UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q

(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022.

OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

COMMISSION FILE NUMBER 0-14703

NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware
  
16-1268674
(State of Incorporation)
  
(I.R.S. Employer Identification No.)

52 South Broad Street, Norwich, New York 13815
(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (607) 337-2265

None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

Title of class
  
Trading Symbol(s)
  
Name of exchange on which registered
Common Stock, par value $0.01 per share
  
NBTB
  
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

As of October 31, 2022, there were 42,839,903 shares outstanding of the Registrant’s Common Stock, $0.01 par value per share.

NBT BANCORP INC.
FORM 10-Q - Quarter Ended September 30, 2022

TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION

Item 1
Financial Statements (Unaudited)
  
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
9
     
Item 2
 29
     
Item 3
 45
     
Item 4
 45
     
PART II
OTHER INFORMATION
  
     
Item 1
 46
Item 1A
46
Item 2
46
Item 3
46
Item 4
46
Item 5
46
Item 6
47
     
 
48

Table of Contents
Item 1 – FINANCIAL STATEMENTS

NBT Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)

 
September 30,
    
December 31,
  
   
2022
    
2021
  
(In thousands, except share and per share data)
            
Assets
            
Cash and due from banks
  
$
223,755
    
$
157,775
  
Short-term interest-bearing accounts
    
97,303
      
1,111,296
  
Equity securities, at fair value
    
30,428
      
33,550
  
Securities available for sale, at fair value
    
1,556,501
      
1,687,361
  
Securities held to maturity (fair value $814,100 and $735,260, respectively)
    
929,541
      
733,210
  
Federal Reserve and Federal Home Loan Bank stock
    
24,892
      
25,098
  
Loans held for sale
    
87
      
830
  
Loans
    
7,904,784
      
7,498,459
  
Less allowance for loan losses
    
96,800
      
92,000
  
Net loans
  
$
7,807,984
    
$
7,406,459
  
Premises and equipment, net
    
69,338
      
72,093
  
Goodwill
    
281,204
      
280,541
  
Intangible assets, net
    
7,879
      
8,927
  
Bank owned life insurance
    
230,990
      
228,238
  
Other assets
    
380,840
      
266,733
  
Total assets
  
$
11,640,742
    
$
12,012,111
  
Liabilities
                
Demand (noninterest bearing)
  
$
3,714,342
    
$
3,689,556
  
Savings, NOW and money market
    
5,758,736
      
6,043,441
  
Time
    
445,673
      
501,472
  
Total deposits
  
$
9,918,751
    
$
10,234,469
  
Short-term borrowings
    
74,554
      
97,795
  
Long-term debt
    
3,322
      
13,995
  
Subordinated debt, net
    
98,817
      
98,490
  
Junior subordinated debt
    
101,196
      
101,196
  
Other liabilities
    
287,556
      
215,713
  
Total liabilities
  
$
10,484,196
    
$
10,761,658
  
Stockholders’ equity
                
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at September 30, 2022 and December 31, 2021
  
$
-
    
$
-
  
Common stock, $0.01 par value. Authorized 100,000,000 shares at September 30, 2022 and December 31, 2021; issued 49,651,493 at September 30, 2022 and December 31, 2021
    
497
      
497
  
Additional paid-in-capital
    
577,899
      
576,976
  
Retained earnings
    
935,170
      
856,203
  
Accumulated other comprehensive loss
    
(183,539
)
    
(23,344
)
Common stock in treasury, at cost, 6,812,238 and 6,483,481 shares at September 30, 2022 and December 31, 2021, respectively
    
(173,481
)
    
(159,879
)
Total stockholders’ equity
  
$
1,156,546
    
$
1,250,453
  
Total liabilities and stockholders’ equity
  
$
11,640,742
    
$
12,012,111
  

See accompanying notes to unaudited interim consolidated financial statements.

3
Table of Contents
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)

 
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2022
    
2021
    
2022
    
2021
  
(In thousands, except per share data)
                        
Interest, fee and dividend income
                        
Interest and fees on loans
  
$
85,266
    
$
72,817
    
$
237,148
    
$
222,705
  
Securities available for sale
    
7,665
      
5,898
      
21,822
      
17,204
  
Securities held to maturity
    
4,854
      
2,976
      
12,532
      
9,454
  
Other
    
1,429
      
524
      
3,396
      
1,206
  
Total interest, fee and dividend income
  
$
99,214
    
$
82,215
    
$
274,898
    
$
250,569
  
Interest expense
                                
Deposits
  
$
2,233
    
$
2,548
    
$
5,831
    
$
8,582
  
Short-term borrowings
    
84
      
28
      
113
      
130
  
Long-term debt
    
20
      
89
      
140
      
301
  
Subordinated debt
    
1,360
      
1,359
      
4,078
      
4,077
  
Junior subordinated debt
    
1,039
      
517
      
2,325
      
1,572
  
Total interest expense
  
$
4,736
    
$
4,541
    
$
12,487
    
$
14,662
  
Net interest income
  
$
94,478
    
$
77,674
    
$
262,411
    
$
235,907
  
Provision for loan losses
    
4,484
      
(3,342
)
    
9,470
      
(11,354
)
Net interest income after provision for loan losses
  
$
89,994
    
$
81,016
    
$
252,941
    
$
247,261
  
Noninterest income
                                
Service charges on deposit accounts
  
$
3,581
    
$
3,489
    
$
11,032
    
$
9,544
  
Card services income    
5,654
      
9,101
      
24,100
      
25,835
  
Retirement plan administration fees
    
11,496
      
10,495
      
37,451
      
30,372
  
Wealth management
    
8,402
      
8,783
      
25,294
      
25,099
  
Insurance services
    
3,892
      
3,720
      
11,258
      
10,689
  
Bank owned life insurance income
    
1,560
      
1,548
      
4,625
      
4,588
  
Net securities (losses) gains
    
(148
)
    
(100
)
    
(914
)
    
568
  
Other
    
2,735
      
3,293
      
8,641
      
9,988
  
Total noninterest income
  
$
37,172
    
$
40,329
    
$
121,487
    
$
116,683
  
Noninterest expense
                                
Salaries and employee benefits
  
$
48,371
    
$
44,190
    
$
140,595
    
$
128,462
  
Technology and data services
     9,096       8,421       26,588       26,154  
Occupancy
    
6,481
      
6,154
      
19,761
      
19,413
  
Professional fees and outside services
    
3,817
      
3,784
      
11,999
      
11,403
  
Office supplies and postage
    
1,469
      
1,364
      
4,441
      
4,478
  
FDIC expense
    
787
      
772
      
2,399
      
2,243
  
Advertising
    
559
      
583
      
1,943
      
1,502
  
Amortization of intangible assets
    
544
      
663
      
1,725
      
2,157
  
Loan collection and other real estate owned, net
    
549
      
706
      
1,690
      
1,959
  
Other
    
5,021
      
6,232
      
13,815
      
14,405
  
Total noninterest expense
  
$
76,694
    
$
72,869
    
$
224,956
    
$
212,176
  
Income before income tax expense
  
$
50,472
    
$
48,476
    
$
149,472
    
$
151,768
  
Income tax expense
    
11,499
      
11,043
      
33,598
      
34,193
  
Net income
  
$
38,973
    
$
37,433
    
$
115,874
    
$
117,575
  
Earnings per share
                                
Basic
  
$
0.91
    
$
0.86
    
$
2.70
    
$
2.71
  
Diluted
  
$
0.90
    
$
0.86
    
$
2.68
    
$
2.69
  

See accompanying notes to unaudited interim consolidated financial statements.

4
Table of Contents
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2022
    
2021
    
2022
    
2021
  
(In thousands)
                        
Net income
  
$
38,973
    
$
37,433
    
$
115,874
    
$
117,575
  
Other comprehensive income (loss), net of tax:
                                
                                 
Securities available for sale:
                                
Unrealized net holding (losses) gains arising during the period, gross
  
$
(78,653
)
  
$
(7,426
)
  
$
(214,543
)
  
$
(21,329
)
Tax effect
    
19,663
      
1,857
      
53,636
      
5,332
  
Unrealized net holding (losses) gains arising during the period, net
  
$
(58,990
)
  
$
(5,569
)
  
$
(160,907
)
  
$
(15,997
)
                                 
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross
  
$
125
    
$
149
    
$
393
    
$
434
  
Tax effect
    
(31
)
    
(38
)
    
(98
)
    
(109
)
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net
  
$
94
    
$
111
    
$
295
    
$
325
  
                                 
Total securities available for sale, net
  
$
(58,896
)
  
$
(5,458
)
  
$
(160,612
)
  
$
(15,672
)
                                 
Cash flow hedges:
                                
Reclassification of net unrealized losses on cash flow hedges to interest expense, gross
  
$
-
    
$
-
    
$
-
    
$
21
  
Tax effect
    
-
      
-
      
-
      
(5
)
Reclassification of net unrealized losses on cash flow hedges to interest expense, net
  
$
-
    
$
-
    
$
-
    
$
16
  
                                 
Total cash flow hedges, net
  
$
-
    
$
-
    
$
-
    
$
16
  
                                 
Pension and other benefits:
                                
Amortization of prior service cost and actuarial losses, gross
  
$
185
    
$
344
    
$
557
    
$
996
  
Tax effect
    
(47
)
    
(86
)
    
(140
)
    
(249
)
Amortization of prior service cost and actuarial losses, net
  
$
138
    
$
258
    
$
417
    
$
747
  
                                 
Total pension and other benefits, net
  
$
138
    
$
258
    
$
417
    
$
747
  
                                 
Total other comprehensive (loss)
  
$
(58,758
)
  
$
(5,200
)
  
$
(160,195
)
  
$
(14,909
)
Comprehensive (loss) income
  
$
(19,785
)
  
$
32,233
    
$
(44,321
)
  
$
102,666
  

See accompanying notes to unaudited interim consolidated financial statements.

5
Table of Contents
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (unaudited)

 
Common
Stock
    
Additional
Paid-in-
Capital
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
(Loss) Income
    
Common
Stock in
Treasury
    
Total
  
(In thousands, except share and per share data)
                                    
Balance at June 30, 2022
  
$
497
    
$
577,345
    
$
909,029
    
$
(124,781
)
  
$
(173,534
)
  
$
1,188,556
  
Net income
    
-
      
-
      
38,973
      
-
      
-
      
38,973
  
Cash dividends - $0.30 per share
    
-
      
-
      
(12,832
)
    
-
      
-
      
(12,832
)
Net issuance of 2,849 shares to employee and other stock plans
    
-
      
(116
)
    
-
      
-
      
53
      
(63
)
Stock-based compensation
    
-
      
670
      
-
      
-
      
-
      
670
  
Other comprehensive (loss)
    
-
      
-
      
-
      
(58,758
)
    
-
      
(58,758
)
Balance at September 30, 2022
  
$
497
    
$
577,899
    
$
935,170
    
$
(183,539
)
  
$
(173,481
)
  
$
1,156,546
  
                                                 
Balance at June 30, 2021
  
$
497
    
$
576,732
    
$
805,722
    
$
(9,292
)
  
$
(148,603
)
  
$
1,225,056
  
Net income
    
-
      
-
      
37,433
      
-
      
-
      
37,433
  
Cash dividends - $0.28 per share
    
-
      
-
      
(12,138
)
    
-
      
-
      
(12,138
)
Purchase of 119,342 treasury shares
     -       -       -       -       (4,212 )     (4,212 )
Net issuance of 1,672 shares to employee and other stock plans
    
-
      
(73
)
    
-
      
-
      
28
      
(45
)
Stock-based compensation
    
-
      
563
      
-
      
-
      
-
      
563
  
Other comprehensive (loss)
    
-
      
-
      
-
      
(5,200
)
    
-
      
(5,200
)
Balance at September 30, 2021
  
$
497
    
$
577,222
    
$
831,017
    
$
(14,492
)
  
$
(152,787
)
  
$
1,241,457
  

 
Common
Stock
    
Additional
Paid-in-
Capital
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
(Loss) Income
    
Common
Stock in
Treasury
    
Total
  
(In thousands, except share and per share data)
                                    
Balance at December 31, 2021
  
$
497
    
$
576,976
    
$
856,203
    
$
(23,344
)
  
$
(159,879
)
  
$
1,250,453
  
Net income
    
-
      
-
      
115,874
      
-
      
-
      
115,874
  
Cash dividends - $0.86 per share
    
-
      
-
      
(36,907
)
    
-
      
-
      
(36,907
)
Purchase of 400,000 treasury shares
    
-
      
-
      
-
      
-
      
(14,713
)
    
(14,713
)
Net issuance of 71,243 shares to employee and other stock plans
    
-
      
(3,026
)
    
-
      
-
      
1,111
      
(1,915
)
Stock-based compensation
    
-
      
3,949
      
-
      
-
      
-
      
3,949
  
Other comprehensive (loss)
    
-
      
-
      
-
      
(160,195
)
    
-
      
(160,195
)
Balance at September 30, 2022
  
$
497
    
$
577,899
    
$
935,170
    
$
(183,539
)
  
$
(173,481
)
  
$
1,156,546
  
                                                 
Balance at December 31, 2020
  
$
497
    
$
578,082
    
$
749,056
    
$
417
    
$
(140,434
)
  
$
1,187,618
  
Net income
    
-
      
-
      
117,575
      
-
      
-
      
117,575
  
Cash dividends - $0.82 per share
    
-
      
-
      
(35,614
)
    
-
      
-
      
(35,614
)
Purchase of 400,000 treasury shares
    
-
      
-
      
-
      
-
      
(14,083
)
    
(14,083
)
Net issuance of 108,599 shares to employee and other stock plans
    
-
      
(4,679
)
    
-
      
-
      
1,730
      
(2,949
)
Stock-based compensation
    
-
      
3,819
      
-
      
-
      
-
      
3,819
  
Other comprehensive (loss)
    
-
      
-
      
-
      
(14,909
)
    
-
      
(14,909
)
Balance at September 30, 2021
  
$
497
    
$
577,222
    
$
831,017
    
$
(14,492
)
  
$
(152,787
)
  
$
1,241,457
  

See accompanying notes to unaudited interim consolidated financial statements.

