COMMUNITY FINANCIAL SYSTEM INC

Previous wording

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 Financial System, Inc. (the “Company” or “CFSI”) as of and for the three and six months ended June 30, 2024 and 2023, although in some circumstances the first quarter of 2024 is 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 40. 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 2024, “last year” and equivalent terms refer to calendar year 2023, “second quarter” refers to the three months ended June 30, 2024, “YTD” refers to the six months ended June 30, 2024, and earnings per share (“EPS”) figures refer to diluted EPS.

Current wording

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 Financial System, Inc. (the “Company” or “CFSI”) as of and for the three and nine months ended September 30, 2024 and 2023, although in some circumstances the second and first quarters of 2024 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 41. 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 2024, “last year” and equivalent terms refer to calendar year 2023, “third quarter” refers to the three months ended September 30, 2024, “YTD” refers to the nine months ended September 30, 2024, and earnings per share (“EPS”) figures refer to diluted EPS.

Previous wording

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 considers its critical accounting estimates those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company’s financial condition or results of operations. 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; and the carrying value of goodwill and other intangible assets. A summary of the critical accounting policies and estimates used by management is disclosed in the MD&A on pages 32-34 of the most recent Form 10-K (fiscal year ended December 31, 2023) filed with the Securities and Exchange Commission (“SEC”) on February 29, 2024, and there have been no material changes other than those described below regarding the Allowance for Credit Losses. A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” on page 11 of this Form 10-Q.

Current wording

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 considers its critical accounting estimates those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company’s financial condition or results of operations. 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; and the carrying value of goodwill and other intangible assets. A summary of the critical accounting policies and estimates used by management is disclosed in the MD&A on pages 32-34 of the most recent Form 10-K (fiscal year ended December 31, 2023) filed with the Securities and Exchange Commission (“SEC”) on February 29, 2024, and there have been no material changes other than those described below regarding the Allowance for Credit Losses. A summary of new accounting policies used by management is disclosed in Note C, “Accounting Policies” beginning on page 11 of this Form 10-Q.

Previous wording

The allowance for credit losses (“ACL”) represents management’s judgment of an estimated amount of lifetime losses expected to be incurred on outstanding loans at the balance sheet date. This is estimated using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. The determination of the appropriateness of the ACL is complex and applies significant and highly subjective estimates. The ACL is measured on a collective (pooled) basis for loan segments that share similar risk characteristics, including collateral type, credit ratings/scores, size, duration, interest rate structure, origination vintage and payment structure. The Company utilizes three methods for calculating the ACL: cumulative loss, vintage loss and line loss. Historical credit loss experience provides the basis for the estimation of expected future credit losses in all three methodologies. Qualitative adjustments are made for differences in loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquisition status, current levels of delinquencies, net charge-offs and risk ratings, as well as actual and forecasted macroeconomic variables. Macroeconomic data includes unemployment rates, changes in collateral values such as home prices, commercial real estate prices including office property-specific price forecasts, office property-specific vacancy rates, automobile prices, gross domestic product, median household income net of inflation and other relevant factors. Management utilizes judgment in determining and applying the qualitative factors and weighting the economic scenarios used, which include baseline, upside and downside forecasts. During the first quarter of 2024, the Company updated the ACL model to add 2023 results into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures. During the second quarter of 2024, the Company updated the ACL model to incorporate office property-specific price forecasts and office property-specific vacancy forecasts to provide greater precision to the model.

Current wording

The allowance for credit losses (“ACL”) represents management’s judgment of an estimated amount of lifetime losses expected to be incurred on outstanding loans at the balance sheet date. This is estimated using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. The determination of the appropriateness of the ACL is complex and applies significant and highly subjective estimates. The ACL is measured on a collective (pooled) basis for loan segments that share similar risk characteristics, including collateral type, credit ratings/scores, size, duration, interest rate structure, origination vintage and payment structure. The Company utilizes three methods for calculating the ACL: cumulative loss, vintage loss and line loss. Historical credit loss experience provides the basis for the estimation of expected future credit losses in all three methodologies. Qualitative adjustments are made for differences in loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquisition status, current levels of delinquencies, net charge-offs and risk ratings, as well as actual and forecasted macroeconomic variables. Macroeconomic data includes unemployment rates, changes in collateral values such as home prices, commercial real estate prices including office property-specific price forecasts, office property-specific vacancy rates, automobile prices, gross domestic product, median household income net of inflation and other relevant factors. Management utilizes judgment in determining and applying the qualitative factors and weighting the economic scenarios used, which include baseline, upside and downside forecasts. During the first quarter of 2024, the Company updated the ACL model to add 2023 results into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures. During the second quarter of 2024, the Company updated the ACL model to incorporate office property-specific price forecasts and office property-specific vacancy forecasts to provide greater precision to the model. During the third quarter of 2024, the Company applied an additional qualitative overlay to the factor for volume and size of business lending loans and risk rating trends to capture future loss expectations in that portfolio. The combination of these factors, loan balance increases, and other qualitative factors drove a $4.7 million net increase in the ACL during the third quarter.

Previous wording

One of the most significant estimates and judgments influencing the results of the ACL calculation is the macroeconomic forecasts. Changes in these economic forecasts could significantly affect the estimated expected credit losses and lead to materially different amounts from one period to the next. To illustrate the sensitivity of the ACL calculation to these economic forecasts, management performed a hypothetical sensitivity analysis using a weighting of 100% to the downside forecast, rather than the existing weighting of baseline, upside and downside of 40%, 30% and 30%, respectively. The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at June 30, 2024 were 4.6% and 1.8%, respectively, compared to 4.5% and 1.9% at March 31, 2024, respectively. The hypothetical downside forecast includes assumptions of a weakening economy represented by a cumulative decline in real GDP of 2.6%, enhanced geopolitical tensions, elevated inflation, a peak unemployment rate of 8.0% and an average unemployment rate of 6.6%. The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three and six months ended June 30, 2024 by approximately $4.6 million, and decrease net income by $3.5 million (net of tax). This change is reflective of the sensitivity of the various economic factors used in the ACL model. The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate concurrent with changing economic conditions, which would affect the results of the ACL calculation. The impact that the economic factors have on the model is affected by the upside or downside severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments. Improvements in one factor may offset deterioration in other factors, both qualitative and quantitative. The third-party downside economic forecast used in the hypothetical scenario described does not predict a severe economic downturn, but rather a moderate recessionary environment. The Company’s geographic distribution of loans primarily outside of major metropolitan areas, combined with low statistical correlation between its historical losses and national economic indicators, results in changes to the allowance that are less significant as compared to national economic activity.

Current wording

One of the most significant estimates and judgments influencing the results of the ACL calculation is the macroeconomic forecasts. Changes in these economic forecasts could significantly affect the estimated expected credit losses and lead to materially different amounts from one period to the next. To illustrate the sensitivity of the ACL calculation to these economic forecasts, management performed a hypothetical sensitivity analysis using a weighting of 100% to the downside forecast, rather than the existing weighting of baseline, upside and downside of 40%, 30% and 30%, respectively. The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at September 30, 2024 were 4.8% and 1.9%, respectively, compared to 4.6% and 1.8% at June 30, 2024, respectively. The hypothetical downside forecast includes assumptions of a weakening economy represented by a cumulative decline in real GDP of 2.6%, enhanced geopolitical tensions, elevated inflation, a peak unemployment rate of 8.3% and an average unemployment rate of 6.9%. The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three and nine months ended September 30, 2024 by approximately $4.9 million, and decrease net income by $3.7 million (net of tax). This change is reflective of the sensitivity of the various economic factors used in the ACL model. The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate concurrent with changing economic conditions, which would affect the results of the ACL calculation. The impact that the economic factors have on the model is affected by the upside or downside severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments. Improvements in one factor may offset deterioration in other factors, both qualitative and quantitative. The third-party downside economic forecast used in the hypothetical scenario described does not predict a severe economic downturn, but rather a moderate recessionary environment. The Company’s geographic distribution of loans primarily outside of major metropolitan areas, combined with low statistical correlation between its historical losses and national economic indicators, results in economic-related changes to the allowance that are less significant as compared to national economic activity.

