16)(15) effectiveness of the Company’s risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, the Company’s ability to manage its credit or interest rate risk, the sufficiency of its allowance for credit losses and the accuracy of the assumptions or estimates used in preparing the Company’s financial statements and disclosures; (17)(16) failure of third parties to provide various services that are important to the Company’s operations; (18)(17) any acquisitions or mergers that might be considered or consummated by the Company and the costs and factors associated therewith, including differences in the actual financial results of the acquisition or merger compared to expectations and the realization of anticipated cost savings and revenue enhancements; (19)(18) the ability to maintain and increase market share and control expenses; (20)(19) the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of the Company and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, service fees, risk management, securities and other aspects of the financial services industry, specifically the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 or those emanating from COVID-19; (21)industry; (20) changes in the Company’s organization, compensation and benefit plans and in the availability of, and compensation levels for, employees in its geographic markets; (22)(21) the outcome of pending or future litigation, government proceedings and government proceedings;local, state and Federal tax audits; (22) the effects of climate change and natural disasters on the Company’s operations or the operations of its customers; (23) other risk factors outlined in the Company’s filings with the SEC from time to time; and (24) the success of the Company at managing the risks of the foregoing.
The foregoing list of important factors is not all-inclusive. For more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to “Item 1A Riskthe discussion under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K filed with Securities and Exchange Commission (“SEC”) for the year ended December 31, 2020.2021 and the Quarterly Report on Form 10-Q filed with the SEC on May 10, 2022 for the quarter ended March 31, 2022. Any forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.
5753
Reconciliation of GAAP to Non-GAAP Measures
Table 11:10: GAAP to Non-GAAP Reconciliations
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| Nine Months Ended | | Three Months Ended | | Nine Months Ended | | ||||||||||||||||
| | September 30, | | September 30, |
| September 30, |
| September 30, |
| ||||||||||||||||
(000's omitted) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||||||||||||||
(000’s omitted) | | 2022 | | 2021 |
| 2022 |
| 2021 | | ||||||||||||||||
Income statement data | | | | | | | | | | | | | | | | | | | | | | | | | |
Pre-tax, pre-provision net revenue | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (GAAP) | | $ | 45,336 | | $ | 42,809 | | $ | 146,130 | | $ | 118,191 | | $ | 48,691 | | $ | 45,336 | | $ | 135,551 | | $ | 146,130 | |
Income taxes | |
| 12,092 | |
| 10,904 | |
| 38,616 | |
| 29,153 | |
| 13,706 | | | 12,092 | |