6
Table of Contents
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

 
Nine Months Ended
September 30,
  
   
2022
    
2021
  
(In thousands)
            
Operating activities
            
Net income
  
$
115,874
    
$
117,575
  
Adjustments to reconcile net income to net cash provided by operating activities
                
Provision for loan losses
    
9,470
      
(11,354
)
Depreciation and amortization of premises and equipment
    
7,581
      
7,339
  
Net amortization on securities
    
2,736
      
4,460
  
Amortization of intangible assets
    
1,725
      
2,157
  
Amortization of operating lease right-of-use assets
    
4,989
      
5,401
  
Excess tax benefit on stock-based compensation
    
(183
)
    
(321
)
Stock-based compensation expense
    
3,949
      
3,819
  
Bank owned life insurance income
    
(4,625
)
    
(4,588
)
Amortization of subordinated debt issuance costs
    
327
      
328
  
Proceeds from sale of loans held for sale
    
4,238
      
48,371
  
Originations of loans held for sale
    
(3,573
)
    
(47,996
)
Net gains on sale of loans held for sale
    
(112
)
    
(280
)
Net security losses (gains)
    
914
      
(568
)
Net gains on sale of other real estate owned
    
(259
)
    
(44
)
Net change in other assets and other liabilities
    
10,470
      
12,501
  
Net cash provided by operating activities
  
$
153,521
    
$
136,800
  
Investing activities
                
Net cash used in acquisitions
   $ (2,534 )   $ (1,550 )
Securities available for sale:
                
Proceeds from maturities, calls and principal paydowns
    
177,704
      
308,688
  
Purchases
    
(262,861
)
    
(560,884
)
Securities held to maturity:
                
Proceeds from maturities, calls and principal paydowns
    
154,194
      
149,200
  
Purchases
    
(351,390
)
    
(216,205
)
Equity securities:
                
Proceeds from calls
     -       1,000  
Purchases
     (1,000 )     -  
Other:
                
Net increase in loans
    
(410,805
)
    
(73,344
)
Proceeds from Federal Home Loan Bank stock redemption
    
6,491
      
2,355
  
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock
    
(6,285
)
    
(163
)
Proceeds from settlement of bank owned life insurance
    
1,873
      
3,571
  
Purchases of bank owned life insurance
     -       (40,000 )
Purchases of premises and equipment, net
    
(4,749
)
    
(5,007
)
Proceeds from sales of other real estate owned
    
426
      
784
  
Net cash used in investing activities
  
$
(698,936
)
  
$
(431,555
)
Financing activities
                
Net (decrease) increase in deposits
  
$
(315,718
)
  
$
1,113,486
  
Net decrease in short-term borrowings
    
(23,241
)
    
(68,671
)
Repayments of long-term debt
    
(10,673
)
    
(25,077
)
Proceeds from the issuance of shares to employee and other stock plans
    
-
      
112
  
Cash paid by employer for tax-withholdings on stock issuance
    
(1,346
)
    
(1,973
)
Purchase of treasury stock
    
(14,713
)
    
(14,083
)
Cash dividends
    
(36,907
)
    
(35,614
)
Net cash (used in) provided by financing activities
  
$
(402,598
)
  
$
968,180
  
Net (decrease) increase in cash and cash equivalents
  
$
(948,013
)
  
$
673,425
  
Cash and cash equivalents at beginning of period
    
1,269,071
      
672,681
  
Cash and cash equivalents at end of period
  
$
321,058
    
$
1,346,106
  

7
Table of Contents
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) (continued)

 
Nine Months Ended
September 30,
  
   
2022
    
2021
  
Supplemental disclosure of cash flow information
            
Cash paid during the period for:
            
Interest expense
  
$
14,456
    
$
17,161
  
Income taxes paid, net of refund
    
41,903
      
39,025
  
Noncash investing activities:
                
Loans transferred to other real estate owned
   $
-     $
141  
Acquisitions:                
Fair value of assets acquired   $
705     $
-  

See accompanying notes to unaudited interim consolidated financial statements.

8
Table of Contents
NBT Bancorp Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2022

1.
Description of Business

NBT Bancorp Inc. (the “Company”) is a registered financial holding company incorporated in the state of Delaware in 1986, with its principal headquarters located in Norwich, New York. The principal assets of the Company consist of all of the outstanding shares of common stock of its subsidiaries, including: NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT Holdings, Inc. (“NBT Holdings”), CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II (collectively, the “Trusts”). The Company’s principal sources of revenue are the management fees and dividends it receives from the Bank, NBT Financial and NBT Holdings.

The Company’s business, primarily conducted through the Bank, consists of providing commercial banking, retail banking and wealth management services primarily to customers in its market area, which includes central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central Connecticut. The Company has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services. The Company’s business philosophy is to operate as a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers.

2.
Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of NBT Bancorp Inc. and its wholly-owned subsidiaries: the Bank, NBT Financial and NBT Holdings. Collectively, NBT Bancorp Inc. and its subsidiaries are referred to herein as the “Company”. In the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and in accordance with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, the consolidated financial statements do not include all of the information and notes necessary for complete financial statements in conformity with GAAP. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2021 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation. The Company combined ATM and debit card fees with card related income previously reported in Other noninterest income which is now disclosed as Card services income. The Company reclassified Data processing and communications expense into Technology and data services expense. The Company reclassified Equipment expense into Occupancy expense and Technology and data services expense. The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.

3.
Recent Accounting Pronouncements

Accounting Standards Issued Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. On January 7, 2021, the FASB issued ASU 2021-01, which refines the scope of Accounting Standards Codification 848 (“ASC 848”) and clarifies some of its guidance. ASU 2020-04 and related amendments provide temporary optional expedients and exceptions to the existing guidance for applying GAAP to affected contract modifications and hedge accounting relationships in the transition away from the London Interbank Offered Rate (“LIBOR”) or other interbank offered rate on financial reporting. The guidance also allows a one-time election to sell and/or reclassify to available for sale (“AFS”) or trading held to maturity (“HTM”) debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective March 12, 2020 through December 31, 2022 and permit relief solely for reference rate reform actions and permit different elections over the effective date for legacy and new activity. The Company does not expect that the impact of adopting the new guidance on the consolidated financial statements will have a material impact on the consolidated financial statements.

9
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the guidance on Troubled Debt Restructurings (“TDRs”) and requires an evaluation on all loan modifications to determine if they result in a new loan or a continuation of the existing loan. The ASU also requires that entities disclose current-period gross charge-offs by year of origination. The elimination of the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously modified, resulting in a cumulative effect adjustment to retained earnings in the period of adoption for changes in the allowance for credit losses. The amendments in this ASU are effective for the Company on January 1, 2023, with early adoption permitted. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements and does not expect it will have a material impact on the consolidated financial statements.

4.
Securities

The amortized cost, estimated fair value and unrealized gains and losses of AFS securities are as follows:

(In thousands)
  
Amortized
Cost
    
Unrealized
Gains
    
Unrealized
Losses
    
Estimated
Fair Value
  
As of September 30, 2022
                        
U.S. treasury
   $
132,600     $
-     $ 11,978     $
120,622  
Federal agency
  

248,427
    

-
    

43,637
    

204,790
  
State & municipal
    
98,126
      
-
      
14,311
      
83,815
  
Mortgage-backed:
                                
Government-sponsored enterprises
    
469,757
      
8
      
60,393
      
409,372
  
U.S. government agency securities
    
82,086
      
19
      
7,966
      
74,139
  
Collateralized mortgage obligations:
                                
Government-sponsored enterprises
    
513,088
      
35
      
58,833
      
454,290
  
U.S. government agency securities
    
175,425
      
1
      
19,332
      
156,094
  
Corporate
    
58,980
      
-
      
5,601
      
53,379
  
Total AFS securities
  
$
1,778,489
    
$
63
    
$
222,051
    
$
1,556,501
  
As of December 31, 2021
                                
U.S. treasury
   $
73,016     $
59     $
6     $
73,069  
Federal agency
  

248,454
    

-
    

8,523
    

239,931
  
State & municipal
    
95,531
      
116
      
1,559
      
94,088
  
Mortgage-backed:
                                
Government-sponsored enterprises
    
538,036
      
8,036
      
5,589
      
540,483
  
U.S. government agency securities
    
65,339
      
1,108
      
255
      
66,192
  
Collateralized mortgage obligations:
                                
Government-sponsored enterprises
    
484,550
      
2,723
      
5,113
      
482,160
  
U.S. government agency securities
    
139,380
      
939
      
884
      
139,435
  
Corporate
    
50,500
      
1,516
      
13
      
52,003
  
Total AFS securities
  
$
1,694,806
    
$
14,497
    
$
21,942
    
$
1,687,361
  

There was no allowance for credit losses on AFS securities as of September 30, 2022 and December 31, 2021.

During the three and nine months ended September 30, 2022 and 2021 there were no gains or losses reclassified out of accumulated other comprehensive income (loss) (“AOCI”) and into earnings.

The amortized cost, estimated fair value and unrealized gains and losses of HTM securities are as follows:

(In thousands)
  
Amortized
Cost
    
Unrealized
Gains
    
Unrealized
Losses
    
Estimated
Fair Value
  
As of September 30, 2022
                        
Federal agency
  
$
100,000
    
$
-
    
$
21,179
    
$
78,821
  
Mortgage-backed:
                                
Government-sponsored enterprises
    
254,889
      
-
      
40,946
      
213,943
  
U.S. government agency securities
    
18,403
      
4
      
573
      
17,834
  
Collateralized mortgage obligations:
                                
Government-sponsored enterprises
    
203,213
      
-
      
14,608
      
188,605
  
U.S. government agency securities
    
67,940
      
1
      
9,071
      
58,870
  
State & municipal
    
285,096
      
2
      
29,071
      
256,027
  
Total HTM securities
  
$
929,541
    
$
7
    
$
115,448
    
$
814,100
  
As of December 31, 2021
                                
Federal agency
  
$
100,000
    
$
-
    
$
4,365
    
$
95,635
  
Mortgage-backed:
                                
Government-sponsored enterprises
    
161,462
      
2,232
      
1,319
      
162,375
  
U.S. government agency securities
    
9,112
      
514
      
-
      
9,626
  
Collateralized mortgage obligations:
                                
Government-sponsored enterprises
    
94,342
      
1,932
      
129
      
96,145
  
U.S. government agency securities
    
44,473
      
336
      
674
      
44,135
  
State & municipal
    
323,821
      
5,026
      
1,503
      
327,344
  
Total HTM securities
  
$
733,210
    
$
10,040
    
$
7,990
    
$
735,260
  

10
Table of Contents
At September 30, 2022 and December 31, 2021, all of the mortgaged-backed HTM securities were comprised of U.S. government agency and government-sponsored enterprises securities. There was no allowance for credit losses on HTM securities as of September 30, 2022 and December 31, 2021 because the expectation of nonrepayment of the amortized cost is zero, except for state & municipal securities, which such expected losses from nonrepayment are immaterial.