Previous wording

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

Current wording

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

Previous wording

Second quarter 2024 net income decreased $0.4 million, or 0.8%, compared to the second quarter of 2023, while YTD net income increased $34.7 million, or 64.2% compared to the equivalent 2023 timeframe. Earnings per share of $0.91 for the second quarter of 2024 was $0.02 more than the second quarter of 2023, while 2024 YTD earnings per share of $1.67 was $0.67 higher than 2023 YTD earnings per share. Although net income decreased slightly between the quarterly periods due to increases in noninterest expenses, the provision for credit losses and income taxes, partially offset by increases in noninterest revenues and net interest income, earnings per share increased between the quarterly periods as the number of fully-diluted shares outstanding decreased reflective of share repurchases between the periods. The YTD increase in net income and earnings per share was primarily the result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale investment securities during the first quarter of 2023 in connection with a balance sheet repositioning. In addition, increases in income taxes, noninterest expenses and the provision for credit losses and a decrease in net interest income were partially offset by an increase in noninterest revenues excluding realized investment security losses and a decrease in the number of fully-diluted shares outstanding. Second quarter and YTD operating net income, a non-GAAP measure, decreased $1.5 million, or 2.9%, as compared to the second quarter of 2023 and decreased $7.4 million, or 7.3%, compared to June YTD 2023. Second quarter and YTD operating earnings per share, a non-GAAP measure, decreased $0.01 compared to the second quarter of 2023 and decreased $0.11 compared to June YTD 2023. Second quarter and YTD operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, increased $0.05 compared to the second quarter of 2023 and was consistent with June YTD 2023.

Current wording

Third quarter 2024 net income decreased $0.2 million, or 0.5%, compared to the third quarter of 2023, while YTD net income increased $34.5 million, or 35.1% compared to the equivalent 2023 timeframe. Earnings per share of $0.83 for the third quarter of 2024 was $0.01 more than the third quarter of 2023, while 2024 YTD earnings per share of $2.50 was $0.68 higher than 2023 YTD earnings per share. Although net income decreased slightly between the quarterly periods due to increases in noninterest expenses, the provision for credit losses and income taxes, partially offset by increases in noninterest revenues and net interest income, earnings per share increased between the quarterly periods as the number of fully-diluted shares outstanding decreased reflective of share repurchases between the periods. The YTD increase in net income and earnings per share was primarily the result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale investment securities during the first quarter of 2023 in connection with a balance sheet repositioning. Increases in income taxes, noninterest expenses and the provision for credit losses were partially offset by increases in noninterest revenues excluding realized investment security losses and net interest income and a decrease in the number of fully-diluted shares outstanding. Third quarter and YTD operating net income, a non-GAAP measure, decreased $0.4 million, or 0.9%, as compared to the third quarter of 2023 and decreased $7.9 million, or 5.3%, compared to September YTD 2023. Third quarter and YTD operating earnings per share, a non-GAAP measure, increased $0.01 compared to the third quarter of 2023 and decreased $0.11 compared to September YTD 2023. Third quarter and YTD operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, increased $0.13 compared to the third quarter of 2023 and increased $0.12 compared to September YTD 2023, demonstrating improvement in the Company’s core operating performance between the periods.

Previous wording

Net interest margin decreased 13 basis points between the second quarter of 2023 and the second quarter of 2024 and decreased 18 basis points on a YTD basis. Fully tax-equivalent net interest margin, a non-GAAP measure, decreased 14 basis points between the second quarter of 2023 and the second quarter of 2024 and decreased 18 basis points on a YTD basis. The yield on average interest-earning assets increased 53 basis points compared to the prior year second quarter and 58 basis points compared to the prior YTD period, as the yield on average loans and average investments both improved. The yield on average loans for the second quarter increased 63 basis points compared to the second quarter of 2023 and 64 basis points between comparable YTD periods. The increase in yield on average loans was driven by higher interest rates on new loans, an increase in variable and adjustable-rate loan yields reflective of higher market interest rates, including the prime rate, and a high level of new loan originations. The yield on average investments, including cash equivalents, increased six basis points compared to the prior year’s second quarter and 11 basis points on a YTD basis, reflective of the sales and maturities of certain lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods. The Company’s total cost of funds increased 70 basis points from last year’s second quarter and 79 basis points YTD, as the rate paid on interest-bearing deposits and the rate paid on borrowings both increased largely due to market-driven increases in deposit and borrowing rates, as well as the higher proportion of funding coming from comparatively higher rate time deposits and external borrowings.

Current wording

Net interest margin decreased four basis points between the third quarter of 2023 and the third quarter of 2024 and decreased 13 basis points on a YTD basis. Fully tax-equivalent net interest margin, a non-GAAP measure, decreased five basis points between the third quarter of 2023 and the third quarter of 2024 and decreased 14 basis points on a YTD basis. The yield on average interest-earning assets increased 49 basis points compared to the prior year third quarter and 54 basis points compared to the prior YTD period, as the yield on average loans and average investments both improved. The yield on average loans for the third quarter of 2024 increased 59 basis points compared to the third quarter of 2023 and 62 basis points between comparable YTD periods. The increase in yield on average loans was driven by higher interest rates on new loans and an increase in variable and adjustable-rate loan yields. The yield on average investments, including cash equivalents, increased eight basis points compared to the prior year’s third quarter and 10 basis points on a YTD basis, primarily reflective of the purchases of certain higher-yielding government agency mortgage-backed securities between the periods. The Company’s total cost of funds increased 56 basis points from last year’s third quarter and 71 basis points YTD, as the rate paid on interest-bearing deposits and the rate paid on borrowings both increased largely due to market-driven increases in deposit and borrowing rates, as well as the higher proportion of funding coming from comparatively higher rate time deposits and external borrowings.

Previous wording

Loan balances increased on both an average and ending basis as compared to the prior year second quarter and YTD period, reflective of continued strong organic loan growth. Deposit balances also increased on both an average and ending basis as compared to the second quarter of 2023 and YTD due primarily to growth in municipal deposit balances. Investment balances, including cash equivalents, decreased on both an average and ending basis as compared to the prior year second quarter and YTD period, primarily due to the maturities and sales of certain available-for-sale investment securities between the periods. Borrowing balances increased on both an average and ending basis compared to the second quarter of 2023 and YTD reflective of the Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings between the periods to support the funding of continued loan growth.

Current wording

Loan balances increased on both an average and ending basis as compared to the prior year third quarter and YTD period, reflective of continued strong organic loan growth. Deposit balances also increased on both an average and ending basis as compared to the third quarter of 2023 and YTD due primarily to growth in municipal deposit balances. Investment book balances, including cash equivalents, decreased on both an average and ending basis as compared to the prior year third quarter and YTD period. The decrease on an average YTD basis was primarily due to the maturities and sales of certain available-for-sale investment securities between the periods while the decrease on an ending basis was driven by a decrease in cash equivalents due in part to the funding of strong loan growth. Borrowing balances increased on both an average and ending basis compared to the third quarter of 2023 and YTD as the Company secured certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings between the periods, reflective of the Company’s net earning asset growth exceeding the increase in deposit balances.