| 37,454 | | | 38,616 | |
Income before income taxes | |
| 57,428 | |
| 53,713 | |
| 184,746 | |
| 147,344 | | | 62,397 | | | 57,428 | | | 173,005 | | | 184,746 | |
Provision for credit losses | |
| (944) | |
| 1,945 | |
| (11,001) | |
| 17,313 | | | 5,061 | | | (944) | | | 12,005 | | | (11,001) | |
Pre-tax, pre-provision net revenue (non-GAAP) | |
| 56,484 | |
| 55,658 | |
| 173,745 | |
| 164,657 | | | 67,458 | | | 56,484 | | | 185,010 | | | 173,745 | |
Acquisition expenses | |
| 102 | |
| 796 | |
| 133 | |
| 4,537 | | | 409 | | | 102 | | | 4,668 | | | 133 | |
Acquisition-related contingent consideration adjustment | | | 0 | | | 0 | | | 400 | | | 0 | | ||||||||||||
Unrealized loss (gain) on equity securities | |
| 10 | |
| 12 | |
| (14) | |
| 30 | | | 4 | | | 10 | | | 24 | | | (14) | |
Litigation accrual | | | (100) | | | 2,950 | | | (100) | | | 2,950 | | | 0 | | | (100) | | | 0 | | | (100) | |
Adjusted pre-tax, pre-provision net revenue (non-GAAP) | | $ | 56,496 | | $ | 59,416 | | $ | 173,764 | | $ | 172,174 | | $ | 67,871 | | $ | 56,496 | | $ | 190,102 | | $ | 173,764 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Pre-tax, pre-provision net revenue per share | |
| | |
| | |
|
| |
|
| | | | | | | | | | | | | |
Diluted earnings per share (GAAP) | | $ | 0.83 | | $ | 0.79 | | $ | 2.68 | | $ | 2.22 | | $ | 0.90 | | $ | 0.83 | | $ | 2.49 | | $ | 2.68 | |
Income taxes | |
| 0.22 | |
| 0.20 | |
| 0.71 | |
| 0.55 | | | 0.25 | | | 0.22 | | | 0.69 | | | 0.71 | |
Income before income taxes | |
| 1.05 | |
| 0.99 | |
| 3.39 | |
| 2.77 | | | 1.15 | | | 1.05 | | | 3.18 | | | 3.39 | |
Provision for credit losses | |
| (0.01) | |
| 0.04 | |
| (0.20) | |
| 0.32 | | | 0.10 | | | (0.01) | | | 0.22 | | | (0.20) | |
Pre-tax, pre-provision net revenue per share (non-GAAP) | |
| 1.04 | |
| 1.03 | |
| 3.19 | |
| 3.09 | | | 1.25 | | | 1.04 | | | 3.40 | | | 3.19 | |
Acquisition expenses | |
| 0.00 | |
| 0.02 | |
| 0.00 | |
| 0.09 | | | 0.00 | | | 0.00 | | | 0.08 | | | 0.00 | |
Acquisition-related contingent consideration adjustment | | | 0.00 | | | 0.00 | | | 0.01 | | | 0.00 | | ||||||||||||
Unrealized loss (gain) on equity securities | |
| 0.00 | |
| 0.00 | |
| 0.00 | |
| 0.00 | | | 0.00 | | | 0.00 | | | 0.00 | | | 0.00 | |
Litigation accrual | | | 0.00 | | | 0.05 | | | 0.00 | | | 0.05 | | | 0.00 | | | 0.00 | | | 0.00 | | | 0.00 | |
Adjusted pre-tax, pre-provision net revenue per share (non-GAAP) | | $ | 1.04 | | $ | 1.10 | | $ | 3.19 | | $ | 3.23 | | $ | 1.25 | | $ | 1.04 | | $ | 3.49 | | $ | 3.19 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | |
| | |
| | |
|
| |
|
| | | | | | | | | | | | | |
Net income (GAAP) | | $ | 45,336 | | $ | 42,809 | | $ | 146,130 | | $ | 118,191 | | $ | 48,691 | | $ | 45,336 | | $ | 135,551 | | $ | 146,130 | |
Acquisition expenses | |
| 102 | |
| 796 | |
| 133 | |
| 4,537 | | | 409 | | | 102 | | | 4,668 | | | 133 | |
Tax effect of acquisition expenses | |
| (21) | |
| (162) | |
| (27) | |
| (915) | | | (90) | | | (21) | | | (1,009) | | | (27) | |
Subtotal (non-GAAP) | | | 49,010 | | | 45,417 | | | 139,210 | | | 146,236 | | ||||||||||||