The Company recorded no gains from calls on HTM securities for the three months ended September 30, 2022. Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $14 thousand for the three months ended September 30, 2021. Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $4 thousand and $29 thousand for the nine months ended September 30, 2022 and 2021, respectively.

AFS and HTM securities with amortized costs totaling $1.74 billion at September 30, 2022 and $1.63 billion at December 31, 2021 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at September 30, 2022 and December 31, 2021, AFS and HTM securities with an amortized cost of $126.2 million and $162.1 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

The following tables set forth information with regard to gains and (losses) on equity securities:

 
Three Months Ended
September 30,
  
(In thousands)
  
2022
    
2021
  
Net (losses) and gains recognized on equity securities
  
$
(148
)
  
$
(114
)
Less: Net (losses) and gains recognized on equity securities sold during the period
    
-
      
-
  
Unrealized (losses) and gains recognized on equity securities still held
  
$
(148
)
  
$
(114
)

 
Nine Months Ended
September 30,
  
(In thousands)
  
2022
    
2021
  
Net (losses) and gains recognized on equity securities
  
$
(918
)
  
$
539
  
Less: Net (losses) and gains recognized on equity securities sold during the period
    
-
      
-
  
Unrealized (losses) and gains recognized on equity securities still held
  
$
(918
)
  
$
539
  

As of September 30, 2022 and December 31, 2021, the carrying value of equity securities without readily determinable fair values was $1.0 million. The Company performed a qualitative assessment to determine whether the investments were impaired and identified no areas of concern as of September 30, 2022 and 2021. There were no impairments, downward or upward adjustments recognized for equity securities without readily determinable fair values during the three and nine months ended September 30, 2022 and 2021.

The following table sets forth information with regard to contractual maturities of debt securities at September 30, 2022:

(In thousands)
  
Amortized
Cost
    
Estimated
Fair Value
  
AFS debt securities:
            
Within one year
  
$
1,644
    
$
1,636
  
From one to five years
    
253,118
      
233,059
  
From five to ten years
    
741,574
      
638,816
  
After ten years
    
782,153
      
682,990
  
Total AFS debt securities
  
$
1,778,489
    
$
1,556,501
  
HTM debt securities:
                
Within one year
  
$
56,687
    
$
56,676
  
From one to five years
    
77,429
      
74,329
  
From five to ten years
    
291,847
      
253,807
  
After ten years
    
503,578
      
429,288
  
Total HTM debt securities
  
$
929,541
    
$
814,100
  

11
Table of Contents
Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Except for U.S. government securities and government-sponsored enterprises securities, there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at September 30, 2022 and December 31, 2021.

The following table sets forth information with regard to investment securities with unrealized losses, for which an allowance for credit losses has not been recorded, segregated according to the length of time the securities had been in a continuous unrealized loss position:

 
Less Than 12 Months
    
12 Months or Longer
    
Total
  
(In thousands)
  
Fair
Value
    
Unrealized
Losses
    
Number
of Positions
    
Fair
Value
    
Unrealized
Losses
    
Number
of Positions
    
Fair
Value
    
Unrealized
Losses
    
Number
of Positions
  
As of September 30, 2022
                                                      
AFS securities:
  
                                                 
U.S. treasury
   $ 120,622     $ (11,978 )     8     $ -     $ -       -     $ 120,622     $ (11,978 )     8  
Federal agency
    
-
      
-
      
-
      
204,790
      
(43,637
)
    
16
      
204,790
      
(43,637
)
    
16
  
State & municipal
    
19,439
      
(2,716
)
    
16
      
64,376
      
(11,595
)
    
52
      
83,815
      
(14,311
)
    
68
  
Mortgage-backed
    
245,801
      
(22,675
)
    
160
      
236,256
      
(45,684
)
    
24
      
482,057
      
(68,359
)
    
184
  
Collateralized mortgage obligations
    
381,916
      
(37,494
)
    
96
      
223,569
      
(40,671
)
    
26
      
605,485
      
(78,165
)
    
122
  
Corporate     53,379       (5,601 )     17       -       -       -       53,379       (5,601 )     17  
Total securities with unrealized losses
  
$
821,157
    
$
(80,464
)
    
297
    
$
728,991
    
$
(141,587
)
    
118
    
$
1,550,148
    
$
(222,051
)
    
415
  
                                                                         
HTM securities:
                                                                        
Federal agency
  
$
-
    
$
-
      
-
    
$
78,821
    
$
(21,179
)
    
4
    
$
78,821
    
$
(21,179
)
    
4
  
Mortgage-backed
    
159,823
      
(24,108
)
    
25
      
71,827
      
(17,411
)
    
9
      
231,650
      
(41,519
)
    
34
  
Collateralized mortgage obligation
     204,362
       (13,975 )     47
       42,467
       (9,704 )     6
       246,829
       (23,679 )     53
  
State & municipal
    
154,286
      
(17,017
)
    
189
      
40,517
      
(12,054
)
    
42
      
194,803
      
(29,071
)
    
231
  
Total securities with unrealized losses
  
$
518,471
    
$
(55,100
)
    
261
    
$
233,632
    
$
(60,348
)
    
61
    
$
752,103
    
$
(115,448
)
    
322
  
                                                                         
As of December 31, 2021
                                                                        
AFS securities:
                                                                        
U.S. treasury
   $ 49,105     $ (6 )     2     $ -     $ -       -     $ 49,105     $ (6 )     2  
Federal agency
    
41,618
      
(1,846
)
    
4
      
198,313
      
(6,677
)
     12      
239,931
      
(8,523
)
    
16
  
State & municipal
     87,515       (1,559 )     61       -       -       -       87,515       (1,559 )     61  
Mortgage-backed
    
281,217
      
(4,319
)
    
24
      
39,491
      
(1,525
)
    
6
      
320,708
      
(5,844
)
    
30
  
Collateralized mortgage obligations
    
341,673
      
(5,495
)
    
34
      
15,774
      
(502
)
     4
      
357,447
      
(5,997
)
    
38
  
Corporate
     9,987       (13 )     2       -       -       -       9,987       (13 )     2  
Total securities with unrealized losses
  
$
811,115
    
$
(13,238
)
    
127
    
$
253,578
    
$
(8,704
)
    
22
    
$
1,064,693
    
$
(21,942
)
    
149
  

                                                                       
HTM securities:
                                                                        
Federal agency
   $ -     $ -       -     $ 95,635     $ (4,365 )     4     $ 95,635     $ (4,365 )     4  
Mortgage-backed     103,789       (1,319 )     10       -       -       -       103,789       (1,319 )     10  
Collateralized mortgage obligations     54,612       (803 )     6       -       -       -       54,612       (803 )     6  
State & municipal
    
52,783
      
(1,189
)
    
40
      
8,950
      
(314
)
     10      
61,733
      
(1,503
)
    
50
  
Total securities with unrealized losses
  
$
211,184
    
$
(3,311
)
    
56
    
$
104,585
    
$
(4,679
)
     14    
$
315,769
    
$
(7,990
)
    
70
  

12
Table of Contents
The Company does not believe the AFS securities that were in an unrealized loss position as of September 30, 2022 and December 31, 2021, which consisted of 415 and 149 individual securities, respectively, represented a credit loss impairment. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. As of September 30, 2022 and December 31, 2021, the majority of the AFS securities in an unrealized loss position consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises that carry the explicit and/or implicit guarantee of the U.S. government, which are widely recognized as “risk free” and have a long history of zero credit losses. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities. AIR on AFS debt securities totaled $4.3 million at September 30, 2022 and $3.9 million at December 31, 2021 and is excluded from the estimate of credit losses and reported in the financial statement line for other assets.

None of the Bank’s HTM debt securities were past due or on nonaccrual status as of September 30, 2022 and December 31, 2021. There was no accrued interest reversed against interest income for the three and nine months ended September 30, 2022 or the year ended December 31, 2021 as all securities remained on accrual status. In addition, there were no collateral-dependent HTM debt securities as of September 30, 2022 and December 31, 2021. As of September 30, 2022 and December 31, 2021, 69% and 56%, respectively, of the Company’s HTM debt securities were issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit losses. Therefore, the Company did not record an allowance for credit losses for these securities as of September 30, 2022 and December 31, 2021. The remaining HTM debt securities at September 30, 2022 and December 31, 2021 were comprised of state and municipal obligations with bond ratings of A to AAA. Utilizing the Current Expected Credit Losses (“CECL”) approach, the Company determined that the expected credit loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit loss was recorded as of September 30, 2022 and December 31, 2021. AIR on HTM debt securities totaled $3.3 million at September 30, 2022 and $2.7 million at December 31, 2021 and is excluded from the estimate of credit losses and reported in the other assets financial statement line.

5.
Allowance for Credit Losses and Credit Quality of Loans

The allowance for credit losses totaled $96.8 million at September 30, 2022, compared to $92.0 million at December 31, 2021. The allowance for credit losses as a percentage of loans was 1.22% at September 30, 2022, compared to 1.23% at December 31, 2021.

The allowance for credit losses calculation incorporated a 6-quarter forecast period to account for forecast economic conditions under each scenario utilized in the measurement. For periods beyond the 6-quarter forecast, the model reverts to long-term economic conditions over a 4-quarter reversion period on a straight-line basis. The Company considers a baseline, upside and downside economic forecast in measuring the allowance.

The quantitative model as of September 30, 2022 incorporated a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model, particularly significant unknowns relating to downside risks as of the measurement date. The baseline outlook reflected an unemployment rate environment at pre-coronavirus (“COVID-19”) pandemic levels of 3.8% and maintaining those levels to the end of the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the fourth quarter of 2022 at about 4.5% and hover around that level across the forecast period. Other utilized economic variables worsened overall during the fourth quarter of the forecast, with outlooks for annualized growth in retail sales and business output declining from the prior quarter along with housing starts. Key assumptions in the baseline economic outlook included the economy reaching full employment in the coming quarters, further interest rate increases by the Federal Reserve, and the global oil market remaining relatively balanced into 2023. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 4.0% in the third quarter of 2022 to a peak of 6.9% in the fourth quarter of 2023. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with an imminent return to full employment and northeast unemployment declining to 3.3% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of September 30, 2022. At September 30, 2022, the weightings were 50%, 0% and 50% for the baseline, upside and downside economic forecasts, respectively. Qualitative adjustments were made for isolated model limitations related to modeled inputs and outputs given abnormally high retail sales and business output growth rates in prior quarters. Additionally, a qualitative adjustment for inflation was added to adjust for potential model limitations arising from the use of a macroeconomic variable denominated in nominal dollar terms. These factors were considered through separate quantitative processes and incorporated into the estimate of current expected credit losses at September 30, 2022.

13
The quantitative model as of June 30, 2022 incorporated a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model, particularly significant unknowns relating to downside risks as of the measurement date. The baseline outlook reflected an unemployment rate environment initially at pre-COVID-19 levels of 3.8% but falling below pre-COVID-19 levels by the end of the forecast period to a low of 3.4%. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the third quarter of 2022 at about 9.5% and hover around 5% by the end of the forecast period. Other utilized economic variables worsened overall during the quarter, with outlooks for annualized growth in retail sales and business output declining from the prior quarter along with housing starts. Key assumptions in the baseline economic outlook included the containment of the European conflict to only Russia and Ukraine, further interest rate increases by the Federal Reserve, and achievement of full employment by the end of 2022. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 4.2% in the second quarter of 2022 to a peak of 7.0% in the third quarter of 2023. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with an imminent return to full employment, with northeast unemployment declining to 2.9% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of June 30, 2022. At June 30, 2022, the weightings were 50%, 0% and 50% for the baseline, upside and downside economic forecasts, respectively. Additionally, qualitative adjustments were made for isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates in prior quarters. These factors were considered through separate quantitative processes and incorporated into the estimate of current expected credit losses at June 30, 2022.