Previous wording

Reflective of an increase in loans outstanding and a stable economic forecast, the Company recorded a $2.7 million provision for credit losses during the second quarter and $8.9 million for YTD 2024 resulting in a $2.0 million and $4.6 million higher provision for credit losses than comparable prior year periods, respectively, as the Company increased credit loss reserves primarily related to the business lending and consumer indirect portfolios. Asset quality remained strong and favorable relative to long-term historical averages during the second quarter and the first six months of 2024. Net charge-offs were $1.3 million, or an annualized 0.05% of average loans, for the second quarter and $4.1 million, or an annualized 0.08% of average loans, for the first six months of 2024, compared to net charge-offs of $0.7 million, or an annualized 0.03% of average loans, for the prior year’s second quarter and $2.2 million, or an annualized 0.05% of average loans, for the first six months of 2023. The nonperforming loan ratio of 0.50% at June 30, 2024 increased 14 basis points from June 30, 2023 primarily driven by the business loans associated with four customers being downgraded from accruing to nonaccrual status and remained consistent with one quarter prior. The 30 to 89 day delinquent loan ratio remained low at 0.45%, down from 0.47% at the end of the second quarter of 2023 and up slightly from 0.43% at the end of the prior quarter.

Current wording

Reflective of a slightly adverse change in certain asset quality metrics, an increase in loans outstanding and continued macroeconomic uncertainty primarily concerning the business lending and consumer indirect portfolios, the Company recorded a $7.7 million provision for credit losses during the third quarter and $16.6 million for YTD 2024 resulting in a $4.8 million and $9.4 million higher provision for credit losses than comparable prior year periods, respectively, as the Company increased credit loss reserves primarily related to the business lending and consumer indirect portfolios. Asset quality remained favorable relative to long-term historical averages during the third quarter and the first nine months of 2024 although certain metrics did weaken as compared to the prior year periods. Net charge-offs were $2.8 million, or an annualized 0.11% of average loans, for the third quarter and $6.9 million, or an annualized 0.09% of average loans, for the first nine months of 2024, compared to net charge-offs of $1.2 million, or an annualized 0.05% of average loans, for the prior year’s third quarter and $3.5 million, or an annualized 0.05% of average loans, for the first nine months of 2023. The nonperforming loan ratio of 0.61% at September 30, 2024 increased 22 basis points from September 30, 2023 primarily driven by the business loans associated with five loan relationships being downgraded from accruing to nonaccrual status. The nonperforming loan ratio increased 11 basis points from June 30, 2024 primarily driven by the business loans associated with one customer being downgraded from accruing to nonaccrual status. The 30 to 89 day delinquent loan ratio remained low at 0.46%, down from 0.51% at the end of the third quarter of 2023 and up slightly from 0.45% at the end of the prior quarter.

Previous wording

Banking noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, increased $1.9 million, or 10.6%, as compared to the prior year’s second quarter, and increased $3.7 million, or 10.9%, between the comparable YTD periods. The growth between both periods was primarily due to increases in mortgage banking revenues that reflected higher sales volumes of secondary market eligible residential mortgage loans. Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, increased $5.8 million, or 12.1%, as compared to the prior year’s second quarter and increased $8.7 million, or 8.9%, compared to the prior YTD period, reflecting revenue growth in all three segments between both periods.

Current wording

Banking noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, increased $3.0 million, or 17.1%, as compared to the prior year’s third quarter, and increased $6.7 million, or 13.0%, between the comparable YTD periods. The growth between both periods included increases in mortgage banking revenues that reflected higher sales volumes of secondary market eligible residential mortgage loans, higher valuation of mortgage servicing rights and increases in other banking services revenues associated with higher interest rate swap fees due to the recent implementation of this product offering, as well as increased revenues from commercial real estate transaction services. Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, increased $5.7 million, or 11.4%, as compared to the prior year’s third quarter and increased $14.4 million, or 9.8%, compared to the prior YTD period, reflecting revenue growth in all three segments between both periods.

Previous wording

Noninterest expenses increased $6.0 million, or 5.3%, between the second quarter of 2023 and the second quarter of 2024 and increased $10.0 million, or 4.4%, between June YTD 2023 and June YTD 2024. The increases were primarily driven by salaries and employee benefits that increased $5.4 million, or 8.0%, and $7.0 million, or 5.0%, for the second quarter and YTD periods of 2024, respectively, as compared to the corresponding periods of 2023, reflective of merit and market-related increases in employee wages and acquisitions between the periods, partially offset by the impact of the previously announced retail customer service workforce optimization plan and a decrease in employee retirement-related severance expense. The remaining net increase in noninterest expenses were mainly due to higher data processing and communications expenses reflective of the Company’s continued investment in customer-facing and back-office technologies including investments in additional technology to enhance its cybersecurity infrastructure combined with an increase in other expenses driven by increases in insurance expenses and a decrease in the net periodic pension benefit credit due to lower non-service related components.

Current wording

Noninterest expenses increased $7.7 million, or 6.6%, between the third quarter of 2023 and the third quarter of 2024 and increased $17.7 million, or 5.1%, between September YTD 2023 and September YTD 2024. The increases were primarily driven by salaries and employee benefits that increased $7.3 million, or 10.4%, and $14.3 million, or 6.8%, for the third quarter and YTD periods of 2024, respectively, as compared to the corresponding periods of 2023, reflective of merit and market-related increases in employee wages, higher incentive plan costs and acquisitions between the periods, partially offset by the impact of the previously announced retail customer service workforce optimization plan. The remaining increase in noninterest expenses were largely due to higher data processing and communications expenses reflective of the Company’s continued investment in customer-facing and back-office technologies including investments in additional technology to enhance its cybersecurity infrastructure, including the detection and prevention of customer payment-related fraud combined with an increase in other expenses driven by increases in insurance expenses and property-related write-downs and a decrease in the net periodic pension benefit credit due to lower non-service related components.

Previous wording

The Company’s deposit base and liquidity position continues to be strong, as the Company had total immediately available liquidity sources of $4.44 billion at the end of the second quarter of 2024, more than double its estimated uninsured deposits, net of collateralized and intercompany deposits. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of total deposits at the end of the second quarter. The Company’s deposit base is well diversified across customer segments, which as of June 30, 2024 was comprised of approximately 61% consumer, 26% business and 13% municipal, and broadly dispersed, illustrated by an average deposit balance per account that was under $20,000. Since the Federal Reserve began raising the federal funds rate in March 2022 in an effort to combat inflation, the cycle-to-date deposit beta (change in the Company’s cost of funds as a proportion of the change in the federal funds rate) for the Company is 22% and the cycle-to-date total funding beta is 24% of the cumulative 525 basis point increase in the federal funds rate. The lower betas are reflective of a comparatively high proportion of non-interest bearing deposits, representing approximately 28% of total ending second quarter deposits, and the composition and stability of the customer base. In addition, more than 66% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the second quarter. The Company did not utilize brokered or wholesale deposits.

Current wording

The Company’s deposit base and liquidity position continues to be strong, as the Company had total immediately available liquidity sources of $4.49 billion at the end of the third quarter of 2024, approximately double its estimated uninsured deposits, net of collateralized and intercompany deposits. Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of total deposits at the end of the third quarter. The Company’s deposit base is well diversified across customer segments, which as of September 30, 2024 was comprised of approximately 58% consumer, 27% business and 15% municipal, and broadly dispersed, illustrated by an average deposit balance per account that was under $20,000. Since the Federal Reserve began raising the federal funds rate in March 2022 in an effort to combat inflation, the deposit beta (change in the Company’s cost of funds as a proportion of the change in the federal funds rate) for the Company was 24% and the cycle-to-date total funding beta was 28% of the cumulative 475 basis point increase in the federal funds rate. The lower betas are reflective of a comparatively high proportion of non-interest-bearing deposits, representing approximately 27% of total ending third quarter deposits, and the composition and stability of the customer base. In addition, 65% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the third quarter. The Company did not utilize brokered or wholesale deposits.

