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 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.

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 months ended March 31, 2025 and 2024, although in some circumstances the fourth 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 35. 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 2025, “last year” and equivalent terms refer to calendar year 2024, “first quarter” refers to the three months ended March 31, 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” beginning 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 38-40 of the most recent Form 10-K (fiscal year ended December 31, 2024) filed with the Securities and Exchange Commission (“SEC”) on February 28, 2025. 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 9 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. 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.

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, and median household income net of inflation. 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 2025, the Company updated the ACL model to add 2024 data into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures. In addition, management adjusted the weighting of the three economic scenarios, increasing the weight for the downside scenario from 30% to 40% and decreasing the weight of the upside scenario from 30% to 20%, to capture additional economic uncertainty, and added additional reserves for business lending to capture additional risk in the portfolio due to the increase in size and volume of new business loans. The change in weighting of the economic scenarios increased the ACL by $0.7 million as compared to the previous weighting and the additional business lending qualitative factor increased the ACL by $2.2 million as compared to the previous factor.

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 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.

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%, 20% and 40%, respectively. The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at March 31, 2025 were 5.2% and 1.3%, respectively, compared to 4.8% and 1.8%, respectively, at December 31, 2024. 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 7.0%. The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three months ended March 31, 2025 by approximately $3.4 million, and decrease net income by $2.6 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 at the same time that economic conditions are changing, 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, and this is reflected in the current methodology that would produce changes to the allowance that are less significant as compared to economic metric-based modeling that is more directly correlated, and therefore sensitive to fluctuations in historical and projected national economic activity.

Previous wording

The Company also provides supplemental reporting of its results on an “operating” or “tangible” basis. During the first quarter of 2024, the Company modified the presentation of its non-GAAP operating results to exclude amortization of intangible assets which the Company believes better reflects core performance across its segments and enhances comparability to both banking and non-banking organizations. The prior period has been recast to conform to the current period presentation. Results on an “operating” basis exclude the after-tax effects of acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain (loss) on equity securities and amortization of intangible assets. Results on a “tangible” basis exclude goodwill and intangible asset balances, net of accumulated amortization and applicable deferred tax amounts. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions or restructuring activities. In addition, the Company provides supplemental reporting for “operating pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain (loss) on equity securities and amortization of intangible assets from income before income taxes. Although operating pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the impact of CECL, helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions or restructuring activities. The Company also provides supplemental reporting of its interest income, net interest income and net interest margin on a fully tax-equivalent (“FTE”) basis, which includes an adjustment to interest income and net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable. Although fully tax-equivalent interest income, net interest income and net interest margin are non-GAAP measures, the Company’s management believes this information helps enhance comparability of the performance of assets that have different tax liabilities. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 14.

Current wording

The Company also provides supplemental reporting of its results on an “operating” or “tangible” basis. Results on an “operating” basis exclude the after-tax effects of acquisition expenses, litigation accrual, unrealized gain on equity securities and amortization of intangible assets. Results on a “tangible” basis exclude goodwill and intangible asset balances, net of accumulated amortization and applicable deferred tax amounts. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisition activity. In addition, the Company provides supplemental reporting for “operating pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual, unrealized gain on equity securities and amortization of intangible assets from income before income taxes. Although operating pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with Current Expected Credit Loss (“CECL”) allowance methods, helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions. The Company also provides supplemental reporting of its interest income, net interest income and net interest margin on a fully tax-equivalent (“FTE”) basis, which includes an adjustment to interest income and net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable. Although fully tax-equivalent interest income, net interest income and net interest margin are non-GAAP measures, the Company’s management believes this information helps enhance comparability of the performance of assets that have different tax profiles. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 14.

Previous wording

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

Current wording

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

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) 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.

Current wording

The Company’s core operating objectives are: (i) maintain diverse revenue streams to achieve positive operating results in all four of the Company’s business units: banking and corporate, employee benefit services, insurance services, and wealth management services, (ii) utilize technology to deliver customer-responsive products and services and improve efficiencies, (iii) increase the noninterest component of total revenues through both organic and acquisition strategies, (iv) optimize the branch network and digital banking delivery systems, primarily through disciplined acquisition strategies, de novo expansions and divestitures/consolidations, (v) build profitable loan and deposit volume using both organic and acquisition strategies, and (vi) 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.