The quantitative model as of December 31, 2021 incorporated a baseline economic outlook along with alternative upside and downside scenarios sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment initially above pre-COVID-19 levels at 4.8% but falling below pre-COVID-19 levels by the end of the forecast period to 3.5%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2022 at approximately 9% and hover around 5% by the middle and end of the forecast period. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rose from 5.7% in the fourth quarter of 2021 to a peak of 8% in the first quarter of 2023, remaining around or above 7% for the entire forecast period. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with a swift return to full employment by the second quarter of 2022 and with northeast unemployment moving down to 3.1% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2021. At December 31, 2021, the weightings were 60%, 10% and 30% for the baseline, upside and downside economic forecasts, respectively. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in the second and third quarters of 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government sponsored loan programs. The Company also continued to monitor the level of criticized and classified loans in the fourth quarter of 2021 compared to the level contemplated by the model during similar, historical economic conditions, and an adjustment was made to estimate potential additional losses above modeled losses. Additionally, qualitative adjustments were made for Moody’s baseline economic forecast to include impacts of the Build Back Better Act not passing by December 31, 2021 and to address potential economic deterioration due to Omicron, as well as isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates in historical periods. These factors were considered through separate quantitative processes and incorporated into the estimate of current expected credit losses at December 31, 2021.
 
There were no loans purchased with credit deterioration during the nine months ended September 30, 2022 or the year ended December 31, 2021. During 2022, the Company purchased $8.0 million of residential loans at a slight discount and $50.1 million in consumer loans at par. The allowance for credit losses recorded for these loans on the purchase date was $3.2 million. During 2021, the Company purchased $58.9 million of residential loans at a 2%-5% premium and $92.5 million in consumer loans at par. The allowance for credit losses recorded for these loans on the purchase date was $6.8 million. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $21.2 million at September 30, 2022 and $19.5 million at December 31, 2021 and there was no estimated allowance for credit losses related to AIR as of September 30, 2022 and December 31, 2021.

The following tables present the activity in the allowance for credit losses by portfolio segment:

(In thousands)
  
Commercial
Loans
    
Consumer
Loans
    
Residential
    
Total
  
Balance as of June 30, 2022
  
$
32,358
    
$
44,940
    
$
16,302
    
$
93,600
  
Charge-offs
    
(624
)
    
(3,951
)
    
(118
)
    
(4,693
)
Recoveries
    
1,282
      
1,924
      
203
      
3,409
  
Provision
    
(60
)
    
5,397
      
(853
)
    
4,484
  
Ending balance as of September 30, 2022
  
$
32,956
    
$
48,310
    
$
15,534
    
$
96,800
  
                                 
Balance as of June 30, 2021
  
$
44,191
    
$
34,881
    
$
19,428
    
$
98,500
  
Charge-offs
    
(1,492
)
    
(3,083
)
    
(312
)
    
(4,887
)
Recoveries
    
354
      
2,143
      
232
      
2,729
  
Provision
    
(9,875
)
    
7,130
      
(597
)
    
(3,342
)
Ending balance as of September 30, 2021
  
$
33,178
    
$
41,071
    
$
18,751
    
$
93,000
  

14
(In thousands)
  
Commercial
Loans
    
Consumer
Loans
    
Residential
    
Total
  
Balance as of December 31, 2021
  
$
28,941
    
$
44,253
    
$
18,806
    
$
92,000
  
Charge-offs
    
(1,659
)
    
(11,051
)
    
(520
)
    
(13,230
)
Recoveries
    
2,212
      
5,693
      
655
      
8,560
  
Provision
    
3,462
      
9,415
      
(3,407
)
    
9,470
  
Ending balance as of September 30, 2022
  
$
32,956
    
$
48,310
    
$
15,534
    
$
96,800
  
                                 
Balance as of December 31, 2020
  
$
50,942
    
$
37,803
    
$
21,255
    
$
110,000
  
Charge-offs
    
(2,123
)
    
(10,702
)
    
(731
)
    
(13,556
)
Recoveries
    
533
      
6,506
      
871
      
7,910
  
Provision
    
(16,174
)
    
7,464
      
(2,644
)
    
(11,354
)
Ending balance as of September 30, 2021
  
$
33,178
    
$
41,071
    
$
18,751
    
$
93,000
  

The increase in the allowance for credit losses from December 31, 2021 and June 30, 2022 to September 30, 2022 was due to an increase in loan balances and a modest deterioration in the economic forecast. The decrease in the allowance for credit losses from December 31, 2020 and June 30, 2021 to September 30, 2021 was primarily due to an improvement in the economic forecast.

Individually Evaluated Loans

As of September 30, 2022, there were four relationships identified to be evaluated for loss on an individual basis which, in aggregate, had an amortized cost basis of $4.3 million, with no allowance for credit loss. As of December 31, 2021, there were five relationships identified to be evaluated for loss on an individual basis with an aggregate amortized cost basis of $10.2 million and no allowance for credit loss. The decrease in the amortized cost basis on an individual basis from December 31, 2021 to September 30, 2022 was primarily due to principal payments and resolution of one relationship in which the cost basis was substantially collected and the related $0.8 million allowance for credit losses was reversed.

The following table sets forth information with regard to past due and nonperforming loans by loan segment:

(In thousands)
  
31-60 Days
Past Due
Accruing
    
61-90 Days
Past Due
Accruing
    
Greater
Than
90 Days
Past Due
Accruing
    
Total
Past Due
Accruing
    
Nonaccrual
    
Current
    
Recorded
Total
Loans
  
As of September 30, 2022
                                          
Commercial loans:
                                          
C&I
  
$
356
    
$
272
    
$
-
    
$
628
    
$
3,951
    
$
1,232,057
    
$
1,236,636
  
CRE
    
-
      
-
      
-
      
-
      
5,839
      
2,604,852
      
2,610,691
  
PPP
    
60
      
-
      
-
      
60
      
-
      
3,268
      
3,328
  
Total commercial loans
  
$
416
    
$
272
    
$
-
    
$
688
    
$
9,790
    
$
3,840,177
    
$
3,850,655
  
Consumer loans:
                                                        
Auto
  
$
7,969
    
$
1,047
    
$
462
    
$
9,478
    
$
1,399
    
$
913,068
    
$
923,945
  
Other consumer
    
5,234
      
2,104
      
1,086
      
8,424
      
357
      
1,031,095
      
1,039,876
  
Total consumer loans
  
$
13,203
    
$
3,151
    
$
1,548
    
$
17,902
    
$
1,756
    
$
1,944,163
    
$
1,963,821
  
Residential
  
$
3,182
    
$
390
    
$
1,184
    
$
4,756
    
$
7,552
    
$
2,078,000
    
$
2,090,308
  
Total loans
  
$
16,801
    
$
3,813
    
$
2,732
    
$
23,346
    
$
19,098
    
$
7,862,340
    
$
7,904,784
  

(In thousands)
  
31-60 Days
Past Due
Accruing
    
61-90 Days
Past Due
Accruing
    
Greater
Than
90 Days
Past Due
Accruing
    
Total
Past Due
Accruing
    
Nonaccrual
    
Current
    
Recorded
Total
Loans
  
As of December 31, 2021
                                          
Commercial loans:
                                          
C&I
  
$
622
    
$
-
    
$
-
    
$
622
    
$
3,618
    
$
1,126,430
    
$
1,130,670
  
CRE
    
1,219
      
132
      
-
      
1,351
      
12,726
      
2,550,910
      
2,564,987
  
PPP
    
-
      
-
      
-
      
-
      
-
      
101,222
      
101,222
  
Total commercial loans
  
$
1,841
    
$
132
    
$
-
    
$
1,973
    
$
16,344
    
$
3,778,562
    
$
3,796,879
  
Consumer loans:
                                                        
Auto
  
$
6,911
    
$
1,547
    
$
545
    
$
9,003
    
$
1,295
    
$
816,210
    
$
826,508
  
Other consumer
    
3,789
      
1,816
      
1,105
      
6,710
      
233
      
832,447
      
839,390
  
Total consumer loans
  
$
10,700
    
$
3,363
    
$
1,650
    
$
15,713
    
$
1,528
    
$
1,648,657
    
$
1,665,898
  
Residential
  
$
2,481
    
$
420
    
$
808
    
$
3,709
    
$
12,413
    
$
2,019,560
    
$
2,035,682
  
Total loans
  
$
15,022
    
$
3,915
    
$
2,458
    
$
21,395
    
$
30,285
    
$
7,446,779
    
$
7,498,459
  

15
As of September 30, 2022 and December 31, 2021, there were no loans in nonaccrual without an allowance for credit losses.

Credit Quality Indicators

The Company has developed an internal loan grading system to evaluate and quantify the Company’s loan portfolio with respect to quality and risk. The system focuses on, among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries. The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and provide management with an early warning system, which facilitates recognition and response to problem loans and potential problem loans.

Commercial Grading System

For Commercial and Industrial (“C&I”), Paycheck Protection Program (“PPP”) and Commercial Real Estate (“CRE”) loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass.

Doubtful

A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss.

Substandard

Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity and/or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual. Although Substandard assets, in the aggregate, will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard.

Special Mention

Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (e.g., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, and/or tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent.

Pass

Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality. Pass loans also include any portion of a government guaranteed loan, including PPP loans.

16
Table of Contents
Consumer and Residential Grading System

Consumer and Residential loans are graded as either Nonperforming or Performing.

Nonperforming

Nonperforming loans are loans that are (1) over 90 days past due and interest is still accruing or (2) on nonaccrual status.

Performing


All loans not meeting any of the above criteria are considered Performing.

The following tables illustrate the Company’s credit quality by loan class by year of origination (vintage):

(In thousands)
  
2022
    
2021
    
2020
    
2019
    
2018
    
Prior
    
Revolving
Loans
Amortized
Cost Basis
    
Revolving
Loans
Converted
to Term
    
Total
  
As of September 30, 2022
                                                      
C&I
                                                      
By internally assigned grade:
                                                      
Pass
  
$
245,005
    
$
266,027
    
$
184,084
    
$
97,714
    
$
43,160
    
$
34,942
    
$
332,028
    
$
3,795
    
$
1,206,755
  
Special mention
    
832
      
591
      
194
      
172
      
1,575
      
1,340
      
2,285
      
-
      
6,989
  
Substandard
    
-
      
1,661
      
490
      
3,725
      
116
      
3,550
      
11,991
      
1,353
      
22,886
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
6
      
-
      
-
      
6
  
Total C&I
  
$
245,837
    
$
268,279
    
$
184,768
    
$
101,611
    
$
44,851
    
$
39,838
    
$
346,304
    
$
5,148
    
$
1,236,636
  
                                                                         
CRE
                                                                        
By internally assigned grade:
                                                                        
Pass
  
$
280,862
    
$
471,072
    
$
443,924
    
$
332,477
    
$
224,344
    
$
600,377
    
$
142,329
    
$
36,163
    
$
2,531,548
  
Special mention
    
609
      
771
      
35
      
2,663
      
4,686
      
26,099
      
850
      
-
      
35,713
  
Substandard
    
-
      
-
      
59
      
4,068
      
2,049
      
31,701
      
5,553
      
-
      
43,430
  
Total CRE
  
$
281,471
    
$
471,843
    
$
444,018
    
$
339,208
    
$
231,079
    
$
658,177
    
$
148,732
    
$
36,163
    
$
2,610,691
  
                                                                         
PPP
                                                                        
By internally assigned grade:
                                                                        
Pass
  
$
-
    
$
3,328
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
3,328
  
Total PPP
  
$
-
    
$
3,328
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
3,328
  
                                                                         
Auto
                                                                        
By payment activity:
                                                                        
Performing
  
$
383,328
    
$
262,078
    
$
85,865
    
$
115,909
    
$
55,123
    
$
19,781
    
$
-
    
$
-
    
$
922,084
  
Nonperforming
    
273
      
519
      
389
      
418
      
237
      
25
      
-
      
-
      
1,861
  
Total auto
  
$
383,601
    
$
262,597
    
$
86,254
    
$
116,327
    
$
55,360
    
$
19,806
    
$
-
    
$
-
    
$
923,945
  
                                                                         
Other consumer
                                                                        
By payment activity:
                                                                        
Performing
  
$
400,118
    
$
325,016
    
$
118,278
    
$
88,449
    
$
56,685
    
$
30,060
    
$
19,820
    
$
7
    
$
1,038,433
  
Nonperforming
    
182
      
649
      
199
      
125
      
39
      
211
      
13
      
25
      
1,443
  
Total other consumer
  
$
400,300
    
$
325,665
    
$
118,477
    
$
88,574
    
$
56,724
    
$
30,271
    
$
19,833
    
$
32
    
$
1,039,876
  
                                                                         
Residential
                                                                        
By payment activity:
                                                                        