Acquisition-related contingent consideration adjustment | | | 0 | | | 0 | | | 400 | | | 0 | | ||||||||||||
Tax effect of acquisition-related contingent consideration adjustment | | | 0 | | | 0 | | | (86) | | | 0 | | ||||||||||||
Subtotal (non-GAAP) | |
| 45,417 | |
| 43,443 | |
| 146,236 | |
| 121,813 | | | 49,010 | | | 45,417 | | | 139,524 | | | 146,236 | |
Acquisition-related provision for credit losses | |
| 0 | |
| 0 | |
| 0 | |
| 3,201 | | | 0 | | | 0 | | | 3,927 | | | 0 | |
Tax effect of acquisition-related provision for credit losses | |
| 0 | |
| 0 | |
| 0 | |
| (649) | | | 0 | | | 0 | | | (848) | | | 0 | |
Subtotal (non-GAAP) | | | 45,417 | | | 43,443 | | | 146,236 | | | 124,365 | | | 49,010 | | | 45,417 | | | 142,603 | | | 146,236 | |
Unrealized loss (gain) on equity securities | | | 10 | | | 12 | | | (14) | | | 30 | | | 4 | | | 10 | | | 24 | | | (14) | |
Tax effect of unrealized loss (gain) on equity securities | | | (2) | | | (2) | | | 2 | | | (6) | | | (1) | | | (2) | | | (5) | | | 2 | |
Subtotal (non-GAAP) | | | 45,425 | | | 43,453 | | | 146,224 | | | 124,389 | | | 49,013 | | | 45,425 | | | 142,622 | | | 146,224 | |
Litigation accrual | | | (100) | | | 2,950 | | | (100) | | | 2,950 | | | 0 | | | (100) | | | 0 | | | (100) | |
Tax effect of litigation accrual | | | 21 | | | (599) | | | 21 | | | (599) | | | 0 | | | 21 | | | 0 | | | 21 | |
Operating net income (non-GAAP) | |
| 45,346 | |
| 45,804 | |
| 146,145 | |
| 126,740 | | | 49,013 | | | 45,346 | | | 142,622 | | | 146,145 | |
Amortization of intangibles | |
| 3,703 | |
| 3,581 | |
| 10,300 | |
| 10,772 | | | 3,837 | | | 3,703 | | | 11,420 | | | 10,300 | |
Tax effect of amortization of intangibles | |
| (780) | |
| (727) | |
| (2,155) | |
| (2,130) | | | (843) | | | (780) | | | (2,472) | | | (2,155) | |
Subtotal (non-GAAP) | |
| 48,269 | |
| 48,658 | |
| 154,290 | |
| 135,382 | | | 52,007 | | | 48,269 | | | 151,570 | | | 154,290 | |
Acquired non-impaired loan accretion | |
| (906) | |
| (1,326) | |
| (3,177) | |
| (4,156) | |||||||||||||
Tax effect of acquired non-impaired loan accretion | |
| 191 | |
| 269 | |
| 666 | |
| 821 | |||||||||||||
Acquired non-PCD loan accretion | | | (1,397) | | | (906) | | | (3,154) | | | (3,177) | | ||||||||||||
Tax effect of acquired non-PCD loan accretion | | | 307 | | | 191 | | | 685 | | | 666 | | ||||||||||||
Adjusted net income (non-GAAP) | | $ | 47,554 | | $ | 47,601 | | $ | 151,779 | | $ | 132,047 | | $ | 50,917 | | $ | 47,554 | | $ | 149,101 | | $ | 151,779 | |
5854
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Nine Months Ended | | ||||||||||||||||
| | September 30, | | September 30, |
| | September 30, |
| September 30, | | ||||||||||||||||
(000's omitted) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| | 2022 |
| 2021 | | 2022 | | 2021 | | ||||||||
Return on average assets | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted net income (non-GAAP) | | $ | 47,554 |
| $ | 47,601 | | $ | 151,779 | | $ | 132,047 | | | $ | 50,917 | | $ | 47,554 | | $ | 149,101 | | $ | 151,779 | |
Average total assets | |
| 15,027,478 |
| | 13,543,460 | |
| 14,638,269 | |
| 12,564,600 | | | | 15,553,296 | | | 15,027,478 | | | 15,533,915 | | | 14,638,269 | |