Previous wording

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

Current wording

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

Previous 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.

Current wording

Loan balances increased on both an average and ending basis as compared to the prior year first quarter, reflective of organic loan growth between the periods. Deposit balances also increased on both an average and ending basis as compared to the first quarter of 2024 due primarily to growth in governmental deposit balances. Investment balances, excluding cash equivalents, increased on both an average basis and ending basis between the first quarter of 2024 and the first quarter of 2025, driven by purchases of mortgage-backed securities between the periods. Over the same period, the balance of cash equivalents decreased on an average basis and was impacted by the Company’s utilization of the Federal Reserve’s Bank Term Funding Program during the first quarter of 2024, while cash equivalents increased on an ending basis driven by net deposit inflows. Borrowing balances decreased on an average basis and increased on an ending basis compared to the prior year’s first quarter. The decrease on an average basis was reflective of the Company’s utilization of the Federal Reserve’s Bank Term Funding Program during the prior year’s first quarter while the increase on an ending basis was due to Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings between the periods to support the funding of loan growth.

Previous 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.

Current wording

Noninterest expenses increased $7.2 million, or 6.1%, between the first quarter of 2024 and the first quarter of 2025, primarily due to a $3.4 million increase in salaries and employee benefits, a $1.8 million increase in data processing and communications expenses and a $1.4 million increase in occupancy and equipment expenses. The increase in salaries and employee benefits was primarily driven by merit and market-related increases in employee wages and incentive compensation. The increase in data processing and communications expenses was reflective of continued investment in customer-facing and back-office technologies including investments being made in the development of artificial intelligence applications along with additional technology to enhance the detection and prevention of customer payment-related fraud and cybersecurity-related incidents. Occupancy and equipment expenses increased due to higher winter weather-related property maintenance costs along with incremental expenses associated with the Bank’s de novo branches opened between the periods.

Previous 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.

Current wording

First quarter operating net income, a non-GAAP measure, increased $8.3 million, or 19.0%, as compared to the first quarter of 2024. Operating earnings per share, a non-GAAP measure, of $0.98 for the first quarter increased $0.16 compared to the first quarter of 2024 while operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, increased $0.22 compared to the prior year’s first quarter. These results demonstrate improvement in the Company’s core operating performance between the periods.

Previous 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.

Current wording

As reflected in Table 1, first quarter net interest income of $120.2 million increased $13.2 million, or 12.4%, from the comparable prior year period. The increase was primarily the result of higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to organic loan growth.

Previous 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.

Current wording

Net interest income totaled $120.2 million for the first quarter of 2025 compared to $107.0 million for the first quarter of 2024. As shown in Table 2, fully tax-equivalent net interest income, a non-GAAP measure, for the first quarter was $121.1 million, a $13.1 million, or 12.1%, increase from the same period last year. The increase resulted from a $586.7 million increase in average interest-earnings asset balances, a 27 basis point increase in the yield on average interest-earning assets and a two basis point decrease in the rate paid on average interest-bearing liabilities, partially offset by a $563.2 million increase in average interest-bearing liability balances. As reflected in Table 3, the favorable impacts of the volume increase in average interest-earning asset balances of $6.3 million, the increase in the yield on average interest-earning assets of $8.5 million and the decrease in the rate paid on average interest-bearing liabilities of $0.7 million were partially offset by the unfavorable net interest income impact of the volume increase in average interest-bearing liability balances of $2.4 million. The net interest margin of 3.21% and fully tax-equivalent net interest margin of 3.24%, a non-GAAP measure, for the first quarter of 2025, both increased 26 basis points from the first quarter of 2024, driven by higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to organic loan growth.

Previous 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.

Current wording

The higher yield on average interest-earning assets for the quarter was the result of an increase in the yield on average loans, partially offset by a decrease in the yield on average investments including cash equivalents. The yield on average loans for the first quarter increased by 33 basis points compared to the first quarter of 2024, reflective of an increase in the proportion of higher rate new loan originations and the increase of certain variable and adjustable-rate loan yields. The first quarter of 2025 yield on average investments, including cash equivalents, decreased one basis point compared to the prior year, due to a decrease in the yield on cash equivalents, partially offset by the net effect of the sales and maturities of lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods. The current quarter’s yield on average investments, excluding cash equivalents, increased 10 basis points due to the aforementioned investment securities sales, maturities and purchases.