Previous wording

As shown in Table 1, net income for the second quarter and June YTD of $47.9 million and $88.8 million, respectively, decreased $0.4 million, or 0.8%, as compared to the second quarter of 2023 and increased $34.7 million, or 64.2%, compared to June YTD 2023. Earnings per share of $0.91 for the second quarter was $0.02 higher than the second quarter of 2023, while earnings per share for the first six months of 2024 of $1.67 was $0.67 higher than the first six months of 2023. The decrease in net income for the quarter was the result of increases in noninterest expenses, the provision for credit losses and income taxes, partially offset by increases in net interest income and noninterest revenues, while the increase in earnings per share for the quarter was the result of a decrease in fully diluted shares outstanding, which more than offset the slight decline in net income. The increase in net income and earnings per share for the YTD period as compared to the prior year was the result of an increase in noninterest revenues, primarily due to the realized loss on the sales of investment securities that was recognized in the first quarter of 2023 as part of a balance sheet repositioning, as well as an increase in all other noninterest revenues and a decrease in fully diluted shares outstanding, partially offset by an increase in noninterest expenses, income taxes and the provision for credit losses, as well as a decrease in net interest income. Operating net income, a non-GAAP measure, of $50.5 million and $94.3 million for the second quarter and June YTD 2024, respectively, decreased $1.5 million, or 2.9%, as compared to the second quarter of 2023 and decreased $7.4 million, or 7.3%, compared to June YTD 2023. Operating earnings per share, a non-GAAP measure, of $0.95 for the second quarter was down $0.01 compared to the second quarter of 2023, while operating earnings per share of $1.77 for the first six months of 2024 was down $0.11 compared to the first six months of 2023. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

Current wording

As shown in Table 1, net income for the third quarter and September YTD of $43.9 million and $132.7 million, respectively, decreased $0.2 million, or 0.5%, as compared to the third quarter of 2023 and increased $34.5 million, or 35.1%, compared to September YTD 2023. Earnings per share of $0.83 for the third quarter was $0.01 higher than the third quarter of 2023, while earnings per share for the first nine months of 2024 of $2.50 was $0.68 higher than the first nine months of 2023. The decrease in net income for the quarter was the result of increases in noninterest expenses, the provision for credit losses and income taxes, partially offset by increases in net interest income and noninterest revenues. The increase in earnings per share for the quarter was the result of a decrease in fully diluted shares outstanding, which offset the slight decline in net income. The increase in net income and earnings per share for the YTD period as compared to the prior year was primarily the result of the realized loss on the sales of investment securities that was recognized in the first quarter of 2023 as part of a balance sheet repositioning. Additionally, an increase in all other noninterest revenues and net interest income, as well as a decrease in fully diluted shares outstanding, was partially offset by an increase in noninterest expenses, income taxes and the provision for credit losses. Operating net income, a non-GAAP measure, of $46.6 million and $140.9 million for the third quarter and September YTD 2024, respectively, decreased $0.4 million, or 0.9%, as compared to the third quarter of 2023 and decreased $7.9 million, or 5.3%, compared to September YTD 2023. Operating earnings per share, a non-GAAP measure, of $0.88 for the third quarter increased $0.01 compared to the third quarter of 2023, while operating earnings per share of $2.65 for the first nine months of 2024 decreased $0.11 compared to the first nine months of 2023. See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

Previous wording

As reflected in Table 1, second quarter net interest income of $109.4 million increased $0.1 million, or 0.1%, from the comparable prior year period. The quarterly improvement resulted from an increase in the balance of and yield on interest-earning assets, partially offset by an increase in the balance of and rate paid on interest-bearing liabilities. Net interest income for the first six months of 2024 decreased $3.9 million, or 1.8%, versus the first six months of 2023. The year-over-year decrease was primarily the result of an increase in the balance and cost of interest-bearing liabilities, partially offset by a higher balance and yield on interest-earning assets due in part to a higher proportion of those assets being comprised of loan balances due to strong organic loan growth, and the sales and maturities of certain lower-yielding available-for-sale investment securities.

Current wording

As reflected in Table 1, third quarter net interest income of $112.7 million increased $5.0 million, or 4.6%, from the comparable prior year period. The quarterly improvement resulted from an increase in the balance of and yield on interest-earning assets, partially offset by an increase in the balance of and rate paid on interest-bearing liabilities. Net interest income for the first nine months of 2024 increased $1.0 million, or 0.3%, versus the first nine months of 2023. The YTD increase was primarily the result of a higher balance and yield on interest-earning assets due in part to a higher proportion of those assets being comprised of loan balances due to strong organic loan growth, and the sales and maturities of certain lower-yielding available-for-sale investment securities, partially offset by an increase in the balance and cost of interest-bearing liabilities.

Previous wording

Reflective of an increase in loans outstanding and a stable economic forecast, the provision for credit losses of $2.7 million for the second quarter and $8.9 million for June YTD increased $1.9 million and $4.6 million as compared to the second quarter and first six months of 2023, respectively. During the first six months of 2024, the Company increased its qualitative assessment of future uncertainty and built credit loss reserves that were primarily attributable to the business lending and consumer indirect portfolios.

Current wording

Reflective of slight adverse changes in certain asset quality metrics, an increase in loans outstanding and continued macroeconomic uncertainty primarily concerning the business lending and consumer indirect portfolios, the provision for credit losses of $7.7 million for the third quarter and $16.6 million for September YTD increased $4.8 million and $9.4 million as compared to the third quarter and first nine months of 2023, respectively. The increase in the allowance for credit losses was primarily related to the business lending and consumer indirect portfolios.

Previous wording

Second quarter and year-to-date noninterest revenues were $74.4 million and $144.7 million, respectively, up $8.4 million, or 12.7%, from the second quarter of 2023 and up $65.2 million, or 82.0%, from the first six months of 2023. Total operating noninterest revenues, a non-GAAP measure, for the second quarter and June YTD were $73.8 million and $144.0 million, respectively, an increase of $7.7 million, or 11.7%, and $12.4 million, or 9.4%, from the prior second quarter and YTD period, respectively. The increase over the prior year second quarter was driven by a $5.8 million, or 12.1%, increase in financial services business revenues and a $1.9 million, or 10.6%, increase in banking noninterest revenues. The increase over the prior June YTD period was driven by an $8.7 million, or 8.9%, increase in financial services business revenues and a $3.7 million, or 10.9%, increase in banking noninterest revenues.

Current wording

Third quarter and year-to-date noninterest revenues were $76.2 million and $220.9 million, respectively, an increase of $8.6 million, or 12.7%, from the third quarter of 2023 and an increase of $73.8 million, or 50.2%, from the first nine months of 2023. Total operating noninterest revenues, a non-GAAP measure, for the third quarter and September YTD were $76.4 million and $220.4 million, respectively, an increase of $8.7 million, or 12.9%, and $21.1 million, or 10.6%, from the prior third quarter and YTD period, respectively. The increase over the prior year third quarter was driven by a $5.7 million, or 11.4%, increase in financial services business revenues and a $3.0 million, or 17.1%, increase in banking noninterest revenues. The increase over the prior September YTD period was driven by a $14.4 million, or 9.8%, increase in financial services business revenues and a $6.7 million, or 13.0%, increase in banking noninterest revenues.

Previous wording

Noninterest expenses of $119.0 million and $237.1 million for the second quarter and June YTD periods, respectively, reflected an increase of $6.0 million, or 5.3%, from the second quarter of 2023 and an increase of $10.0 million, or 4.4%, from the first six months of 2023. The increase in noninterest expenses for the second quarter and June YTD periods was primarily due to increases in salaries and employee benefits, data processing and communications and other expenses. Operating noninterest expenses increased $6.7 million, or 6.2%, from the prior year second quarter, and $10.7 million, or 4.9%, from the prior June YTD.

Current wording

Noninterest expenses of $124.2 million and $361.3 million for the third quarter and September YTD periods, respectively, reflected an increase of $7.7 million, or 6.6%, from the third quarter of 2023 and an increase of $17.7 million, or 5.1%, from the first nine months of 2023. The increase in noninterest expenses for the third quarter and September YTD periods was primarily due to increases in salaries and employee benefits, data processing and communications and other expenses. Operating noninterest expenses, a non-GAAP measure, increased $8.0 million, or 7.1%, from the prior year third quarter, and $18.7 million, or 5.6%, from the prior September YTD.