Adjusted return on average assets (non-GAAP) | |
| 1.26 | % | | 1.40 | % |
| 1.39 | % |
| 1.40 | % | | | 1.30 | % | | 1.26 | % | | 1.28 | % | | 1.39 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Return on average equity | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted net income (non-GAAP) | | $ | 47,554 |
| $ | 47,601 | | $ | 151,779 | | $ | 132,047 | | | $ | 50,917 | | $ | 47,554 | | $ | 149,101 | | $ | 151,779 | |
Average total equity | |
| 2,104,164 |
| | 2,095,211 | |
| 2,057,700 | |
| 2,002,797 | | | | 1,680,525 | | | 2,104,164 | | | 1,820,273 | | | 2,057,700 | |
Adjusted return on average equity (non-GAAP) | |
| 8.97 | % | | 9.04 | % |
| 9.86 | % |
| 8.81 | % | | | 12.02 | % | | 8.97 | % | | 10.95 | % | | 9.86 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per common share | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share (GAAP) | | $ | 0.83 | | $ | 0.79 | | $ | 2.68 | | $ | 2.22 | | | $ | 0.90 | | $ | 0.83 | | $ | 2.49 | | $ | 2.68 | |
Acquisition expenses | |
| 0.00 | |
| 0.02 | |
| 0.00 | |
| 0.09 | | |
| 0.00 | |
| 0.00 | | | 0.08 | | | 0.00 | |
Tax effect of acquisition expenses | |
| 0.00 | |
| 0.00 | |
| 0.00 | |
| (0.02) | | |
| 0.00 | |
| 0.00 | | | (0.02) | | | 0.00 | |
Subtotal (non-GAAP) | |
| 0.83 | |
| 0.81 | |
| 2.68 | |
| 2.29 | | |
| 0.90 | |
| 0.83 | | | 2.55 | | | 2.68 | |
Acquisition-related contingent consideration adjustment | |
| 0.00 | |
| 0.00 | | | 0.01 | | | 0.00 | | |||||||||||||
Tax effect of acquisition-related contingent consideration adjustment | |
| 0.00 | |
| 0.00 | | | 0.00 | | | 0.00 | | |||||||||||||
Subtotal (non-GAAP) | |
| 0.90 | |
| 0.83 | | | 2.56 | | | 2.68 | | |||||||||||||
Acquisition-related provision for credit losses | |
| 0.00 | |
| 0.00 | |
| 0.00 | |
| 0.06 | | |
| 0.00 | |
| 0.00 | | | 0.07 | | | 0.00 | |
Tax effect of acquisition-related provision for credit losses | |
| 0.00 | |
| 0.00 | |
| 0.00 | |
| (0.01) | | |
| 0.00 | |
| 0.00 | | | (0.01) | | | 0.00 | |
Subtotal (non-GAAP) | |
| 0.83 | |
| 0.81 | |
| 2.68 | |
| 2.34 | | |
| 0.90 | |
| 0.83 | | | 2.62 | | | 2.68 | |
Unrealized loss (gain) on equity securities | |
| 0.00 | |
| 0.00 | |
| 0.00 | |
| 0.00 | | |
| 0.00 | |
| 0.00 | | | 0.00 | | | 0.00 | |
Tax effect of unrealized loss (gain) on equity securities | |
| 0.00 | |
| 0.00 | |
| 0.00 | |
| 0.00 | | |
| 0.00 | |
| 0.00 | | | 0.00 | | | 0.00 | |
Subtotal (non-GAAP) | | | 0.83 | | | 0.81 | | | 2.68 | | | 2.34 | | | | 0.90 | | | 0.83 | | | 2.62 | | | 2.68 | |
Litigation accrual | | | 0.00 | | | 0.05 | | | 0.00 | | | 0.05 | | | | 0.00 | | | 0.00 | | | 0.00 | | | 0.00 | |
Tax effect of litigation accrual | | | 0.00 | | | (0.01) | | | 0.00 | | | (0.01) | | | | 0.00 | | | 0.00 | | | 0.00 | | | 0.00 | |
Operating earnings per share (non-GAAP) | |
| 0.83 | |
| 0.85 | |
| 2.68 | |
| 2.38 | | | | 0.90 | | | 0.83 | | | 2.62 | | | 2.68 | |
Amortization of intangibles | |
| 0.07 | |
| 0.07 | |
| 0.19 | |
| 0.21 | | |
| 0.07 | |
| 0.07 | | | 0.21 | | | 0.19 | |
Tax effect of amortization of intangibles | |
| (0.01) | |
| (0.01) | |
| (0.04) | |
| (0.03) | | |
| (0.02) | |
| (0.01) | | | (0.05) | | | (0.04) | |