Previous 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.

Current wording

The average book balance of investments in the first quarter, including cash equivalents, decreased $27.6 million, or 0.6%, as compared to the corresponding prior year period due to a $99.7 million decrease in average cash equivalents, partially offset by a $72.0 million, or 1.6%, increase in average investment balances, reflective of purchases of investment securities between the periods. Investment purchases outpaced sales, maturities, calls and principal payments during the first quarter of 2025, driven by $45.3 million of government agency mortgage-backed securities purchases classified as held-to-maturity. Average loan balances were $614.3 million, or 6.3%, greater than the prior year’s first quarter balances with increases in all five major loan portfolios due to solid organic growth.

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 24.2% 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.

Current wording

Table 2 below sets forth information related to average interest-earning assets and average 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 25.1% in 2025 and 24.4% in 2024. 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 swap, prepayment, late and other fees and the accretion of acquired loan marks. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

Previous wording

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

Current wording

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

Previous 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%.

Current wording

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 38.5% for the quarter ended March 31, 2025 versus 39.4% for the equivalent period of 2024. The decrease was driven by a 12.1% increase in fully tax-equivalent net interest income, a non-GAAP measure, while operating noninterest revenues, a non-GAAP measure, increased 7.9%.

Previous wording

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

Current wording

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

Previous 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%.

Current wording

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 61.9% for the first quarter of 2025, 2.2 percentage points favorable to the comparable quarter of 2024. This resulted from operating revenues (FTE), a non-GAAP measure as described above, increasing by 10.4% while operating noninterest expenses, a non-GAAP measure as described above, increased a lesser 6.6%. Current year operating noninterest expenses, a non-GAAP measure as described above, as a percentage of average assets were 10 basis points higher than the prior year. First quarter operating noninterest expenses, a non-GAAP measure as defined above, increased 6.6% year-over-year, while average assets increased 4.1% primarily due to the aforementioned organic loan growth.

Previous wording

The carrying value of investment securities was $4.29 billion at the end of the third quarter, an increase of $122.2 million, or 2.9%, from December 31, 2023 and an increase of $327.5 million, or 8.3%, from September 30, 2023. The book value of investment securities (excluding unrealized gains and losses) of $4.60 billion at the end of the third quarter increased $57.4 million from December 31, 2023 and increased $97.1 million from September 30, 2023. During the first nine months of 2024, the Company purchased $128.8 million of government agency mortgage-backed securities with an average yield of 5.62%, which the Company classified as held-to-maturity. The Company also participated in a Visa Class B share exchange during the second quarter of 2024, in which half of its Visa Class B shares were converted into Visa Class C shares that are convertible (with certain timing restrictions) to NYSE-traded Visa Class A shares, resulting in a $0.9 million unrealized gain on equity securities. These additions were offset by proceeds of $53.4 million from sales of tax-exempt obligations of state and political subdivisions available-for-sale investment securities, proceeds of $4.1 million from sales of taxable obligations of state and political subdivisions available-for-sale investment securities and $50.2 million of investment maturities, calls and principal payments during the first nine months of 2024. A realized loss of $0.5 million was recognized on the sales of tax-exempt obligations of state and political subdivisions available-for-sale investment securities during the first nine months of 2024. Additionally, there was $28.5 million of net accretion on investment securities during the first nine months of 2024. The effective duration of the investment securities portfolio was 6.4 years at the end of the third quarter of 2024, as compared to 7.0 years at the end of 2023 and 7.2 years at the end of the third quarter of 2023.

Current wording

The carrying value of investment securities (including unrealized gains and losses on available-for-sale securities) was $4.30 billion at the end of the first quarter, an increase of $83.0 million, or 2.0%, from December 31, 2024 and $149.2 million, or 3.6%, higher than March 31, 2024. The book value (excluding unrealized gains and losses) of investment securities increased $31.4 million from December 31, 2024 and increased $79.5 million from March 31, 2024, driven by government agency mortgage-backed securities purchases. During the first quarter of 2025, the Company purchased $44.8 million of government agency mortgage-backed securities with an average yield of 5.35%, which the Company classified as held-to-maturity. These additions were offset by $16.2 million from investment maturities, calls, and principal payments during the first three months of 2025. Additionally, there was $9.5 million of net accretion on investment securities during the first quarter of 2025. The effective duration of the investment securities portfolio was 6.0 years at the end of the first quarter of 2025, as compared to 6.2 years at the end of 2024 and 6.8 years at the end of the first quarter of 2024.