Previous wording

The effective income tax rates were 22.8% and 22.9% for second quarter and YTD 2024, respectively, as compared to 21.4% and 21.0% for the comparable prior year periods, primarily due to a higher full year projected pre-tax income result and a higher proportion of income from taxable sources.

Current wording

The effective income tax rates were 23.0% and 22.9% for third quarter and YTD 2024, respectively, as compared to 21.2% and 21.1% for the comparable prior year periods, primarily due to a higher full year projected pre-tax income result and a higher proportion of income from fully taxable sources.

Previous wording

Net interest income totaled $109.4 million for the second quarter of 2024 compared to $109.3 million for the second quarter of 2023. As shown in Table 2a, fully tax-equivalent net interest income, a non-GAAP measure, for the second quarter was $110.4 million, consistent with the same period last year. This was driven by a 53 basis point increase in the yield on average interest-earning assets and a $664.3 million increase in average interest-earning asset balances, offset by an 89 basis point increase in the rate paid on average interest-bearing liabilities and an $888.5 million increase in average interest-bearing liability balances in comparison to the second quarter of 2023. As reflected in Table 3 for the quarter, the favorable net interest income impacts of the increase in the yield on average interest-earning assets of $18.7 million and the volume increase in average interest-earning asset balances of $6.5 million were offset by the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $23.0 million and the volume increase in average interest-bearing liability balances of $2.3 million.

Current wording

Net interest income totaled $112.7 million for the third quarter of 2024 and was a new quarterly record for the Company. This compares to $107.8 million of net interest income for the third quarter of 2023. As shown in Table 2a, fully tax-equivalent net interest income, a non-GAAP measure, for the third quarter was $113.6 million, also a new quarterly record for the Company, compared to $108.8 million for the third quarter of the prior year. The increase was driven by a 49 basis point increase in the yield on average interest-earning assets and an $850.4 million increase in average interest-earning asset balances, partially offset by a 70 basis point increase in the rate paid on average interest-bearing liabilities and a $986.0 million increase in average interest-bearing liability balances in comparison to the third quarter of 2023. As reflected in Table 3 for the quarter, the favorable net interest income impacts of the increase in the yield on average interest-earning assets of $17.4 million and the volume increase in average interest-earning asset balances of $8.8 million were partially offset by the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $17.9 million and the volume increase in average interest-bearing liability balances of $3.5 million.

Previous wording

Net interest income totaled $216.4 million for the first six months of 2024 compared to $220.3 million for the first six months of 2023. As reflected in Table 2b, June YTD fully tax-equivalent net interest income, a non-GAAP measure, of $218.4 million, decreased $4.1 million, or 1.8%, from the year-earlier period. The June YTD decrease resulted from a 102 basis point increase in the rate paid on average interest-bearing liabilities and an $822.1 million increase in average interest-bearing liability balances, partially offset by a $519.9 million increase in average interest-earning asset balances and a 58 basis point increase in the yield on average interest-earning assets. As reflected in Table 3 for June YTD, the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $52.5 million and the volume increase in average interest-bearing liability balances of $3.6 million were partially offset by the favorable impacts of the volume increase in average interest-earning asset balances of $9.9 million and the increase in the yield on average interest-earning assets of $42.1 million.

Current wording

Net interest income totaled $329.1 million for the first nine months of 2024 compared to $328.1 million for the first nine months of 2023. As reflected in Table 2b, September YTD fully tax-equivalent net interest income, a non-GAAP measure, of $332.0 million, increased $0.7 million, or 0.2%, from the year-earlier period. The September YTD increase resulted from a 54 basis point increase in the yield on average interest-earning assets and a $631.0 million increase in average interest-earning asset balances, partially offset by a 91 basis point increase in the rate paid on average interest-bearing liabilities and an $877.2 million increase in average interest-bearing liability balances. As reflected in Table 3 for September YTD, the favorable impacts of the increase in the yield on average interest-earning assets of $59.7 million and the volume increase in average interest-earning asset balances of $18.5 million were partially offset by the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $70.7 million and the volume increase in average interest-bearing liability balances of $6.8 million.

Previous wording

Net interest margin of 3.01% for the second quarter of 2024 was 13 basis points lower as compared to the second quarter of 2023. The fully tax-equivalent net interest margin, a non-GAAP measure, of 3.04% for the second quarter of 2024 was 14 basis points lower as compared to the prior year’s second quarter. Net interest margin of 2.98% and fully tax-equivalent net interest margin, a non-GAAP measure, of 3.01% for the first six months of 2024 were both 18 basis points lower than the comparable period of 2023. The decreases were the result of the increase in the rate paid on average interest-bearing liabilities, partially offset by the increase in the yield on average interest-earnings assets and a higher proportion of those assets being comprised of loan balances due to strong organic loan growth and the sales and maturities of certain lower-yielding available-for-sale investment securities between the periods. The decline in noninterest checking deposit balances combined with an increase in time deposit balances also had an adverse impact on the net interest margin and fully tax-equivalent net interest margin, a non-GAAP measure, between both periods.

Current wording

Net interest margin of 3.03% for the third quarter of 2024 was four basis points lower as compared to the third quarter of 2023. The fully tax-equivalent net interest margin, a non-GAAP measure, of 3.05% for the third quarter of 2024 was five basis points lower as compared to the prior year’s third quarter. Net interest margin of 3.00% and fully tax-equivalent net interest margin, a non-GAAP measure, of 3.02% for the first nine months of 2024 were lower by 13 basis points and 14 basis points, respectively, than the comparable period of 2023. The decreases were the result of the increase in the rate paid on average interest-bearing liabilities, partially offset by the increase in the yield on average interest-earnings assets and a higher proportion of those assets being comprised of loan balances due to strong organic loan growth and the sales and maturities of certain lower-yielding available-for-sale investment securities between the YTD periods. The decline in noninterest and low rate checking and savings deposit balances combined with an increase in time and money market deposit balances also had an adverse impact on the net interest margin and fully tax-equivalent net interest margin, a non-GAAP measure, between both periods.

Previous wording

The 53 basis point increase in the average yield on interest-earning assets for the quarter was the result of increases in both the yield on average loans and the yield on average investments, including cash equivalents. The yield on average loans for the second quarter increased by 63 basis points compared to the second quarter of 2023. The second quarter of 2024 yield on average investments, including cash equivalents, increased six basis points compared to the prior year while the yield on average investments, excluding cash equivalents, increased four basis points for the same timeframe. The 58 basis point increase in the yield on interest-earning assets for the first six months of 2024 was the result of a 64 basis point increase in the yield on average loans and an 11 basis point increase in the yield on average investments, including cash equivalents, compared to the prior YTD period. Excluding cash equivalents, the yield on average investments increased two basis points compared to the prior YTD period. The increase in loan yields were reflective of higher interest rates on new loans, an increase in variable and adjustable-rate loan yields driven by higher market interest rates, including the prime rate, and a high level of new loan originations. As the majority of the Company’s investment portfolio, excluding cash equivalents, is comprised of fixed yield securities, the increase in investment yields were driven by the sales and maturities of certain lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods.

Current wording

The 49 basis point increase in the average yield on interest-earning assets for the quarter was the result of increases in both the yield on average loans and the yield on average investments, including cash equivalents. The yield on average loans for the third quarter increased by 59 basis points compared to the third quarter of 2023. The third quarter of 2024 yield on average investments, including cash equivalents, increased eight basis points compared to the prior year while the yield on average investments, excluding cash equivalents, increased nine basis points for the same timeframe. The 54 basis point increase in the yield on interest-earning assets for the first nine months of 2024 was the result of a 62 basis point increase in the yield on average loans and a 10 basis point increase in the yield on average investments, including cash equivalents, compared to the prior YTD period. Excluding cash equivalents, the yield on average investments increased five basis points compared to the prior YTD period. The increase in loan yields were reflective of higher interest rates on new loans and an increase in certain variable and adjustable-rate loan yields. As the majority of the Company’s investment portfolio, excluding cash equivalents, is comprised of fixed yield securities, the increase in investment yields were driven by the sales and maturities of certain lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods.