Subtotal (non-GAAP) | |
| 0.89 | |
| 0.91 | |
| 2.83 | |
| 2.56 | | | | 0.95 | | | 0.89 | | | 2.78 | | | 2.83 | |
Acquired non-impaired loan accretion | |
| (0.02) | |
| (0.03) | |
| (0.06) | |
| (0.09) | | |||||||||||||
Tax effect of acquired non-impaired loan accretion | |
| 0.00 | |
| 0.00 | |
| 0.01 | |
| 0.01 | | |||||||||||||
Acquired non-PCD loan accretion | | | (0.02) | | | (0.02) | | | (0.06) | | | (0.06) | | |||||||||||||
Tax effect of acquired non-PCD loan accretion | | | 0.01 | | | 0.00 | | | 0.02 | | | 0.01 | | |||||||||||||
Diluted adjusted net earnings per share (non-GAAP) | | $ | 0.87 | | $ | 0.88 | | $ | 2.78 | | $ | 2.48 | | | $ | 0.94 | | $ | 0.87 | | $ | 2.74 | | $ | 2.78 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest operating expenses | | | | | | | | | | | | | | |
| | |
| | | | | | | | |
Noninterest expenses (GAAP) | | $ | 100,436 | | $ | 96,966 | | $ | 287,225 | | $ | 281,532 | | | $ | 108,185 | | $ | 100,436 | | $ | 318,416 | | $ | 287,225 | |
Amortization of intangibles | |
| (3,703) | |
| (3,581) | |
| (10,300) | |
| (10,772) | | |
| (3,837) | |
| (3,703) | | | (11,420) | | | (10,300) | |
Acquisition expenses | |
| (102) | |
| (796) | |
| (133) | |
| (4,537) | | | | (409) | | | (102) | | | (4,668) | | | (133) | |
Acquisition-related contingent consideration adjustment | |
| 0 | |
| 0 | | | (400) | | | 0 | | |||||||||||||
Litigation accrual | | | 100 | | | (2,950) | | | 100 | | | (2,950) | | |
| 0 | |
| 100 | | | 0 | | | 100 | |
Total adjusted noninterest expenses (non-GAAP) | | $ | 96,731 | | $ | 89,639 | | $ | 276,892 | | $ | 263,273 | | | $ | 103,939 | | $ | 96,731 | | $ | 301,928 | | $ | 276,892 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Efficiency ratio | |
| | |
| | |
| | |
| | | |
| | |
| | | | | | | | |
Adjusted noninterest expenses (non-GAAP) - numerator | | $ | 96,731 | | $ | 89,639 | | $ | 276,892 | | $ | 263,273 | | | $ | 103,939 | | $ | 96,731 | | $ | 301,928 | | $ | 276,892 | |
Fully tax-equivalent net interest income | |
| 93,416 | |
| 93,928 | |
| 281,242 | |
| 277,980 | | | | 111,512 | | | 93,416 | | | 311,363 | | | 281,242 | |
Noninterest revenues | |
| 64,309 | |
| 59,659 | |
| 182,300 | |
| 171,219 | | | | 65,249 | | | 64,309 | | | 195,019 | | | 182,300 | |
Acquired non-impaired loan accretion | |
| (906) | |
| (1,326) | |
| (3,177) | |
| (4,156) | | |||||||||||||
Acquired non-PCD loan accretion | | | (1,397) | | | (906) | | | (3,154) | | | (3,177) | | |||||||||||||
Unrealized loss (gain) on equity securities | |
| 10 | |
| 12 | |
| (14) | |
| 30 | | | | 4 | | | 10 | | | 24 | | | (14) | |
Operating revenues (non-GAAP) - denominator | | $ | 156,829 | | $ | 152,273 | | $ | 460,351 | | $ | 445,073 | | | $ | 175,368 | | $ | 156,829 | | $ | 503,252 | | $ | 460,351 | |
Efficiency ratio (non-GAAP) | |
| 61.7 | % |
| 58.9 | % |
| 60.1 | % |
| 59.2 | % | | | 59.3 | % | | 61.7 | % | | 60.0 | % | | 60.1 | % |
5955
| | | | | | | | | | | | | | | | | | | | |
| | September 30, |
| December 31, |
| September 30, | | | September 30, |
| December 31, |
| September 30, | | ||||||
(000's omitted) | | 2021 | | 2020 | | 2020 | | |||||||||||||