Previous wording

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At September 30, 2024, the investment portfolio (excluding held-to-maturity investment securities) had a $315.9 million net unrealized loss, as compared to a $380.7 million net unrealized loss at December 31, 2023 and a $546.4 million net unrealized loss at September 30, 2023. These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases, sales and maturities that have occurred over the past 12 months.

Current wording

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses. At March 31, 2025, the investment portfolio (excluding held-to-maturity investment securities) had a $353.0 million net unrealized loss, a $51.6 million decrease from the $404.6 million net unrealized loss at December 31, 2024 and a $69.7 million decrease from the $422.7 million net unrealized loss at March 31, 2024. This increase is reflective of movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases, sales and maturities that occurred during the past 12 months.

Previous wording

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

Current wording

The following table sets forth the carrying value for the Company’s investment securities portfolio:

Previous wording

Mortgages on commercial property combined with general-purpose business lending to commercial, industrial, non-profit and municipal customers and vehicle dealer floor plan financing is characterized as the Company’s business lending activity. The business lending portfolio increased $476.7 million, or 12.2%, from September 30, 2023, and $307.2 million, or 7.5%, from December 31, 2023, driven by net organic growth over both periods. Business non-real estate loans, including commercial and industrial lending, increased $94.1 million, or 9.4%, owner-occupied commercial real estate increased $117.4 million, or 15.6%, multifamily increased $75.0 million, or 12.1%, and non-owner occupied commercial real estate increased $20.7 million, or 1.2%, as compared to December 31, 2023. While certain macroeconomic concerns are persisting related to non-owner occupied and multifamily commercial real estate and construction loans, the Company’s exposure to these portfolios remains diverse both geographically and by property type, and remains relatively low at 15% of total assets, 24% of total loans and 199% of total bank-level regulatory capital. Commercial real estate lending represents 75.1% of the total business lending portfolio at September 30, 2024 while other business lending, including commercial and industrial loans represents the remaining 24.9% of total business lending. The Company’s largest non-owner occupied commercial real estate lending concentration by property type is multifamily at 21.1% of total commercial real estate lending, followed by office at 11.3% and commercial construction, at 10.5%. The Company’s largest owner-occupied commercial real estate lending concentration by industry is retail trade at 9.0% of total commercial real estate lending, followed by arts, entertainment and recreation and health care and social assistance, both at 2.7%. These levels demonstrate the Company’s diversity in the business lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) that accounts for more than 13% of the CRE portfolio and a very low level of commercial real estate lending being conducted in major metropolitan areas. See Table 7 below for concentrations of CRE lending by borrower type and Table 8 below for concentrations of CRE by property location.

Current wording

Mortgages on commercial property combined with general-purpose business lending to commercial, industrial, non-profit and governmental customers and vehicle dealer floor plan financing is characterized as the Company’s business lending activity. The business lending portfolio increased $319.8 million, or 7.6%, from March 31, 2024, and $34.8 million, or 0.8%, from December 31, 2024, driven by net organic growth over both periods. As compared to December 31, 2024, multifamily increased $77.7 million, or 10.7% and business non-real estate loans, including commercial and industrial lending, increased $37.6 million, or 3.3%, while non-owner occupied commercial real estate decreased $74.2 million, or 4.2%, and owner-occupied commercial real estate decreased $6.3 million, or 0.7%. The change from December 31, 2024 includes $68.1 million of construction loans that were reclassified from non-owner occupied to multifamily during the first quarter of 2025. While certain macroeconomic concerns persist related to non-owner occupied and multifamily commercial real estate, the Company’s exposure to these portfolios is diverse both geographically and by industry type, and remains relatively low at 15% of total assets, 24% of total loans and 191% of total bank-level regulatory capital. Commercial real estate (“CRE”) lending represents 74.0% of the total business lending portfolio at March 31, 2025 while other commercial and industrial lending represents the remaining 26.0% of total business lending. The Company’s largest non-owner occupied commercial real estate lending concentration by property type is multifamily at 17.7% of total business lending, followed by office and lodging, at 8.5% and 7.2%, respectively. The Company’s largest owner-occupied lending concentration by industry is retail trade at 6.2% of total business lending, followed by arts, entertainment and recreation at 1.9% and health care and social assistance at 1.8%. These levels demonstrate the Company’s diversity in the lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) accounting for more than 14% of the CRE portfolio and a very low level of commercial real estate lending being conducted in major metropolitan areas. See Table 7 below for concentrations of CRE lending by borrower type and Table 8 below for concentrations of CRE by property location.