Previous wording

The second quarter and YTD average book balance of investments, including cash equivalents, decreased $232.2 million and $380.1 million, respectively, as compared to the corresponding prior year periods, primarily due to declines in the investment securities portfolio driven by scheduled maturities and the sales of certain available-for-sale investment securities combined with cashflows being redeployed into loan originations. Investment purchases outpaced sales, maturities, calls and principal payments during the second quarter and YTD periods, driven by $85.9 million of YTD government agency mortgage-backed securities purchases classified as held-to-maturity. The cash equivalents component of average interest-earning assets increased $20.4 million and $111.5 million for the second quarter and YTD periods, respectively, compared to the prior year periods. Average loan balances increased $896.5 million for the quarter and $900.0 million YTD as compared to the prior year, with increases in all five major loan portfolios between both periods due to high levels of organic growth.

Current wording

The third quarter and YTD average book balance of investments, including cash equivalents, decreased $1.4 million and $252.4 million, respectively, as compared to the corresponding prior year periods. The YTD decrease was primarily due to declines in the investment securities portfolio driven by scheduled maturities and the sales of certain available-for-sale investment securities. Investment purchases outpaced sales, maturities, calls and principal payments during the current third quarter and YTD periods, driven by $128.8 million of YTD government agency mortgage-backed securities purchases classified as held-to-maturity. The cash equivalents component of average interest-earning assets decreased $14.8 million and increased $69.0 million for the third quarter and YTD periods, respectively, compared to the prior year periods. Average loan balances increased $851.9 million for the quarter and $883.4 million YTD as compared to the prior year, with increases in all five major loan portfolios between both periods due to high levels of organic growth.

Previous wording

The rate paid on average interest-bearing liabilities increased by 89 basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits increased 84 basis points and the average rate paid on external borrowings increased 111 basis points from the comparable prior period. For the first six months of 2024, the rate paid on average interest-bearing liabilities increased by 102 basis points from the comparable prior year period as the rate paid on average interest-bearing deposits increased 97 basis points and the rate paid on average external borrowings increased 105 basis points. The increase in the rate paid on average interest-bearing deposits was due to interest rates on certain interest-bearing deposits being raised in response to market conditions, including the effects of a 100 basis point increase in the Federal Funds rate during 2023 as a result of the Federal Reserve Bank’s (“Federal Reserve” or “FRB”) efforts to lower elevated inflation, and a shift in deposit mix as customers responded to changes in market interest rates by moving funds into higher yielding account types. The increase in the rate paid on average borrowings was primarily the result of higher market interest rates between the periods and the Company securing $400.0 million of fixed rate FHLB term borrowings in the third and fourth quarters of 2023 and $150.0 million of additional fixed rate FHLB term borrowings in the second quarter of 2024 to help meet the Company’s funding needs including the funding of the Company’s strong loan growth.

Current wording

The rate paid on average interest-bearing liabilities increased by 70 basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits increased 60 basis points and the average rate paid on external borrowings increased 74 basis points from the comparable prior period. For the first nine months of 2024, the rate paid on average interest-bearing liabilities increased by 91 basis points from the comparable prior year period as the rate paid on average interest-bearing deposits increased 85 basis points and the rate paid on average external borrowings increased 96 basis points. The increase in the rate paid on average interest-bearing deposits was due to interest rates on certain interest-bearing deposits being raised in response to market conditions, including the effects of a 100 basis point increase in the Federal Funds rate during 2023 as a result of the Federal Reserve Bank’s (“Federal Reserve” or “FRB”) efforts to lower elevated inflation, and a shift in deposit mix as customers responded to changes in market interest rates by moving funds into higher yielding account types. The increase in the rate paid on average borrowings was primarily the result of the Company securing $400.0 million of fixed rate FHLB term borrowings in the third and fourth quarters of 2023, $150.0 million of additional fixed rate FHLB term borrowings in the second quarter of 2024 and $100.0 million of additional fixed rate FHLB term borrowings in the third quarter of 2024 to help meet the Company’s funding needs, which reduced the proportion of lower rate securities sold under agreement to repurchase (customer repurchase agreements) to total borrowings.

Previous wording

Average interest-bearing deposits increased $626.1 million compared to the prior year quarter and $581.0 million compared to the prior YTD period. The quarterly and YTD increases in average interest-bearing deposits were due to increases in time and money market deposits, partially offset by decreases in savings and interest checking deposits reflective of the aforementioned shift in deposit mix and net municipal inflows. The average borrowing balance, which primarily includes borrowings at the FHLB and securities sold under agreement to repurchase (customer repurchase agreements), increased $262.4 million and $241.1 million for the quarter and YTD periods, respectively. The increase in average borrowings from the prior year quarter and YTD periods was primarily due to the aforementioned increase in FHLB term borrowings to meet the Company’s funding needs.

Current wording

Average interest-bearing deposits increased $575.3 million compared to the prior year quarter and $579.1 million compared to the prior YTD period. The quarterly and YTD increases in average interest-bearing deposits were due to increases in time and money market deposits, partially offset by decreases in savings and interest checking deposits reflective of the aforementioned shift in deposit mix and net municipal deposit balance inflows. The average borrowing balance, which primarily includes borrowings at the FHLB and customer repurchase agreements, increased $410.7 million and $298.1 million for the quarter and YTD periods, respectively. The increase in average borrowings from the prior year quarter and YTD periods was primarily due to the aforementioned increase in FHLB term borrowings to meet the Company’s funding needs, as earning asset growth outpaced the increase in deposit balances.

Previous wording

Tables 2a and 2b below sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent (“FTE”) basis using a marginal income tax rate of 24.4% in 2024 and 24.3% in 2023. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment, late and other fees and the accretion of acquired loan purchase discounts and premiums. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

Current wording

Tables 2a and 2b below sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated. Interest income and yields are on a fully tax-equivalent (“FTE”) basis using a marginal income tax rate of 24.4% in 2024 and 24.2% in 2023. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment, late and other fees and the accretion of acquired loan purchase discounts and premiums. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

Previous wording

As displayed in Table 4, noninterest revenues totaled $74.4 million for the second quarter of 2024 and $144.7 million for the first six months of 2024. This represents an increase of $8.4 million, or 12.7%, for the quarter and an increase of $65.2 million, or 82.0%, for the YTD period in comparison to the equivalent 2023 periods. Noninterest revenues for the second quarter and YTD periods of 2024 included a $0.9 million unrealized gain on equity securities associated with the conversion of certain Visa Class B shares to Visa Class C shares and a $0.2 million loss on sales of investment securities associated with the sales of certain available-for-sale investment securities. Noninterest revenues for the first six months of 2023 included a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities in connection with a strategic balance sheet repositioning executed during the prior year’s first quarter and a $0.2 million gain on debt extinguishment. Operating noninterest revenues, a non-GAAP measure as defined in the table above, totaled $73.8 million for the second quarter of 2024, an increase of $7.7 million, or 11.7%, from the prior year’s second quarter and totaled $144.0 million for the first six months of 2024, an increase of $12.4 million, or 9.4%, from the first six months of 2023. The increases between both periods reflected growth in employee benefit services revenues, banking noninterest revenues, insurance services revenues and wealth management services revenues.