Performing
  
$
200,520
    
$
347,085
    
$
215,272
    
$
161,759
    
$
162,244
    
$
742,940
    
$
240,655
    
$
11,097
    
$
2,081,572
  
Nonperforming
    
109
      
833
      
644
      
268
      
847
      
5,894
      
21
      
120
      
8,736
  
Total residential
  
$
200,629
    
$
347,918
    
$
215,916
    
$
162,027
    
$
163,091
    
$
748,834
    
$
240,676
    
$
11,217
    
$
2,090,308
  
                                                                         
Total loans
  
$
1,511,838
    
$
1,679,630
    
$
1,049,433
    
$
807,747
    
$
551,105
    
$
1,496,926
    
$
755,545
    
$
52,560
    
$
7,904,784
  

17
Table of Contents
(In thousands)
  
2021
    
2020
    
2019
    
2018
    
2017
    
Prior
    
Revolving
Loans
Amortized
Cost Basis
    
Revolving
Loans
Converted
to Term
    
Total
  
As of December 31, 2021
                                                      
C&I
                                                      
By internally assigned grade:
                                                      
Pass
  
$
335,685
    
$
219,931
    
$
114,617
    
$
64,310
    
$
20,137
    
$
32,146
    
$
280,476
    
$
15,731
    
$
1,083,033
  
Special mention
    
148
      
5,255
      
4,641
      
2,430
      
2,699
      
1,111
      
11,835
      
522
      
28,641
  
Substandard
    
1,482
      
874
      
7,010
      
187
      
2,582
      
3,272
      
3,512
      
34
      
18,953
  
Doubtful
    
-
      
-
      
-
      
1
      
42
      
-
      
-
      
-
      
43
  
Total C&I
  
$
337,315
    
$
226,060
    
$
126,268
    
$
66,928
    
$
25,460
    
$
36,529
    
$
295,823
    
$
16,287
    
$
1,130,670
  
                                                                         
CRE
                                                                        
By internally assigned grade:
                                                                        
Pass
  
$
489,300
    
$
434,866
    
$
370,377
    
$
236,274
    
$
251,082
    
$
441,310
    
$
141,367
    
$
43,942
    
$
2,408,518
  
Special mention
    
789
      
826
      
11,235
      
3,544
      
15,379
      
53,372
      
780
      
420
      
86,345
  
Substandard
    
-
      
77
      
4,539
      
12,934
      
12,424
      
34,563
      
744
      
-
      
65,281
  
Doubtful
    
-
      
-
      
-
      
-
      
-
      
4,843
      
-
      
-
      
4,843
  
Total CRE
  
$
490,089
    
$
435,769
    
$
386,151
    
$
252,752
    
$
278,885
    
$
534,088
    
$
142,891
    
$
44,362
    
$
2,564,987
  
                                                                         
PPP
                                                                        
By internally assigned grade:
                                                                        
Pass
  
$
92,884
    
$
8,338
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
101,222
  
Total PPP
  
$
92,884
    
$
8,338
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
101,222
  
                                                                         
Auto
                                                                        
By payment activity:
                                                                        
Performing
  
$
351,778
    
$
129,419
    
$
183,959
    
$
101,441
    
$
46,007
    
$
12,064
    
$
-
    
$
-
    
$
824,668
  
Nonperforming
    
305
      
319
      
457
      
411
      
266
      
82
      
-
      
-
      
1,840
  
Total auto
  
$
352,083
    
$
129,738
    
$
184,416
    
$
101,852
    
$
46,273
    
$
12,146
    
$
-
    
$
-
    
$
826,508
  
                                                                         
Other consumer
                                                                        
By payment activity:
                                                                        
Performing
  
$
427,401
    
$
151,300
    
$
116,451
    
$
78,523
    
$
29,705
    
$
15,660
    
$
19,011
    
$
1
    
$
838,052
  
Nonperforming
    
216
      
429
      
249
      
134
      
238
      
33
      
18
      
21
      
1,338
  
Total other consumer
  
$
427,617
    
$
151,729
    
$
116,700
    
$
78,657
    
$
29,943
    
$
15,693
    
$
19,029
    
$
22
    
$
839,390
  
                                                                         
Residential
                                                                        
By payment activity:
                                                                        
Performing
  
$
345,338
    
$
226,723
    
$
179,087
    
$
179,575
    
$
146,611
    
$
687,863
    
$
246,103
    
$
11,161
    
$
2,022,461
  
Nonperforming
    
-
      
1,411
      
643
      
1,072
      
1,534
      
8,522
      
-
      
39
      
13,221
  
Total residential
  
$
345,338
    
$
228,134
    
$
179,730
    
$
180,647
    
$
148,145
    
$
696,385
    
$
246,103
    
$
11,200
    
$
2,035,682
  
                                                                         
Total loans
  
$
2,045,326
    
$
1,179,768
    
$
993,265
    
$
680,836
    
$
528,706
    
$
1,294,841
    
$
703,846
    
$
71,871
    
$
7,498,459
  


Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The allowance for losses on unfunded commitments totaled $5.3 million as of September 30, 2022, compared to $5.1 million as of December 31, 2021.

Troubled Debt Restructuring

When the Company modifies a loan in a TDR, such modifications generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a temporary reduction in the interest rate; or a change in scheduled payment amount. Residential and Consumer TDRs occurring during 2022 and 2021 were due to reductions in the interest rate and/or extensions of the term.

18
Table of Contents
An allowance for impaired commercial and consumer loans that have been modified in a TDR is measured based on the present value of the expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan, an impairment charge would be recorded.

The Company began offering loan modifications to assist borrowers during the COVID-19 national emergency. The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), along with a joint agency statement issued by banking regulatory agencies, provides that modifications made in response to COVID-19 do not need to be accounted for as a TDR. The Company evaluated the modification programs provided to its borrowers and concluded the modifications were generally made in accordance with the CARES Act guidance to borrowers who were in good standing prior to the COVID-19 pandemic and are not required to be designated as TDRs.

The following tables illustrate the recorded investment and number of modifications designated as TDRs, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring:

 
Three Months Ended September 30, 2022
    
Three Months Ended September 30, 2021
  
(Dollars in thousands)
  
Number of
Contracts
    
Pre-
Modification
Outstanding
Recorded
Investment
    
Post-
Modification
Outstanding
Recorded
Investment
    
Number of
Contracts
    
Pre-
Modification
Outstanding
Recorded
Investment
    
Post-
Modification
Outstanding
Recorded
Investment
  
Consumer loans:
                                    
Auto
     -     $
-     $
-       1     $
20     $
20  
Total consumer loans
     -     $
-     $
-       1     $
20     $
20  
Residential
    
6
    
$
613
    
$
682
      
3
    
$
460
    
$
507
  
Total TDRs
    
6
    
$
613
    
$
682
      
4
    
$
480
    
$
527
  

 
Nine Months Ended September 30, 2022
    
Nine Months Ended September 30, 2021
  
(Dollars in thousands)
  
Number of
Contracts
    
Pre-
Modification
Outstanding
Recorded
Investment
    
Post-
Modification
Outstanding
Recorded
Investment
    
Number of
Contracts
    
Pre-
Modification
Outstanding
Recorded
Investment
    
Post-
Modification
Outstanding
Recorded
Investment
  
Consumer loans:
                                    
Auto
    
-
    
$
-
    
$
-
      
2
    
$
38
    
$
38
  
Total consumer loans
    
-
    
$
-
    
$
-
      
2
    
$
38
    
$
38
  
Residential
    
10
    
$
829
    
$
928
      
9
    
$
1,071
    
$
1,183
  
Total TDRs
    
10
    
$
829
    
$
928
      
11
    
$
1,109
    
$
1,221
  

The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period:

 
Three Months Ended
September 30, 2022
    
Three Months Ended
September 30, 2021
  
(Dollars in thousands)
  
Number of
Contracts
    
Recorded
Investment
    
Number of
Contracts
    
Recorded
Investment
  
Commercial loans:
                                
C&I
     1     $
 320       -     $
 -  
Total commercial loans
     1     $
 320       -     $
 -  
Residential
    
18
    
$
869
      
19
    
$
1,401
  
Total TDRs
    
19
    
$
1,189
      
19
    
$
1,401
  

 
Nine Months Ended
September 30, 2022
    
Nine Months Ended
September 30, 2021
  
(Dollars in thousands)
  
Number of
Contracts
    
Recorded
Investment
    
Number of
Contracts
    
Recorded
Investment
  
Commercial loans:
                                
C&I
     1     $
 320       -     $
 -  
Total commercial loans
     1     $
 320       -     $
 -  
Consumer loans:
                                
Auto
    
1
    
$
11
      
2
    
$
18
  
Total consumer loans
    
1
    
$
11
      
2
    
$
18
  
Residential
    
44
    
$
2,320
      
39
    
$
2,356
  
Total TDRs
    
46
    
$
2,651
      
41
    
$
2,374
  

19
Table of Contents
6.
Defined Benefit Post-Retirement Plans

The Company has a qualified, noncontributory, defined benefit pension plan (the “Plan”) covering substantially all of its employees at September 30, 2022. Benefits paid from the Plan are based on age, years of service, compensation and social security benefits and are determined in accordance with defined formulas. The Company’s policy is to fund the Plan in accordance with Employee Retirement Income Security Act of 1974 standards. Assets of the Plan are invested in publicly traded stocks and mutual funds. In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives. The Company also assumed supplemental retirement plans for former executives of Alliance Financial Corporation (“Alliance”) when the Company acquired Alliance. These supplemental employee retirement plans and the Plan are collectively referred to herein as “Pension Benefits”.

In addition, the Company provides certain health care benefits for retired employees. Benefits were accrued over the employees’ active service period. Only employees that were employed by the Company on or before January 1, 2000 are eligible to receive post-retirement health care benefits. In addition, the Company assumed post-retirement medical and life insurance benefits for certain Alliance employees, retirees and their spouses, if applicable, in the Alliance acquisition. These post-retirement benefits are referred to herein as “Other Benefits”.

The Company made no voluntary contributions to the pension and other benefits plans during the three and nine months ended September 30, 2022 and 2021.

The components of expense for Pension Benefits and Other Benefits are set forth below:

 
Pension Benefits
    
Other Benefits
  
   
Three Months Ended
September 30,
    
Three Months Ended
September 30,
  
(In thousands)
  
2022
    
2021
    
2022
    
2021
  
Components of net periodic (benefit) cost:
                        
Service cost
  
$
506
    
$
517
    
$
2
    
$
2
  
Interest cost
    
690
      
679
      
42
      
45
  
Expected return on plan assets
    
(2,220
)
    
(2,197
)
    
-
      
-
  
Net amortization
    
183
      
331
      
2
      
13
  
Total net periodic (benefit) cost
  
$
(841
)
  
$
(670
)
  
$
46
    
$
60
  

 
Pension Benefits
    
Other Benefits
  
   
Nine Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(In thousands)
  
2022
    
2021
    
2022
    
2021
  
Components of net periodic (benefit) cost:
                        
Service cost
  
$
1,574
    
$
1,486
    
$
6
    
$
6
  
Interest cost
    
2,078
      
2,034
      
124
      
135
  
Expected return on plan assets
    
(6,676
)
    
(6,602
)
    
-
      
-
  
Net amortization
    
553
      
957
      
4
      
39
  
Total net periodic (benefit) cost
  
$
(2,471
)
  
$
(2,125
)
  
$
134
    
$
180
  

The service cost component of the net periodic (benefit) cost is included in Salaries and Employee Benefits and the interest cost, expected return on plan assets and net amortization components are included in Other Noninterest Expense on the unaudited interim consolidated statements of income.
20
Table of Contents

7.
Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company’s dilutive stock options and restricted stock units).