Previous wording

The business loan balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the Company’s market areas, as well as the Company’s strong liquidity profile relative to competitors that creates opportunities to gain market share. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins. The Company expects the composition of its growth in its business lending portfolio over the remaining quarter of 2024 to be proportionally higher for business non-real estate lending than commercial real estate lending compared to what was experienced by the Company over the past several years, in order to keep the concentration of its CRE portfolio relatively constant. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category.

Current wording

The business loan balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the Company’s market areas, as well as the Company’s strong liquidity profile relative to competitors that creates opportunities to gain market share. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong credit quality and producing profitable margins. The Company intends the composition of its growth in its business lending portfolio over the remainder of 2025 to be proportionally higher for business non-real estate lending than commercial real estate lending compared to what was experienced by the Company over the past several years, with the intent of keeping CRE loans’ share of the total business portfolio relatively constant. The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category. To assist business lending customers in managing their interest rate risk, the Company enters into interest rate swaps which have associated interest rate and credit risk; for additional detail on the Company’s use of interest rate swaps, see Note K beginning on page 30 of this Form 10-Q.

Previous wording

The following table presents the concentration by borrower type of the Company’s CRE loan balances as of September 30, 2024:

Current wording

The following table presents the concentration by borrower type of the Company’s CRE loan balances as of March 31, 2025 and December 31, 2024:

Previous wording

The following table presents the geographic concentrations of the Company’s CRE loan balances by property location (MSA) as of September 30, 2024:

Current wording

The following table presents the geographic concentrations of the Company’s CRE loan balances by property location (MSA) as of March 31, 2025 and December 31, 2024:

Previous wording

Consumer mortgages increased $230.6 million, or 7.2%, from one year ago and increased $142.3 million, or 4.3%, from December 31, 2023, with the increases over both periods representing net organic growth and included the impact of certain secondary market sales. The Company sold $27.4 million and $39.9 million of consumer mortgage production during the three and nine months ended 2024, respectively. Over the past year, the Company produced organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, recruitment of additional mortgage loan originators and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets relative to the national environment. Reflective of the higher interest rate environment and consumer expectations of future interest rate movements, the consumer mortgage growth produced over the last quarter is comprised of a higher proportion of adjustable rate loans than experienced in recent periods. During the first nine months of 2024, approximately 21% of new consumer mortgage loan originations was comprised of adjustable rate loans compared to approximately 7% over the first nine months of 2023. The Company expects this trend to continue during the remainder of 2024. Home equity loans increased $16.2 million, or 3.6%, from one year ago and increased $14.4 million, or 3.2%, from December 31, 2023, in part a result of lower levels of payoffs and paydowns related to consumer mortgage refinancing in the higher interest rate environment.

Current wording

Consumer mortgages increased $186.7 million, or 5.6%, from one year ago and increased $14.4 million, or 0.4%, from December 31, 2024, with the increases over both periods representing net organic growth and included the impact of certain secondary market sales of organic production. The Company sold $17.6 million and $75.2 million of consumer mortgage production during the first quarter of 2025 and over the last twelve months, respectively. Over the past year, the Company produced net organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, recruitment of additional mortgage loan originators and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets relative to the national environment. Home equity loans increased $35.2 million, or 7.9%, from one year ago and increased $3.8 million, or 0.8%, from December 31, 2024, in part a result of lower levels of payoffs and paydowns related to consumer mortgage refinancing in the higher interest rate environment.