Current wording

As displayed in Table 4, noninterest revenues totaled $76.2 million for the third quarter of 2024 and $220.9 million for the first nine months of 2024. This represents an increase of $8.6 million, or 12.7%, for the quarter and an increase of $73.8 million, or 50.2%, for the YTD period in comparison to the equivalent 2023 periods. Noninterest revenues for the YTD periods of 2024 included a $1.0 million unrealized gain on equity securities primarily associated with the conversion of certain Visa Class B shares to Visa Class C shares and a $0.5 million loss on sales of investment securities associated with the sales of certain available-for-sale investment securities. Noninterest revenues for the first nine months of 2023 included a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities in connection with a strategic balance sheet repositioning executed during the prior year’s first quarter, a $0.1 million unrealized loss on equity securities and a $0.2 million gain on debt extinguishment. Operating noninterest revenues, a non-GAAP measure as defined in the table above, totaled $76.4 million for the third quarter of 2024, an increase of $8.7 million, or 12.9%, from the prior year’s third quarter and totaled $220.4 million for the first nine months of 2024, an increase of $21.1 million, or 10.6%, from the first nine months of 2023. The increases between both periods reflected growth in all of the primary business categories: employee benefit services revenues, the four banking noninterest revenue lines, insurance services revenues and wealth management services revenues.

Previous wording

Employee benefit services revenues increased $3.5 million, or 12.4%, and $5.9 million, or 10.1%, for the three and six months ended June 30, 2024, respectively, as compared to the equivalent prior year periods driven by new business and increases in the total participants under administration, along with growth in asset-based fee revenues resulting from market appreciation and the acquisition of certain assets of Creative Plan Designs Limited, a provider of employee benefit plan design, administration and consulting, on February 1, 2024.

Current wording

Employee benefit services revenues increased $3.2 million, or 10.7%, and $9.1 million, or 10.3%, for the three and nine months ended September 30, 2024, respectively, as compared to the equivalent prior year periods, driven by new business and increases in the total participants under administration, growth in asset-based fee revenues, resulting from market appreciation and the acquisition of certain assets of Creative Plan Designs Limited, a provider of employee benefit plan design, administration and consulting, on February 1, 2024.

Previous wording

Banking noninterest revenues increased $1.9 million, or 10.6%, between the second quarter of 2023 and 2024 and increased $3.7 million, or 10.9%, between the first six months of 2023 and 2024. The growth between both periods was driven by increases in mortgage banking revenues (up $2.3 million for the quarter and YTD), deposit service charges and fees (up $0.4 million for the quarter and $1.1 million YTD) and debit interchange and ATM fees (up $0.1 million for the quarter and $0.8 million YTD), partially offset by a decrease in other banking revenues (down $0.9 million for the quarter and $0.5 million YTD). The increases in mortgage banking revenues reflected higher sales volumes of secondary market eligible residential mortgage loans and an increase in the value of mortgage servicing rights. The Company expects growth in its other banking revenues associated with interest rate swap fee revenues due to its recent implementation of interest rate swap origination capabilities.

Current wording

Banking noninterest revenues increased $3.0 million, or 17.1%, between the third quarter of 2023 and 2024 and increased $6.7 million, or 13.0%, between the first nine months of 2023 and 2024. The growth between both periods was driven by increases in mortgage banking revenues (increased $0.9 million for the quarter and $3.3 million YTD), deposit service charges and fees (increased $0.9 million for the quarter and $1.9 million YTD), debit interchange and ATM fees (increased $0.8 million YTD) and other banking revenues (increased $1.2 million for the quarter and $0.7 million YTD). The increases in mortgage banking revenues reflected higher sales volumes of secondary market eligible residential mortgage loans and an increase in the value of mortgage servicing rights. The increases in other banking revenues were associated with higher interest rate swap fee revenues due to the recent implementation of this product offering and other commercial banking-related fees.

Previous wording

Insurance services revenues increased $1.4 million, or 12.2%, and $1.0 million, or 4.4%, for the second quarter and YTD periods, respectively, due to organic and acquired growth in commissions revenues, including the incremental revenues resulting from the acquisition of a New York-based insurance agency for $4.6 million in total consideration on April 1, 2024.

Current wording

Insurance services revenues increased $1.5 million, or 12.7%, and $2.6 million, or 7.2%, for the third quarter and YTD periods, respectively, due to organic and acquired growth in commissions revenues, including the incremental revenues resulting from the acquisition of a New York-based insurance agency for $4.6 million in total consideration on April 1, 2024.

Previous wording

Wealth management services revenues increased $0.8 million, or 10.6%, for the second quarter of 2024 and $1.8 million, or 11.2%, for June 2024 YTD as compared to the same time periods of 2023, as more favorable investment market conditions drove an increase in assets under management between the periods.

Current wording

Wealth management services revenues increased $1.0 million, or 12.1%, for the third quarter of 2024 and $2.8 million, or 11.5%, for September 2024 YTD as compared to the same time periods of 2023, as more favorable investment market conditions drove an increase in the value of assets under management between the periods.

Previous wording

The ratio of noninterest revenues to total revenues was 40.5% for the second quarter of 2024 and 40.1% for June YTD 2024, compared to 37.6% for the prior year’s second quarter and 26.5% for June YTD 2023. The quarterly increase was due to noninterest revenues increasing 12.7% while net interest income increased 0.1%. The YTD increase was primarily the result of the $65.2 million, or 82.0%, increase in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities recognized in the prior year’s first quarter, while net interest income decreased 1.8% driven by funding cost pressures.

Current wording

The ratio of noninterest revenues to total revenues was 40.3% for the third quarter of 2024 and 40.2% for September YTD 2024, compared to 38.5% for the prior year’s third quarter and 31.0% for September YTD 2023. The quarterly increase was due to noninterest revenues increasing 12.7% while net interest income increased 4.6%. The YTD increase was primarily the result of the $73.8 million, or 50.2%, increase in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities recognized in the prior year’s first quarter, while net interest income increased 0.3%.

Previous wording

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 40.1% for the quarter and 39.7% for the six months ended June 30, 2024, respectively, versus 37.4% and 37.2% for the comparable periods of 2023. The increase between the quarterly periods was due to an 11.7% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, was flat. The year-to-date increase was a function of a 9.4% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, decreased 1.8%, driven by funding cost pressures.

Current wording

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 40.2% for the quarter and 39.9% for the nine months ended September 30, 2024, respectively, versus 38.3% and 37.8% for the comparable periods of 2023. The increase between the quarterly periods was due to a 12.9% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, increased 4.4%. The year-to-date increase was the result of a 10.6% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, increased 0.2%.

Previous wording

As shown in Table 5, the Company recorded noninterest expenses of $119.0 million and $237.1 million for the second quarter and YTD periods of 2024, respectively, representing an increase of $6.0 million, or 5.3%, and an increase of $10.0 million, or 4.4%, from the prior year periods, respectively. The increases were primarily driven by salaries and employee benefits that increased $5.4 million, or 8.0%, and $7.0 million, or 5.0%, for the second quarter and YTD periods of 2024, respectively, as compared to the corresponding periods of 2023. The remaining change to noninterest expenses is attributable to data processing and communications (up $1.0 million for the quarter and $2.2 million YTD), amortization of intangible assets (up $0.2 million for the quarter and $0.1 million YTD), occupancy and equipment (up $0.3 million for the quarter and $0.6 million YTD), legal and professional fees (up $0.3 million for the quarter and down $0.5 million YTD), business development and marketing (down $0.4 million for the quarter and $0.3 million YTD), acquisition-related contingent consideration adjustments (down $1.0 million for the quarter and YTD), acquisition expenses (up $0.1 million for the quarter and YTD), litigation accrual (up $0.1 million YTD) and other expenses (up $0.1 million for the quarter and $1.7 million YTD).