The following is a reconciliation of basic and diluted EPS for the periods presented in the unaudited interim consolidated statements of income:

 
Three Months Ended
September 30,
  
(In thousands, except per share data)
  
2022
    
2021
  
Basic EPS:
            
Weighted average common shares outstanding
    
42,838
      
43,360
  
Net income available to common stockholders
  
$
38,973
    
$
37,433
  
Basic EPS
  
$
0.91
    
$
0.86
  
                 
Diluted EPS:
                
Weighted average common shares outstanding
    
42,838
      
43,360
  
Dilutive effect of common stock options and restricted stock
    
273
      
271
  
Weighted average common shares and common share equivalents
    
43,111
      
43,631
  
Net income available to common stockholders
  
$
38,973
    
$
37,433
  
Diluted EPS
  
$
0.90
    
$
0.86
  

 
Nine Months Ended
September 30,
  
(In thousands, except per share data)
  
2022
    
2021
  
Basic EPS:
            
Weighted average common shares outstanding
    
42,940
      
43,464
  
Net income available to common stockholders
  
$
115,874
    
$
117,575
  
Basic EPS
  
$
2.70
    
$
2.71
  
                 
Diluted EPS:
                
Weighted average common shares outstanding
    
42,940
      
43,464
  
Dilutive effect of common stock options and restricted stock
    
254
      
305
  
Weighted average common shares and common share equivalents
    
43,194
      
43,769
  
Net income available to common stockholders
  
$
115,874
    
$
117,575
  
Diluted EPS
  
$
2.68
    
$
2.69
  

There was a nominal number of weighted average stock options outstanding for the three and nine months ended September 30, 2022 and September 30, 2021, that were not considered in the calculation of diluted EPS since the stock options’ exercise prices were greater than the average market price during these periods.
21
Table of Contents

8.
Reclassification Adjustments Out of Other Comprehensive Income (Loss)

The following table summarizes the reclassification adjustments out of AOCI:

Detail About AOCI Components
  
Amount Reclassified from AOCI
  
Affected Line Item in the
Consolidated Statement of
Comprehensive Income (Loss)
   
Three Months Ended
    
(In thousands)
  
September 30, 2022
    
September 30, 2021
    
AFS securities:
                
Amortization of unrealized gains related to securities transfer
  
$
125
    
$
149
  
Interest income
Tax effect
  
$
(31
)
  
$
(38
)
Income tax (benefit)
Net of tax
  
$
94
    
$
111
    
                      
Cash flow hedges:
                    
Net unrealized losses on cash flow hedges reclassified to interest expense
  
$
-
    
$
-
  
Interest expense
Tax effect
  
$
-
    
$
-
Income tax (benefit)
Net of tax
  
$
-
    
$
-
    
                      
Pension and other benefits:
                    
Amortization of net losses
  
$
156
    
$
317
  
Other noninterest expense
Amortization of prior service costs
    
29
      
27
  
Other noninterest expense
Tax effect
  
$
(47
)
  
$
(86
)
Income tax (benefit)
Net of tax
  
$
138
    
$
258
    
                      
Total reclassifications, net of tax
  
$
232
    
$
369
    

Detail About AOCI Components
  
Amount Reclassified from AOCI
  
Affected Line item in the
Consolidated Statement of
 Comprehensive Income (Loss)
   
Nine Months Ended
    
(In thousands)
   September 30, 2022     September 30, 2021    
AFS securities:
                
Amortization of unrealized gains related to securities transfer
   $
393
     $
434
  
Interest income
Tax effect
  
$
(98
)
  
$
(109
)
Income tax (benefit)
Net of tax
  
$
295
    
$
325
    
                      
Cash flow hedges:
                    
Net unrealized losses on cash flow hedges reclassified to interest expense
  
$
-
    
$
21
  
Interest expense
Tax effect
  
$
-
 
$
(5
)
Income tax (benefit)
Net of tax
  
$
-
    
$
16
    
                      
Pension and other benefits:
                    
Amortization of net losses
  
$
470
    
$
913
  
Other noninterest expense
Amortization of prior service costs
    
87
      
83
  
Other noninterest expense
Tax effect
  
$
(140
)
  
$
(249
)
Income tax (benefit)
Net of tax
  
$
417
    
$
747
    
                      
Total reclassifications, net of tax
  
$
712
    
$
1,088
    

22
9.
Derivative Instruments and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate risk, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Generally, the Company may use derivative financial instruments to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments. Currently, the Company has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

Derivatives Not Designated as Hedging Instruments

The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated as hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the consolidated balance sheet at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of income.

The Company is subject to over-the-counter derivative clearing requirements, which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company began to clear certain derivative transactions through the Chicago Mercantile Exchange Clearing House (“CME”) in January 2021. The CME requires the Company to post initial and variation margin payments to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company’s financial statements are not equal and offsetting.

As of September 30, 2022 and December 31, 2021, the Company had fifteen and eighteen risk participation agreements, respectively, with financial institution counterparties for interest rate swaps related to participated loans. Risk participation agreements provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions.

Derivatives Designated as Hedging Instruments

The Company has previously entered into interest rate swaps to modify the interest rate characteristics of certain short-term Federal Home Loan Bank (“FHLB”) advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges with currently none outstanding.

23
The following table summarizes the derivatives outstanding:

(In thousands)
  
Notional
Amount
  
Balance
Sheet
Location
  
Fair
Value
    
Notional
Amount
  
Balance
Sheet
Location
  
Fair
Value
  
As of September 30, 2022
                            
Derivatives not designated as hedging instruments
                            
Interest rate derivatives
  
$
1,380,347
  
Other assets
  
$
124,892
    
$
1,380,347
  
Other liabilities
  
$
124,892
  
Risk participation agreements
    
89,472
  
Other assets
    
51
      
18,982
  
Other liabilities
    
11
  
Total derivatives not designated as hedging instruments
                
$
124,943
                  
$
124,903
  
Netting adjustments(1)
              
26,369
                
(41
)
Net derivatives in the balance sheet
                
$
98,574
                  
$
124,944
  
Derivatives not offset on the balance sheet
                
$
9
                  
$
9
  
Cash collateral(2)
              
-
                
-
  
Net derivative amounts
                
$
98,565
                  
$
124,935
  
                                     
As of December 31, 2021
                                    
Derivatives not designated as hedging instruments
                                    
Interest rate derivatives
  
$
1,342,187
  
Other assets
  
$
60,203
    
$
1,342,187
  
Other liabilities
  
$
60,203
  
Risk participation agreements
     90,938    Other assets     252       37,193   Other liabilities     60  
Total derivatives not designated as hedging instruments
               $ 60,455                 $ 60,263  
Netting adjustments(1)
              
(170
)
              
5,482
  
Net derivatives in the balance sheet
             
$
60,625
               
$
54,781
  
Derivatives not offset on the balance sheet
                
$
5,455
                  
$
5,455
  
Cash collateral(2)
              
-
                
43,420
  
Net derivative amounts
                
$
55,170
                  
$
5,906
  

(1)
Netting adjustments represents the amounts recorded to convert derivatives assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance on the settle-to-market rules for cleared derivatives. The CME legally characterizes the variation margin posted between counterparties as settlements of the outstanding derivative contracts instead of cash collateral. The Company began to clear certain derivative transactions through the CME in 2021.

(2)
Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s short-term rate borrowings. During the three months ended March 31, 2021 the Company’s final cash flow hedge of interest rate risk matured and the remaining balance was reclassified from AOCI as a reduction to interest expense. There is no additional amount that will be reclassified from AOCI as a reduction to interest expense.

The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of income:

 
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(In thousands)
  
2022
    
2021
    
2022
    
2021
  
Derivatives designated as hedging instruments:
                        
Interest rate derivatives - included component
                        
Amount of loss reclassified from AOCI into interest expense
   $
-
     $
-
     $
-
     $
21
  

The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship:

 
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(In thousands)
  
2022
  

2021
    
2022
  
2021
  
Derivatives not designated as hedging instruments:
      

   
   
 
(Decrease) in other income
  
$
(33
)
  
$
(307
)
  
$
(152
)
  
$
(382
)

24
10.
Fair Value Measurements and Fair Value of Financial Instruments

GAAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (e.g., supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted prices for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or quote from alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the methodologies used by its third-party providers in pricing the securities.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flows.

25
Table of Contents
The following tables set forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted for at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

(In thousands)
  
Level 1
    
Level 2
    
Level 3
    
September 30, 2022
  
Assets:
                        
AFS securities
                        
U.S. treasury
   $
120,622     $
-     $
-     $
120,622  
Federal agency
  

-
    

204,790
    

-
    

204,790
  
State & municipal
    
-
      
83,815
      
-
      
83,815
  
Mortgage-backed
    
-
      
483,511
      
-
      
483,511
  
Collateralized mortgage obligations
    
-
      
610,384
      
-
      
610,384
  
Corporate
    
-
      
53,379
      
-
      
53,379
  
Total AFS securities
  
$
120,622
    
$
1,435,879
    
$
-
    
$
1,556,501
  
Equity securities
    
29,428
      
1,000
      
-
      
30,428
  
Derivatives
    
-
      
124,943
      
-
      
124,943
  
Total
  
$
150,050
    
$
1,561,822
    
$
-
    
$
1,711,872
  
                                 
Liabilities:
                                
Derivatives
  
$
-
    
$
124,903
    
$
-
    
$
124,903
  
Total
  
$
-
    
$
124,903
    
$
-
    
$
124,903
  

(In thousands)
  
Level 1
    
Level 2
    
Level 3
    
December 31, 2021
  
Assets:
                        
AFS securities
                        
U.S. treasury
   $
73,069     $
-     $
 -     $
73,069  
Federal agency
  

-
    

239,931
    

-
    

239,931
  
State & municipal
    
-
      
94,088
      
-
      
94,088
  
Mortgage-backed
    
-
      
606,675
      
-
      
606,675
  
Collateralized mortgage obligations
    
-
      
621,595
      
-
      
621,595
  
Corporate
    
-
      
52,003
      
-
      
52,003
  
Total AFS securities
  
$
73,069
    
$
1,614,292
    
$
-
    
$
1,687,361
  
Equity securities
    
32,550
      
1,000
      
-
      
33,550
  
Derivatives
    
-
      
60,625
      
-
      
60,625
  
Total
  
$
105,619
    
$
1,675,917
    
$
-
    
$
1,781,536
  
                                 
Liabilities:
                                
Derivatives
  
$
-
    
$
60,263
    
$
-
    
$
60,263
  
Total
  
$
-
    
$
60,263
    
$
-
    
$
60,263
  

GAAP requires disclosure of assets and liabilities measured and recorded at fair value on a non-recurring basis such as goodwill, loans held for sale, other real estate owned, collateral-dependent impaired loans and HTM securities. The non-recurring fair value measurements recorded during the three and nine month periods ended September 30, 2022 and the year ended December 31, 2021 were related to impaired loans, write-downs of other real estate owned and write-down of branch assets to fair value. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the allowance for credit losses for individually evaluated collateral dependent loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10% to 50%. Based on the valuation techniques used, the fair value measurements for collateral dependent individually evaluated loans are classified as Level 3.


26
Table of Contents
The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, AFS securities, equity securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and derivatives.

       
September 30, 2022
    
December 31, 2021
  
(In thousands)
  
Fair Value
Hierarchy
    
Carrying
Amount
    
Estimated
Fair Value
    
Carrying
Amount
    
Estimated
Fair Value
  
Financial assets:
                              
HTM securities
    
2
    
$
929,541
    
$
814,100
    
$
733,210
    
$
735,260
  
Net loans
    
3
      
7,808,071
      
7,538,178
      
7,407,289
      
7,530,768
  
Financial liabilities:
                                        
Time deposits
    
2
    
$
445,673
    
$
428,762
    
$
501,472
    
$
500,717
  
Long-term debt
    
2
      
3,322
      
3,066
      
13,995
      
14,260
  
Subordinated debt
    
1
      
100,000
      
96,025
      
100,000
      
107,402
  
Junior subordinated debt
    
2
      
101,196
      
96,107
      
101,196
      
107,569
  


Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial wealth operation that contributes net fee income annually. The wealth management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value.

HTM Securities

The fair value of the Company’s HTM securities is primarily measured using information from a third-party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Net Loans

Net loans include portfolio loans and loans held for sale. Loans were first segregated by type and then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments, including credit risk, illiquidity risk and other market factors to calculate the exit price fair value in accordance with ASC 820.

Time Deposits

The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Long-Term Debt

The fair value of long-term debt was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments.

Subordinated Debt

The fair value of subordinated debt has been measured using the observable market price as of the period reported.

Junior Subordinated Debt

The fair value of junior subordinated debt has been estimated using a discounted cash flow analysis.

27
Table of Contents
11.
Commitments and Contingencies

The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, standby letters of credit and certain agricultural real estate loans sold to investors with recourse, with the sold portion having a government guarantee that is assignable back to the Company upon repurchase of the loan in the event of default. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, unused lines of credit, standby letters of credit and loans sold with recourse is represented by the contractual amount of those investments. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s credit worthiness. Commitments to extend credit and unused lines of credit totaled $2.40 billion at September 30, 2022 and $2.30 billion at December 31, 2021.

Since many loan commitments, standby letters of credit and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.

The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third-parties. These standby letters of credit are generally issued in support of third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. Standby letters of credit totaled $54.3 million at September 30, 2022 and $55.1 million at December 31, 2021. As of September 30, 2022 and December 31, 2021, the fair value of the Company’s standby letters of credit was not significant.