Previous wording

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine and recreational vehicle dealerships (referred to as “consumer indirect”), increased $78.2 million, or 4.1%, from one year ago, and increased $83.1 million, or 4.4%, from December 31, 2023. The increases were primarily due to the Company offering competitive pricing, benefitting from reduced participation by certain competitors and capturing an increased share of the sales volumes that existed in its market area and dealer network, which resulted in growth in the Company’s consumer installment portfolio. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer direct loans have provided a key source of credit to the Company’s retail customers across its branch network for an extended period of time, and the Company is committed to continuing to offer competitive loan products in this segment. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.

Current wording

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine and recreational vehicle dealerships (referred to as “consumer indirect”), decreased $4.0 million, or 0.2%, from one year ago, and decreased $64.2 million, or 3.3%, from December 31, 2024. The decrease was primarily due to a weather-related reduction in vehicle sales volume in the Company’s footprint. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network. Consumer installment loans have historically provided attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.

Previous wording

The following table sets forth the allocation of the allowance for credit losses by loan category as of the end of the periods indicated, as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to change when the risk factors of each component part change. The allocation is not indicative of the specific amount of future net charge-offs that is expected to be incurred in each of the loan categories, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table 9, total allowance for credit losses at the end of the third quarter was $76.2 million, an increase of $11.2 million, or 17.3%, from one year earlier and up $9.5 million, or 14.2%, from the end of 2023.

Current wording

The following table sets forth the allocation of the allowance for credit losses by loan category as of the end of the periods indicated, as well as the proportional share of each category’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to change when the risk factors of each component part change. The allocation is not indicative of the specific amount of future net charge-offs that is expected to be incurred in each of the loan categories, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. As shown in Table 9, total allowance for credit losses at the end of the first quarter was $82.8 million, an increase of $12.7 million, or 18.2%, from one year earlier and up $3.7 million, or 4.7%, from the end of 2024.

Previous wording

As demonstrated in Table 9, the consumer direct and indirect installment loan portfolios carry higher credit risk than the business lending, consumer mortgage and home equity portfolios and therefore the Company allocates a higher proportional allowance to these portfolios. The unallocated allowance is maintained for potential inherent losses in the specific portfolios that are not captured due to model imprecision. The unallocated allowance of $1.0 million at September 30, 2024 was consistent with December 31, 2023 and September 30, 2023. The changes in allowance allocations reflect management’s continued refinement of its loss estimation techniques. Management considers the allocated and unallocated portions of the allowance for credit losses to be prudent and reasonable.

Current wording

As demonstrated in Table 9, the consumer direct and indirect installment loan portfolios carry higher credit risk than the business lending, consumer mortgage and home equity portfolios and therefore the Company allocates a higher proportional allowance to these portfolios. The unallocated allowance is maintained for potential inherent losses in the specific portfolios that are not captured due to model imprecision. The unallocated allowance of $1.0 million at March 31, 2025 was consistent with December 31, 2024 and March 31, 2024.

Previous wording

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

Current wording

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

Previous wording

Net charge-offs during the third quarter of 2024 were $2.8 million, an increase of $1.5 million compared to the third quarter of 2023. Compared with the third quarter of 2023, all loan portfolios experienced higher levels of net charge-offs. The total net charge-off ratio (net charge-offs annualized as a percentage of average loans outstanding for the quarter) for the third quarter was 0.11%, one basis point higher than the ratio for the fourth quarter of 2023 and six basis points higher than the ratio for the third quarter of 2023. Net charge-off ratios for the third quarter of 2024 for all loan portfolios were above the Company’s average for the trailing eight quarters.

Current wording

The net charge-offs during the first quarter of 2025 were $3.2 million, $0.4 million higher than the first quarter of 2024, with business lending and consumer indirect experiencing higher net charge-off levels while consumer mortgage, consumer direct and home equity were lower than the prior year. The total net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the first quarter of 2025 was 0.13%, one basis point higher than both the level during the first quarter of 2024 and the fourth quarter of 2024. Net charge-off levels for the first quarter of 2025 were below the Company’s average for the trailing eight quarters for all portfolios except for consumer indirect. While there is additional economic uncertainty in the first quarter of 2025, the Company generally continues to experience low and stable levels of losses as compared to the Company’s 10-year historical averages.