Balance sheet data – at end of quarter | | | | | | | | | |
| ||||||||||
(000’s omitted) | | 2022 | | 2021 | | 2021 |
| |||||||||||||
Balance sheet data - at end of quarter | | | | | | | | | |
| ||||||||||
Total assets | | | | | | | | | |
| | | | | | | | | |
|
Total assets (GAAP) | | $ | 15,331,098 | | $ | 13,931,094 | | $ | 13,845,325 | | | $ | 15,594,547 | | $ | 15,552,657 | | $ | 15,331,098 | |
Intangible assets | |
| (868,104) | |
| (846,648) | |
| (850,214) | | |
| (909,224) | |
| (864,335) | |
| (868,104) | |
Deferred taxes on intangible assets | |
| 43,768 | |
| 44,370 | |
| 44,733 | | |
| 48,893 | |
| 44,160 | |
| 43,768 | |
Total tangible assets (non-GAAP) | | $ | 14,506,762 | | $ | 13,128,816 | | $ | 13,039,844 | | | $ | 14,734,216 | | $ | 14,732,482 | | $ | 14,506,762 | |
| | | | | | | | | | | | | | | | | | | | |
Total common equity | |
| | |
| | |
| | | |
| | |
| | |
| | |
Shareholders' Equity (GAAP) | | $ | 2,069,934 | | $ | 2,104,107 | | $ | 2,098,660 | | ||||||||||
Shareholders’ Equity (GAAP) | | $ | 1,461,163 | | $ | 2,100,807 | | $ | 2,069,934 | | ||||||||||
Intangible assets | |
| (868,104) | |
| (846,648) | |
| (850,214) | | |
| (909,224) | |
| (864,335) | |
| (868,104) | |
Deferred taxes on intangible assets | |
| 43,768 | |
| 44,370 | |
| 44,733 | | |
| 48,893 | |
| 44,160 | |
| 43,768 | |
Total tangible common equity (non-GAAP) | | $ | 1,245,598 | | $ | 1,301,829 | | $ | 1,293,179 | | | $ | 600,832 | | $ | 1,280,632 | | $ | 1,245,598 | |
| | | | | | | | | | | | | | | | | | | | |
Net tangible equity-to-assets ratio at quarter end | |
| | |
| | |
| | | |
| | |
| | |
| | |
Total tangible common equity (non-GAAP) - numerator | | $ | 1,245,598 | | $ | 1,301,829 | | $ | 1,293,179 | | | $ | 600,832 | | $ | 1,280,632 | | $ | 1,245,598 | |
Total tangible assets (non-GAAP) - denominator | | $ | 14,506,762 | | $ | 13,128,816 | | $ | 13,039,844 | | | $ | 14,734,216 | | $ | 14,732,482 | | $ | 14,506,762 | |
Net tangible equity-to-assets ratio at quarter end (non-GAAP) | |
| 8.59 | % |
| 9.92 | % |
| 9.92 | % | |
| 4.08 | % |
| 8.69 | % |
| 8.59 | % |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates, prices or credit risk. Credit risk associated with the Company’s loan portfolio has been previously discussed in the asset quality section of the MD&A. Management believes that the tax risk of the Company’s municipal investments associated with potential future changes in statutory, judicial and regulatory actions is minimal. Treasury, agency, mortgage-backed and CMOcollateralized mortgage obligation securities issued by government agencies comprise 90.6%90.8% of the total portfolio and are currently rated AAA by Moody’s Investor Services and AA+ by Standard & Poor’s. MunicipalsObligations of state and political subdivisions account for 9.2%9.1% of the total portfolio, of which, 94.2%96.4% carry a minimum rating of A-. The remaining 0.2%0.1% of the portfolio is comprised of other investment grade securities. The Company does not have material foreign currency exchange rate risk exposure. Therefore, almost all the market risk in the investment portfolio is related to interest rates.