28
Table of Contents
NBT BANCORP INC. AND SUBSIDIARIES
Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion and analysis is to provide a concise description of the consolidated financial condition and results of operations of NBT Bancorp Inc. (“NBT”) and its wholly-owned subsidiaries, including NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”) and NBT Holdings, Inc. (“NBT Holdings”) (collectively referred to herein as the “Company”). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company’s Annual Report on Form 10‑K for the year ended December 31, 2021 for an understanding of the following discussion and analysis. Operating results for the three and nine month periods ending September 30, 2022 are not necessarily indicative of the results of the full year ending December 31, 2022 or any future period.

Forward-looking Statements

Certain statements in this filing and future filings by NBT Bancorp Inc. (the “Company”) with the Securities and Exchange Commission (“SEC”), in the Company’s press releases or other public or stockholder communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control, that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact; (2) changes in the level of nonperforming assets and charge-offs; (3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (4) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board (“FRB”); (5) inflation, interest rate, securities market and monetary fluctuations; (6) political instability; (7) acts of war, including international military conflicts, or terrorism; (8) the timely development and acceptance of new products and services and the perceived overall value of these products and services by users; (9) changes in consumer spending, borrowing and saving habits; (10) changes in the financial performance and/or condition of the Company’s borrowers; (11) technological changes; (12) acquisition and integration of acquired businesses; (13) the ability to increase market share and control expenses; (14) changes in the competitive environment among financial holding companies; (15) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including those under the Dodd-Frank Act, Economic Growth, Regulatory Relief, Consumer Protection Act of 2018, Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and other legislative and regulatory responses to the coronavirus (“COVID-19”) pandemic; (16) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (17) changes in the Company’s organization, compensation and benefit plans; (18) the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (19) greater than expected costs or difficulties related to the integration of new products and lines of business; (20) the adverse impact on the U.S. economy, including the markets in which we operate, of the COVID-19 global pandemic or other public health crises; and (21) the Company’s success at managing the risks involved in the foregoing items.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors including, but not limited to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the SEC, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future periods to differ materially from those anticipated or projected.

Unless required by law, the Company does not undertake, and specifically disclaims any obligation to publicly release any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

29
Non-GAAP Measures

This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Where non-GAAP disclosures are used in this Form 10-Q, the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables. Management believes that these non-GAAP measures provide useful information that is important to an understanding of the results of the Company’s core business as well as provide information standard in the financial institution industry. Non-GAAP measures should not be considered a substitute for financial measures determined in accordance with GAAP and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation.

Critical Accounting Estimates

The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain. The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations. These policies relate to the allowance for credit losses, pension accounting and provision for income taxes.

The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. Measurement of Credit Losses on Financial Instruments (“CECL”) approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. The allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.

Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

One of the most significant judgements involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast period. As of September 30, 2022, the model incorporated a baseline economic outlook along with an alternative downside scenario. All else held equal, the changes in the weightings of our forecasted scenarios would impact the amount of estimated allowance for credit losses through changes in the quantitative reserve and scenario-specific qualitative adjustments. To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of September 30, 2022, the Company increased the downside scenario weighting by 10% to 60% and decreased the baseline scenario to 40% weighting which resulted in a 3% increase in the overall estimated allowance for credit losses.

The Company’s policies on the CECL method for allowance for credit losses are disclosed in Note 1 to the consolidated financial statements presented in our 2021 Annual Report on Form 10-K. All accounting policies are important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements presented in our 2021 Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported. Refer to Note 3 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards.

30
Overview

Significant factors management reviews to evaluate the Company’s operating results and financial condition include, but are not limited to: net income and earnings per share, return on average assets and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology advancements, market share and peer comparisons. The following information should be considered in connection with the Company’s results for the three and nine months ended September 30, 2022:


 ●
net income for the three months ended September 30, 2022 was $39.0 million, up $1.5 million from the third quarter of 2021 and up $1.2 million from the second quarter of 2022;

●
diluted earnings per share of $0.90 for the three months ended September 30, 2022, up $0.04 from the third quarter of 2021 and up $0.02 from the second quarter of 2022;

●
noninterest income for the three months ended September 30, 2022 was $37.2 million, down $3.2 million from the third quarter of 2021 and down $4.5 million from the second quarter of 2022; represents 28% of total revenues excluding securities gains (losses);

●
period end loans were $7.90 billion, up 7.2%, annualized, from December 31, 2021 (9.1% excluding Paycheck Protection Program (“PPP”) loans);

●
strong credit quality metrics including net charge-offs to average loans of 0.07% annualized for the three months ended September 30, 2022 and 0.08% annualized for the nine months ended September 30, 2022, and allowance for loan losses to total loans at 1.22%;

●
book value per share of $27.00 at September 30, 2022; tangible book value per share(1) was $20.25 at September 30, 2022, $20.99 at June 30, 2022 and $21.95 at September 30, 2021.

(1)
Non-GAAP measure - Refer to non-GAAP reconciliation below.

COVID-19 Pandemic

The COVID-19 pandemic and countermeasures taken to contain its spread have caused economic and financial disruptions globally. The impact of the COVID-19 pandemic on the Company’s results of operations and the ultimate effect of the pandemic will depend on numerous factors that are highly uncertain, including how long restrictions for business and individuals will last, further information around the severity of the virus and any variants, additional actions taken by federal, state and local governments to contain and treat COVID-19 and what, if any, additional government relief will be provided. The expected impact of the pandemic on the Company’s business, financial condition, results of operations, and its customers has not fully manifested. The pandemic appears to be slowly receding, and thus becoming less disruptive on the Company’s business, financial condition, results of operations, and its clients as of September 30, 2022. However, economic uncertainty remains high and volatility is expected to continue. The Company continues to monitor the impact of the COVID-19 pandemic on its business and customers, and believes its historically strong underwriting practices, diverse and granular portfolios and geographic footprint will help to mitigate any adverse impact to the Company.

The Company participated in the Small Business Administration’s (“SBA”) PPP, a guaranteed, forgivable loan program created under the CARES Act and the Consolidated Appropriation Act targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the SBA, the guarantee is backed by the full faith and credit of the United States government. PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders receive pre-determined fees for processing and servicing PPP loans. In addition, PPP loans are risk-weighted at zero percent under the generally applicable Standardized Approach used to calculate risk-weighted assets for regulatory capital purposes. The Company processed approximately 6,100 loans totaling $835 million in relief. The Company is supporting the forgiveness process under the PPP with online resources, educational webinars and a partnership with a certified public accounting firm. As of September 30, 2022, the Company has received payment from the SBA on 5,980 loans totaling $804 million and total forgiveness and paydown is equal to 99% of the original balance.

Results of Operations

The Company reported net income of $39.0 million for the three months ended September 30, 2022, up $1.2 million from $37.8 million for the second quarter of 2022 and up $1.5 million from $37.4 million for the third quarter of 2021. Net interest income was $94.5 million for the three months ended September 30, 2022, up $6.9 million, or 7.9%, from the second quarter of 2022 and up $16.8 million, or 21.6% from the third quarter of 2021. Average interest-earning assets were down $255.7 million, or 2.3% from the prior quarter and comparable to the third quarter of 2021. The provision for loan losses was $4.5 million for three months ended September 30, 2022, as compared with $4.4 million in the second quarter of 2022 and a net benefit of $3.3 million in the third quarter of 2021.

31
The Company reported net income of $115.9 million for the nine months ended September 30, 2022, down $1.7 million from $117.6 million for the same period last year. Net interest income was $262.4 million for the nine months ended September 30, 2022, up $26.5 million, or 11.2% from $235.9 million for the nine months ended September 30, 2021. Average interest-earning assets were up $429.8 million, or 4.1% from the same period last year. The provision for loan losses was $9.5 million for the nine months ended September 30, 2022, as compared to a net benefit of $11.4 million for the nine months ended September 30, 2021.

The following table sets forth certain financial highlights:

   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
2022
    
June 30,
2022
    
September 30,
2021
    
September 30,
2022
    
September 30,
2021
  
Performance:
                              
Diluted earnings per share
  
$
0.90
    
$
0.88
    
$
0.86
    
$
2.68
    
$
2.69
  
Return on average assets(2)
    
1.33
%
    
1.28
%
    
1.26
%
    
1.31
%
    
1.37
%
Return on average equity(2)
    
12.87
%
    
12.73
%
    
12.04
%
    
12.79
%
    
13.00
%
Return on average tangible common equity(2)
    
17.12
%
    
17.00
%
    
15.97
%
    
17.00
%
    
17.35
%
Net interest margin, fully taxable equivalent (“FTE”)(2)
    
3.51
%
    
3.21
%
    
2.88
%
    
3.22
%
    
3.01
%
Capital:
                                        
Equity to assets
    
9.94
%
    
10.14
%
    
10.35
%
    
9.94
%
    
10.35
%
Tangible equity ratio
    
7.64
%
    
7.87
%
    
8.13
%
    
7.64
%
    
8.13
%
Book value per share
  
$
27.00
    
$
27.75
    
$
28.65
    
$
27.00
    
$
28.65
  
Tangible book value per share
  
$
20.25
    
$
20.99
    
$
21.95
    
$
20.25
    
$
21.95
  
Leverage ratio
    
10.21
%
    
9.77
%
    
9.47
%
    
10.21
%
    
9.47
%
Common equity tier 1 capital ratio
    
12.17
%
    
12.14
%
    
12.20
%
    
12.17
%
    
12.20
%
Tier 1 capital ratio
    
13.27
%
    
13.27
%
    
13.39
%
    
13.27
%
    
13.39
%
Total risk-based capital ratio
    
15.50
%
    
15.50
%
    
15.74
%
    
15.50
%
    
15.74
%

The following table provide non-GAAP reconciliations:

   
Three Months Ended
    
Nine Months Ended
  
(In thousands, except per share data)
  
September 30,
2022
    
June 30,
2022
    
September 30,
2021
    
September 30,
2022
    
September 30,
2021
  
Return on average tangible common equity:
                              
Net income
  
$
38,973
    
$
37,775
    
$
37,433
    
$
115,874
    
$
117,575
  
Amortization of intangible assets (net of tax)
    
408
      
409
      
497
      
1,294
      
1,618
  
Net income, excluding intangible amortization
  
$
39,381
    
$
38,184
    
$
37,930
    
$
117,168
    
$
119,193
  
Average stockholders’ equity
  
$
1,201,656
    
$
1,190,585
    
$
1,233,045
    
$
1,210,998
    
$
1,209,586
  
Less: average goodwill and other intangibles
    
289,296
      
289,584
      
290,492
      
289,366
      
291,177
  
Average tangible common equity
  
$
912,360
    
$
901,001
    
$
942,553
    
$
921,632
    
$
918,409
  
Return on average tangible common equity (2)
    
17.12
%
    
17.00
%
    
15.97
%
    
17.00
%
    
17.35
%
Tangible equity ratio:
                                        
Stockholders’ equity
  
$
1,156,546
    
$
1,188,556
    
$
1,241,457
    
$
1,156,546
    
$
1,241,457
  
Intangibles
    
289,083
      
289,259
      
290,119
      
289,083
      
290,119
  
Assets
  
$
11,640,742
    
$
11,720,459
    
$
11,994,411
    
$
11,640,742
    
$
11,994,411
  
Tangible equity ratio
    
7.64
%
    
7.87
%
    
8.13
%
    
7.64
%
    
8.13
%
Tangible book value:
                                        
Stockholders’ equity
  
$
1,156,546
    
$
1,188,556
    
$
1,241,457
    
$
1,156,546
    
$
1,241,457
  
Intangibles
    
289,083
      
289,259
      
290,119
      
289,083
      
290,119
  
Tangible equity
  
$
867,463
    
$
899,297
    
$
951,338
    
$
867,463
    
$
951,338
  
Diluted common shares outstanding
    
42,839
      
42,836
      
43,338
      
42,839
      
43,338
  
Tangible book value per share
  
$
20.25
    
$
20.99
    
$
21.95
    
$
20.25
    
$
21.95
  
(2) Annualized

32
Net Interest Income

Net interest income is the difference between interest income on earning assets, primarily loans and securities and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on interest-earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings.