Previous wording

Other real estate owned (“OREO”) at September 30, 2024 was $2.3 million. This compares to $1.2 million at December 31, 2023 and $0.6 million at September 30, 2023. At September 30, 2024, OREO consisted of 34 residential properties with a total value of $2.3 million. This compares to 21 residential properties with a total value of $1.1 million and one commercial property with a value of $0.1 million at December 31, 2023, and 10 residential properties with a total value of $0.6 million at September 30, 2023. The increase in OREO over the last twelve months was primarily driven by the Company working through a backlog of residential foreclosures that arose due to pandemic-related moratoriums that have since been lifted.

Current wording

Other real estate owned (“OREO”) at March 31, 2025 was $2.7 million as compared to $1.7 million at March 31, 2024 and $2.8 million at December 31, 2024. At March 31, 2025, OREO consisted of 46 residential properties with a total value of $2.7 million and no commercial properties. This compares to 44 residential properties with a total value of $2.8 million and no commercial properties at December 31, 2024, and 23 residential properties with a total value of $1.3 million and two commercial properties with a total value of $0.4 million at March 31, 2024. The increase in OREO over the last twelve months was primarily driven by the Company working through a backlog of residential foreclosures that arose due to pandemic-related moratoriums that have since been lifted.

Previous wording

Approximately 49% of the nonperforming loans at September 30, 2024 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry and property type. Of the nonperforming loans in the business lending portfolio, non-owner occupied commercial real estate represents 40% of the balance, owner-occupied commercial real estate represents 33% of the balance, other commercial and industrial loans represents 26% of the balance, and multifamily represents the remaining 1% of the balance. The level of nonperforming business loans increased from the prior year primarily due to changes in the financial conditions and loan repayment performance of five business lending relationships, including one business lending relationship with total loan balances of $14.5 million, that were individually assessed for a specific allocation of the allowance for credit losses.

Current wording

Approximately 55% of the nonperforming loans at March 31, 2025 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry and property type. Of the nonperforming loans in the business lending portfolio, multifamily represents 30% of the balance, non - owner occupied commercial real estate represents 29% of the balance, other commercial and industrial loans represents 24% of the balance and owner - occupied commercial real estate represents 17% of the balance. The level of nonperforming business loans increased from the prior year primarily due to changes in the financial conditions and loan repayment performance of three business lending relationships that were individually assessed for a specific allocation of the allowance for credit losses.

Previous wording

Approximately 46% of nonperforming loans at September 30, 2024 were comprised of consumer mortgages. Collateral values of residential properties within most of the Company’s market areas have generally remained stable or increased over the past several years. Although high levels of inflation has had some adverse impact on consumers, the unemployment rate remains low and this has contributed to the credit performance in the consumer mortgage loan portfolio remaining favorable. The remaining 5% of nonperforming loans relate to consumer installment and home equity loans, with home equity nonperforming loan levels being driven by the same factors that were identified for consumer mortgages. The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 121% at the end of the third quarter, as compared to 122% at year-end 2023 and 176% at September 30, 2023. The decrease in this ratio versus one year ago was due to nonperforming loans increasing proportionally more than the allowance for credit losses, primarily driven by the aforementioned increase in a limited number of nonperforming business loans.

Current wording

Approximately 41% of nonperforming loans at March 31, 2025 were comprised of consumer mortgages. Collateral values of residential properties within most of the Company’s market areas have generally remained stable or increased over the past several years. Although high levels of inflation has had some adverse impact on consumers, the unemployment rate remains low and this has contributed to the credit performance in the consumer mortgage loan portfolio remaining favorable. The remaining 4% of nonperforming loans relate to consumer installment and home equity loans, with home equity nonperforming loan levels being driven by the same factors that were identified for consumer mortgages. Consumer installment loans generally have very low non-performing levels because they are usually charged off prior to becoming 90 or more days delinquent or reaching non-accrual status. The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 110% at the end of the first quarter, as compared to 108% at year-end 2024 and 142% at March 31, 2024. The decrease in this ratio between the annual quarterly periods was due to nonperforming loans increasing proportionally more than the allowance for credit losses, primarily driven by the aforementioned increase in nonperforming business loans.

Previous wording

The Company’s senior management, special asset officers and business lending management review all delinquent and nonaccrual loans and OREO regularly in order to identify deteriorating situations, monitor known problem credits and discuss any needed changes to collection efforts, if warranted. Based on this analysis, a relationship may be assigned a special assets officer or other senior lending officer to review the loan, meet with the borrowers, assess the collateral and recommend an action plan. This plan could include foreclosure, restructuring loans, issuing demand letters or other actions. The Company’s larger criticized credits are also reviewed on a quarterly basis by senior management, senior credit administration management, special assets officers and business lending management to monitor their status and discuss relationship management plans. Business lending management reviews the criticized business loan portfolio on a monthly basis.