The ongoing monitoring and management of both interest rate risk and liquidity inover the short and long term time horizons is an important component of the Company'sCompany’s asset/liability management process, which is governed by limitsguidelines established in the policies reviewed and approved annually by the Company’s Board. The Board delegates responsibility for carrying out the policies to the ALCO, which meets each month. The committee is made up of the Company'sCompany’s senior management as well as regional and line-of-business managers who oversee specific earning asset classes and various funding sources. As the Company does not believe it is possible to reliably predict future interest rate movements, it has maintained an appropriate process and set of measurement tools, which enables it to identify and quantify sources of interest rate risk in varying rate environments. The primary tool used by the Company in managing interest rate risk is income simulation. This begins with the development of a base case scenario, which projects net interest income (“NII”) over the next twelve month period. The base case scenario NII may increase or decrease significantly from quarter to quarter reflective of changes during the most recent quarter in the Company’s: (i) earning assets and liabilities balances, (ii) composition of earning assets and liabilities, (iii) earning asset yields, (iv) cost of funds and (v) model projections, as well as current market interest rates, including the slope of the yield curve and projected changes in the slope of the yield curve over the twelve month period. Due to increases in market interest rates on new loans and a significant increase in the Company’s loan balances during the third quarter of 2022, the base case NII projection increased significantly between the second quarter income simulation and the third quarter income simulation.
While a wide variety of strategic balance sheet and treasury yield curve scenarios are tested on an ongoing basis, the following reflects the Company'sCompany’s estimated net interest income (“NII”)NII sensitivity as compared to the base case scenario over the subsequent twelve months based on:
● |
● | The model assumes the Company’s average deposit balances will increase approximately |
56
● | The model assumes the Company’s average earning asset balances will increase approximately |
60
● | Cash flows on earning assets are based on contractual maturity, optionality, and amortization schedules along with applicable prepayments derived from internal historical data and external sources. |
● |
● | In the rising rates scenarios, the prime rate and federal funds rates are assumed to move up by the amounts listed below over a 12-month period while moving the long end of the treasury curve to spreads over the three month treasury that are more consistent with historical norms based on the last three years (normalized yield curve). Deposit rates are assumed to move in a manner that reflects the historical relationship between deposit rate movement and changes in the federal funds rate. In the -100 basis point model, the prime and federal funds |
Net Interest Income Sensitivity Model
| | | | | | | |
| | Calculated annualized increase (decrease) |
| Calculated annualized increase |
| Calculated annualized increase | |
| | in projected net interest |
| (decrease) in projected net interest | | (decrease) in projected net interest | |
| | income at September 30, 2021 |
| income at September 30, 2022 | | income at September 30, 2022 | |
Interest rate scenario |
| (000’s omitted) |
| (000’s omitted) | | (%) | |
+300 basis points | | ($8,243) | | (1.8%) | |||
+200 basis points | | $ | 15,592 | | ($5,702) | | (1.2%) |
+100 basis points | | $ | 7,174 | | ($3,217) | | (0.7%) |
-100 basis points | | $ | (4,809) | | ($763) | | (0.2%) |
-200 basis points | | ($2,455) | | (0.5%) | |||
-300 basis points | | ($9,804) | | (2.1%) |
Projected NII over the 12-month forecast period increasesdecreases in the rising rate environments largely due to deposits and overnight borrowings repricing higher rates earned on significant levels of cash equivalents, investment purchases, and assumed higher rates on new loans, including variable and adjustable rate loans. These increasesin year 1, which are only partially offset by anticipated increases in deposit and borrowing costs.loans repricing higher. Over the longer time period, the growth in NII continuesbegins to improve in bothall rising rate environments as the impact from lower yielding assets maturematuring and arebeing replaced at higher rates.rates is significantly more material than the increase in funding costs.