Current wording

As shown in Table 5, the Company recorded noninterest expenses of $124.2 million and $361.3 million for the third quarter and YTD periods of 2024, respectively, representing an increase of $7.7 million, or 6.6%, and an increase of $17.7 million, or 5.1%, from the prior year periods, respectively. The increases were primarily driven by salaries and employee benefits that increased $7.3 million, or 10.4%, and $14.3 million, or 6.8%, for the third quarter and YTD periods of 2024, respectively, as compared to the corresponding periods of 2023. The remaining change to noninterest expenses is attributable to increases in data processing and communications (up $0.4 million for the quarter and $2.6 million YTD), occupancy and equipment (up $0.2 million for the quarter and $0.8 million YTD), acquisition expenses (up $0.1 million for the quarter and YTD), litigation accrual (up $0.1 million for the quarter and $0.2 million YTD) and other expenses (up $0.3 million for the quarter and $2.1 million YTD). The increases were partially offset by decreases in amortization of intangible assets (down $0.2 million for the quarter and $0.1 million YTD), legal and professional fees (down $0.1 million for the quarter and $0.6 million YTD), business development and marketing (down $0.3 million for the quarter and $0.5 million YTD) and acquisition-related contingent consideration adjustments (down $0.2 million for the quarter and $1.2 million YTD).

Previous wording

The increases in salaries and benefits expense were driven by merit and market-related increases in employee wages and acquisitions between the periods, partially offset by the impact of the previously announced retail customer service workforce optimization plan and a decrease in employee retirement-related severance expense. The increases in data processing and communications expenses are reflective of the Company’s continued investment in customer-facing and back-office technologies including investments in additional technology to enhance its cybersecurity infrastructure, including the detection and prevention of customer payment-related fraud. The increase in other expenses on a YTD basis was primarily due to increases in insurance expenses and non-service related components lowering the net periodic pension benefit credit. The increase in insurance expenses included $0.3 million associated with an additional expected increase to the Federal Deposit Insurance Corporation (“FDIC”) special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate.

Current wording

The increases in salaries and benefits expense were driven by merit and market-related increases in employee wages, higher incentive plan costs and acquisitions between the periods, partially offset by the impact of the previously announced retail customer service workforce optimization plan. The increases in data processing and communications expenses are reflective of the Company’s continued investment in customer-facing and back-office technologies including investments in additional technology to enhance its cybersecurity infrastructure, in part related to the detection and prevention of customer payment-related fraud. The increase in other expenses on a YTD basis was primarily due to increases in insurance expenses, property-related writedowns and non-service related components lowering the net periodic pension benefit credit. The increase in insurance expenses included $0.2 million associated with an additional expected increase to the Federal Deposit Insurance Corporation (“FDIC”) special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate.

Previous wording

The Company’s GAAP efficiency ratio was 64.7% for the second quarter of 2024, 0.2 percentage points unfavorable to the comparable quarter of 2023. This resulted from total revenues increasing 4.9%, primarily due to higher noninterest revenues, while total noninterest expenses increased 5.3% due to the factors noted above. The GAAP efficiency ratio of 65.7% for June YTD 2024 was 10.1 percentage points favorable to the 75.8% GAAP efficiency ratio for June YTD 2023. The improvement in the GAAP efficiency ratio between the comparable YTD periods was the result of total revenues increasing 20.4% primarily due to the $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the first quarter of 2023, while total noninterest expenses increased 4.4% due to the factors noted above.

Current wording

The Company’s GAAP efficiency ratio was 65.7% for the third quarter of 2024, 0.7 percentage points favorable to the comparable quarter of 2023. This resulted from total revenues increasing 7.7%, due to increases in both noninterest revenues and net interest income, while total noninterest expenses increased 6.6% due to the factors noted above. The GAAP efficiency ratio of 65.7% for September YTD 2024 was 6.6 percentage points favorable to the 72.3% GAAP efficiency ratio for September YTD 2023. The improvement in the GAAP efficiency ratio between the comparable YTD periods was the result of total revenues increasing 15.8% primarily due to the $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the first quarter of 2023, while total noninterest expenses increased 5.1% due to the factors noted above.

Previous wording

Annualized current quarter noninterest expenses as a percentage of average assets increased 0.04 percentage points versus the second quarter of the prior year as noninterest expenses increased 5.3% while average assets increased 4.2%. On a YTD basis, annualized noninterest expenses as a percentage of average assets increased 0.02 percentage points as noninterest expenses increased 4.4% while average assets increased 3.5%. Noninterest expenses increased between both periods due to the factors noted above and average assets increased between both periods primarily due to the aforementioned organic loan growth.

Current wording

Annualized current quarter noninterest expenses as a percentage of average assets increased 0.02 percentage points versus the third quarter of the prior year as noninterest expenses increased 6.6% while average assets increased 6.2%. On a YTD basis, annualized noninterest expenses as a percentage of average assets also increased 0.02 percentage points as noninterest expenses increased 5.1% while average assets increased 4.4%. Noninterest expenses increased between both periods due to the factors noted above and average assets increased between both periods primarily due to the aforementioned organic loan growth.

Previous wording

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 62.5% for the second quarter, 1.1 percentage points unfavorable to the comparable quarter of 2023. This resulted from operating noninterest expenses, a non-GAAP measure as described above, increasing 6.2%, while operating revenues (FTE), a non-GAAP measure as described above, increased 4.4%. The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, of 63.3% for the first six months of 2024 was 1.5 percentage points unfavorable compared to the first six months of 2023 due to 4.9% higher operating noninterest expenses, a non-GAAP measure as described above, while operating revenues (FTE), a non-GAAP measure as described above, increased by 2.3%.

Current wording

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 63.6% for the third quarter, 0.4 percentage points favorable to the comparable quarter of 2023. This resulted from operating revenues (FTE), a non-GAAP measure, increasing 7.7% while operating noninterest expenses, a non-GAAP measure, increased 7.1%. The Company’s operating efficiency ratio, a non-GAAP measure, of 63.4% for the first nine months of 2024 was 0.9 percentage points unfavorable compared to the first nine months of 2023 due to 5.6% higher operating noninterest expenses, a non-GAAP measure as described above, while operating revenues (FTE), a non-GAAP measure as described above, increased by 4.1%.

Previous wording

Annualized current year operating noninterest expenses, a non-GAAP measure as described above, as a percentage of average assets increased 0.06 percentage points versus the prior year quarter and increased 0.03 percentage points versus the prior year-to-date period as operating noninterest expenses, a non-GAAP measure as described above, increased at a higher rate than average assets on both a quarterly and YTD basis. Operating noninterest expenses, a non-GAAP measure as described above, increased 6.2% for the quarter and 4.9% for the year-to-date period, while average assets increased 4.2% for the quarter and 3.5% for the year-to-date period.

Current wording

Annualized current year operating noninterest expenses, a non-GAAP measure as described above, as a percentage of average assets increased 0.03 percentage points versus the prior year quarter and increased 0.04 percentage points versus the prior year-to-date period as operating noninterest expenses, a non-GAAP measure as described above, increased at a higher rate than average assets on both a quarterly and YTD basis. Operating noninterest expenses, a non-GAAP measure, increased 7.1% for the quarter and 5.6% for the year-to-date period, while average assets increased 6.2% for the quarter and 4.4% for the year-to-date period.

Previous wording

The second quarter and YTD 2024 effective income tax rates were 22.8% and 22.9%, respectively, as compared to 21.4% and 21.0% for the comparable periods of 2023. The increase in the second quarter and YTD 2024 effective income tax rates are primarily attributable to an increase in the full-year 2024 pre-tax income projection as compared to the prior year, as the prior YTD included a $52.3 million realized loss on sales of investment securities. The Company recorded a $0.2 million income tax expense and a $0.3 million income tax benefit associated with stock-based compensation for YTD 2024 and YTD 2023, respectively. The effective tax rates adjusted to exclude stock-based compensation tax benefits and federal tax credit amortization for the second quarter and YTD 2024 were 22.3% and 22.1%, respectively, as compared to 21.4% for both of the comparable periods of 2023.

Current wording

The third quarter and YTD 2024 effective income tax rates were 23.0% and 22.9%, respectively, as compared to 21.2% and 21.1% for the comparable periods of 2023. The increase in the third quarter and YTD 2024 effective income tax rates are primarily attributable to an increase in the full-year 2024 pre-tax income projection as compared to the prior year, as the prior YTD included a $52.3 million realized loss on sales of investment securities and a higher proportion of pre-tax income being generated from fully taxable sources.