Current wording

The Company’s senior management, special asset officers and business lending management review all delinquent and nonaccrual loans and OREO regularly in order to identify deteriorating situations, monitor known problem credits and discuss any needed changes to collection efforts, if warranted. Based on this analysis, a relationship may be assigned a special assets officer or other senior lending officer to review the loan, meet with the borrowers, assess the collateral and recommend an action plan. This plan could include foreclosure, restructuring loans, issuing demand letters or other actions. The Company’s larger criticized credits (greater than $2.0 million exposure) are also reviewed on a quarterly basis by senior management, senior credit administration management, special assets officers and business lending management to monitor their status and discuss relationship management plans. Business lending management reviews the criticized business loan portfolio on a monthly basis.

Previous wording

Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 1.07% at the end of the third quarter, one basis point above the 1.06% level at year-end 2023 and 17 basis points above the 0.90% level at September 30, 2023. The business lending delinquency ratio at the end of the third quarter of 0.74% was 13 basis points above the level of 0.61% at December 31, 2023 and 25 basis points above the level of 0.49% at September 30, 2023. The delinquency rates for all loan portfolios except for business lending and consumer mortgage decreased as compared to the levels at December 31, 2023. The delinquency rates for all loan portfolios except for home equity increased as compared to the levels at September 30, 2023.

Current wording

Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 1.29% at the end of the first quarter of 2025, five basis points above the year-end 2024 ratio of 1.24% and 36 basis points above the March 31, 2024 ratio of 0.93%. The business lending delinquency ratio at the end of the first quarter was 27 basis points above the level at December 31, 2024 and 80 basis points above the level at March 31, 2024. The delinquency rates for the consumer mortgage, consumer indirect and consumer direct portfolios all increased as compared to the levels at March 31, 2024 while the home equity delinquency rate decreased. The consumer direct, consumer indirect, and consumer mortgage delinquency rates were lower than the rate at December 31, 2024 while home equity was consistent.

Previous wording

The Company recorded a $7.7 million provision for credit losses in the third quarter of 2024. The third quarter provision for credit losses was $4.8 million higher than the equivalent prior year period’s provision for credit losses of $2.9 million. The allowance for credit losses of $76.2 million as of September 30, 2024 increased $11.2 million from one year ago. The current quarter provision for credit losses is reflective of a slight adverse movement in certain asset quality metrics, an increase in loan balances and continued macroeconomic uncertainty primarily concerning the business lending and consumer indirect portfolios. The allowance for credit losses to total loans ratio was 0.74% at September 30, 2024, five basis points higher than the levels at December 31, 2023 and September 30, 2023. Refer to Note E: Loans and Allowance for Credit Losses in the notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

Current wording

The Company recorded a $6.7 million provision for credit losses in the first quarter of 2025. The first quarter provision for credit losses was $0.6 million higher than the equivalent prior year period’s provision for credit losses of $6.1 million. The allowance for credit losses of $82.8 million as of March 31, 2025 increased $12.7 million from the level one year ago. The current quarter provision for credit losses is reflective of the Company increasing its qualitative assessment for economic uncertainty as well as an increase in the specific reserve on one non-owner occupied CRE loan relationship placed on nonaccrual status during the fourth quarter of 2023. The allowance for credit losses to total loans ratio was 0.79% at March 31, 2025, eight basis points higher than the level at March 31, 2024 and three basis points higher than the level at December 31, 2024. Refer to Note E: Loans and Allowance for Credit Losses in the notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

Previous wording

As of September 30, 2024, the net purchase discount related to the $934.7 million of remaining non-purchased credit deteriorated (“PCD”) loan balances acquired through prior period acquisition transactions was approximately $18.3 million, or 2.0% of that portfolio.

Current wording

As of March 31, 2025, the net purchase discount related to the $860.5 million of remaining non-Purchased Credit Deteriorated (“PCD”) loan balances acquired through prior period acquisition transactions was approximately $16.8 million, or 2.0% of that portfolio.