In the -100 basis points scenario,falling rate scenarios, the Company shows interest rate risk exposure to lower short term rates.rates on all terms. During the first twelve months, net interest income declines largely due to lower assumed rates on investment purchasesloan originations, and new loans, includingcertain adjustable and variable rate assets.loans. Modestly lower funding costs associated with deposits and borrowings only partially offset the decrease in interest income.
The analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions: the nature and timing of interest rate levels (including yield curve shape), prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and other factors. While the assumptions are developed based upon a reasonable outlook for national and local economic and local market conditions, the Company cannot make any assurances as to the predictive efficacy of these assumptions, including how customer preferences or competitor influences might change. Furthermore, the sensitivity analysis does not reflect actions that the ALCO might take in responding to or anticipating changes in interest rates.rates and other developments.
6157
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as defined in Rule 13a -15(e) and 15d – 15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”), designed to ensure information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is: (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on management’s evaluation of the effectiveness of the Company’s disclosure controls and procedures, with the participation of the Chief Executive Officer and the Chief Financial Officer, it has concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, these disclosure controls and procedures were effective as of September 30, 2021.2022.
Changes in Internal Control over Financial Reporting
The Company regularly assesses the adequacy of its internal controls over financial reporting. There have been no changes in the Company’s internal controls over financial reporting in connection with the evaluation referenced in the paragraph above that occurred during the Company’s quarter ended September 30, 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II.Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of September 30, 2021,2022, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. The range of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is believed to be between $0 and $1 million in the aggregate. This estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. Information on current legal proceedings is set forth in Note J to the consolidated financial statements included under Part I, Item 1. Although the Company does not believe that the outcome of pending litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
Item 1A. Risk Factors
There has not been any material change in the risk factors disclosure from that contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20202021, as filed with the SEC on March 1, 2021.2022, and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, as filed with the SEC on May 10, 2022.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
a) | Not applicable. |
b) | Not applicable. |
c) | At its December |
6258
The following table presents stock purchases made during the third quarter of 2021:2022:
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | | | |
| | Total | | | | Total Number of Shares | | Maximum Number of | | Total | | | | Total Number of Shares | | Maximum Number of | ||
| | Number of | | Average | | Purchased as Part of | | Shares That May Yet Be | | Number of | | Average | | Purchased as Part of | | Shares That May Yet Be | ||
| | Shares | | Price Paid | | Publicly Announced | | Purchased Under the Plans | | Shares | | Price Paid | | Publicly Announced | | Purchased Under the Plans | ||
Period |
| Purchased |
| Per Share |
| Plans or Programs |
| or Programs |
| Purchased |
| Per Share |
| Plans or Programs |
| or Programs | ||
July 1-31, 2021 | | 830 | | $ | 73.44 | | 0 | | 2,680,000 | |||||||||
August 1-31, 2021 | | 0 | | | 0.00 | | 0 | | 2,680,000 | |||||||||
September 1-30, 2021 | | 0 | | | 0.00 | | 0 | | 2,680,000 | |||||||||
July 1-31, 2022 | | 903 | | $ | 63.64 | | 0 | | 2,447,000 | |||||||||
August 1-31, 2022 | | 0 | | | 0.00 | | 0 | | 2,447,000 | |||||||||
September 1-30, 2022 | | 0 | | | 0.00 | | 0 | | 2,447,000 | |||||||||
Total (1) |
| 830 | | $ | 73.44 |
|
|
|
|
| 903 | | $ | 63.64 |
| |
| |
(1) | Included in the common shares repurchased were |
Item 3.Defaults Upon Senior Securities
Not applicable.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
Not applicable.
6359
Item 6.Exhibits
| | |
Exhibit No. |
| Description |
| | |
10.1 | | |
10.2 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
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.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
(1) | Denotes management contract or compensatory plan or arrangement. |
(2) | Filed herewith. |
Furnished herewith. |
6460
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Community Bank System, Inc.
|
|
Date: November 9, | /s/ Mark E. Tryniski |
| Mark E. Tryniski, President and Chief Executive Officer |
|
|
|
|
Date: November 9, | /s/ Joseph E. Sutaris |
| Joseph E. Sutaris, Treasurer and Chief |
| Financial Officer |
6561