Net interest income was $94.5 million for the third quarter of 2022, up $6.9 million, or 7.9%, from the previous quarter. PPP loan interest and fees recognized into interest income for the three months ended September 30, 2022 was $0.3 million compared to $1.3 million for the previous quarter. The FTE net interest margin was 3.51% for the three months ended September 30, 2022, an increase of 30 basis points (“bps”) from the previous quarter. Interest income increased $7.7 million, or 8.5%, as the yield on average interest-earning assets increased 33 bps from the prior quarter to 3.68%, while average interest-earning assets of $10.73 billion decreased $255.7 million from the prior quarter, primarily due to a decrease in short-term interest-bearing accounts (“excess liquidity”), resulting primarily from the incremental deployment of excess liquidity into loans and investment securities. Interest expense was up $0.8 million, or 21.5%, as the cost of interest-bearing liabilities increased 6 bps to 0.29% for the quarter ended September 30, 2022, driven by an increase in the cost of deposits and the higher interest rate on borrowings.

Net interest income was $94.5 million for the third quarter of 2022, up $16.8 million, or 21.6%, from the third quarter of 2021. PPP loan interest and fees recognized into interest income for the three months ended September 30, 2022 was $0.3 million compared to $2.9 million for the third quarter of 2021. The FTE net interest margin was 3.51% for the three months ended September 30, 2022, an increase of 63 bps from the third quarter of 2021. Interest income increased $17.0 million, or 20.7%, as the yield on average interest-earning assets increased 63 bps from the same period in 2021 to 3.68%, while average interest-earning assets of $10.73 billion was comparable with the third quarter of 2021 as the decrease in excess liquidity was fully offset by the increase in loans and investment securities. Interest expense was up $0.2 million, or 4.3%, as the cost of interest-bearing liabilities increased 2 bps to 0.29% for the quarter ended September 30, 2022, driven by the higher interest rate on borrowings.

Net interest income for the first nine months of 2022 was $262.4 million, up $26.5 million, or 11.2%, from the same period in 2021. PPP loan interest and fees recognized into interest income for the nine months ended September 30, 2022 was $3.6 million compared to $13.8 million for the same period in 2021. FTE net interest margin was 3.22% for the nine months ended September 30, 2022, an increase of 21 bps from the same period in 2021. Interest income increased $24.3 million, or 9.7%, as the yield on average interest-earning assets increased 17 bps from the same period in 2021 to 3.37%, while average interest-earning assets of $10.93 billion increased $429.8 million primarily due to an increase in average loans and investment securities. Interest expense was down $2.2 million, or 14.8%, for the nine months ended September 30, 2022 as compared to the same period in 2021 as the cost of interest-bearing liabilities decreased 5 bps to 0.25%, driven by interest-bearing deposit costs decreasing 7 bps.

33
Average Balances and Net Interest Income

The following tables include the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing liabilities on a taxable equivalent basis.

Three Months Ended
  
September 30, 2022
    
September 30, 2021
  
(Dollars in thousands)
  
Average
Balance
    
Interest
    
Yield/
Rates
    
Average
Balance
    
Interest
    
Yield/
Rates
  
Assets:
                                    
Short-term interest-bearing accounts
  
$
191,463
    
$
1,209
      
2.51
%
  
$
1,014,120
    
$
403
      
0.16
%
Securities taxable (1)
    
2,491,315
      
11,478
      
1.83
%
    
1,923,700
      
7,907
      
1.63
%
Securities tax-exempt (1) (3)
    
211,306
      
1,318
      
2.47
%
    
246,685
      
1,225
      
1.97
%
Federal Reserve Bank and FHLB stock
    
25,182
      
220
      
3.47
%
    
25,154
      
121
      
1.91
%
Loans (2) (3)
    
7,808,025
      
85,326
      
4.34
%
    
7,517,839
      
72,857
      
3.84
%
Total interest-earning assets
  
$
10,727,291
    
$
99,551
      
3.68
%
  
$
10,727,498
    
$
82,513
      
3.05
%
Other assets
    
887,378
                      
1,019,797
                  
Total assets
  
$
11,614,669
                    
$
11,747,295
                  
                                                 
Liabilities and stockholders’ equity:
                                                
Money market deposit accounts
  
$
2,332,341
    
$
877
      
0.15
%
  
$
2,580,570
    
$
1,266
      
0.19
%
NOW deposit accounts
    
1,548,115
      
800
      
0.21
%
    
1,442,678
      
183
      
0.05
%
Savings deposits
    
1,854,122
      
149
      
0.03
%
    
1,691,539
      
219
      
0.05
%
Time deposits
    
455,168
      
407
      
0.35
%
    
565,216
      
880
      
0.62
%
Total interest-bearing deposits
  
$
6,189,746
    
$
2,233
      
0.14
%
  
$
6,280,003
    
$
2,548
      
0.16
%
Federal funds purchased
    
1,522
      
13
      
3.39
%
    
-
      
-
      
-
  
Repurchase agreements
    
69,048
      
17
      
0.10
%
    
99,703
      
28
      
0.11
%
Short-term borrowings
    
6,440
      
54
      
3.33
%
    
-
      
-
      
-
  
Long-term debt
    
3,331
      
20
      
2.38
%
    
14,029
      
89
      
2.52
%
Subordinated debt, net
    
98,748
      
1,360
      
5.46
%
    
98,311
      
1,359
      
5.48
%
Junior subordinated debt
    
101,196
      
1,039
      
4.07
%
    
101,196
      
517
      
2.03
%
Total interest-bearing liabilities
  
$
6,470,031
    
$
4,736
      
0.29
%
  
$
6,593,242
    
$
4,541
      
0.27
%
Demand deposits
  
$
3,708,131
                    
$
3,676,883
                  
Other liabilities
    
234,851
                      
244,125
                  
Stockholders’ equity
    
1,201,656
                      
1,233,045
                  
Total liabilities and stockholders’ equity
  
$
11,614,669
                    
$
11,747,295
                  
Net interest income (FTE)
          
$
94,815
                    
$
77,972
          
Interest rate spread
                    
3.39
%
                    
2.78
%
Net interest margin (FTE)
                    
3.51
%
                    
2.88
%
Taxable equivalent adjustment
          
$
337
                    
$
298
          
Net interest income
          
$
94,478
                    
$
77,674
          

(1)
Securities are shown at average amortized cost.
(2)
For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding.
(3)
Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.

34
Nine Months Ended
  
September 30, 2022
    
September 30, 2021
  
(Dollars in thousands)
  
Average
Balance
    
Interest
    
Yield/
Rates
    
Average
Balance
    
Interest
    
Yield/
Rates
  
Assets:
                                    
Short-term interest-bearing accounts
  
$
575,517
    
$
2,742
      
0.64
%
  
$
860,067
    
$
763
      
0.12
%
Securities taxable (1)
    
2,406,042
      
31,460
      
1.75
%
    
1,852,963
      
23,711
      
1.71
%
Securities tax-exempt (1) (3)
    
242,033
      
3,664
      
2.02
%
    
208,438
      
3,730
      
2.39
%
Federal Reserve Bank and FHLB stock
    
25,064
      
654
      
3.49
%
    
25,290
      
443
      
2.34
%
Loans (2) (3)
    
7,683,159
      
237,290
      
4.13
%
    
7,555,276
      
222,821
      
3.94
%
Total interest-earning assets
  
$
10,931,815
    
$
275,810
      
3.37
%
  
$
10,502,034
    
$
251,468
      
3.20
%
Other assets
    
905,931
                      
984,372
                  
Total assets
  
$
11,837,746
                    
$
11,486,406
                  
                                                 
Liabilities and stockholders’ equity:
                                                
Money market deposit accounts
  
$
2,541,927
    
$
2,801
      
0.15
%
  
$
2,557,172
    
$
4,022
      
0.21
%
NOW deposit accounts
    
1,570,318
      
1,260
      
0.11
%
    
1,419,102
      
531
      
0.05
%
Savings deposits
    
1,831,485
      
442
      
0.03
%
    
1,633,941
      
625
      
0.05
%
Time deposits
    
475,966
      
1,328
      
0.37
%
    
590,385
      
3,404
      
0.77
%
Total interest-bearing deposits
  
$
6,419,696
    
$
5,831
      
0.12
%
  
$
6,200,600
    
$
8,582
      
0.19
%
Federal funds purchased
    
513
      
13
      
3.39
%
    
-
      
-
      
-
  
Repurchase agreements
    
67,279
      
46
      
0.09
%
    
101,574
      
104
      
0.14
%
Short-term borrowings
    
2,170
      
54
      
3.33
%
    
1,740
      
26
      
2.07
%
Long-term debt
    
7,509
      
140
      
2.49
%
    
15,976
      
301
      
2.52
%
Subordinated debt, net
    
98,641
      
4,078
      
5.53
%
    
98,204
      
4,077
      
5.56
%
Junior subordinated debt
    
101,196
      
2,325
      
3.07
%
    
101,196
      
1,572
      
2.08
%
Total interest-bearing liabilities
  
$
6,697,004
    
$
12,487
      
0.25
%
  
$
6,519,290
    
$
14,662
      
0.30
%
Demand deposits
  
$
3,709,761
                    
$
3,514,005
                  
Other liabilities
    
219,983
                      
243,525
                  
Stockholders’ equity
    
1,210,998
                      
1,209,586
                  
Total liabilities and stockholders’ equity
  
$
11,837,746
                    
$
11,486,406
                  
Net interest income (FTE)
          
$
263,323
                    
$
236,806
          
Interest rate spread
                    
3.12
%
                    
2.90
%
Net interest margin (FTE)
                    
3.22
%
                    
3.01
%
Taxable equivalent adjustment
          
$
912
                    
$
899
          
Net interest income
          
$
262,411
                    
$
235,907
          

(1)
Securities are shown at average amortized cost.
(2)
For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding.
(3)
Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.

35
The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume) and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.

Three Months Ended September 30,
  
Increase (Decrease)
2022 over 2021
  
(In thousands)
  
Volume
    
Rate
    
Total
  
Short-term interest-bearing accounts
  
$
(578
)
  
$
1,384
    
$
806
  
Securities taxable
    
2,533
      
1,038
      
3,571
  
Securities tax-exempt
    
(192
)
    
285
      
93
  
Federal Reserve Bank and FHLB stock
    
-
      
99
      
99
  
Loans
    
2,896
      
9,573
      
12,469
  
Total FTE interest income
  
$
4,659
    
$
12,379
    
$
17,038
  
Money market deposit accounts
  
$
(113
)
  
$
(276
)
  
$
(389
)
NOW deposit accounts
    
14
      
603
      
617
  
Savings deposits
    
19
      
(89
)
    
(70
)
Time deposits
    
(148
)
    
(325
)
    
(473
)
Federal funds purchased
    
13
      
-
      
13
  
Repurchase agreements
    
(8
)
    
(3
)
    
(11
)
Short-term borrowings
    
54
      
-
      
54
  
Long-term debt
    
(64
)
    
(5
)
    
(69
)
Subordinated debt, net
    
6
      
(5
)
    
1
  
Junior subordinated debt
    
-
      
522
      
522
  
Total FTE interest expense
  
$
(227
)
  
$
422
    
$
195
  
Change in FTE net interest income
  
$
4,886
    
$
11,957
    
$
16,843
  

Nine Months Ended September 30,
  
Increase (Decrease)
2022 over 2021
  
(In thousands)
  
Volume
    
Rate
    
Total
  
Short-term interest-bearing accounts
  
$
(330
)
  
$
2,309
    
$
1,979
  
Securities taxable
    
7,221
      
528
      
7,749
  
Securities tax exempt
    
554
      
(620
)
    
(66
)
Federal Reserve Bank and FHLB stock
    
(4
)
    
215
      
211
  
Loans
    
3,819
      
10,650
      
14,469
  
Total FTE interest income
  
$
11,260
    
$
13,082
    
$
24,342
  
Money market deposit accounts
  
$
(24
)
  
$
(1,197
)
  
$
(1,221
)
NOW deposit accounts
    
62
      
667
      
729
  
Savings deposits
    
69
      
(252
)
    
(183
)
Time deposits
    
(567
)
    
(1,509
)
    
(2,076
)
Federal funds purchased
    
13
      
-
      
13
  
Repurchase agreements
    
(29
)
    
(29
)
    
(58
)
Short-term borrowings
    
8
      
20
      
28
  
Long-term debt
    
(158
)
    
(3
)
    
(161
)
Subordinated debt
    
18
      
(17
)
    
1
  
Junior subordinated debt
    
-
      
753
      
753
  
Total FTE interest expense
  
$
(608
)
  
$
(1,567
)
  
$
(2,175
)
Change in net FTE interest income
  
$
11,868
    
$
14,649
    
$
26,517
  

36
Noninterest Income

Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of operations. The following table sets forth information by category of noninterest income for the periods indicated:

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(In thousands)
  
2022
    
2021
    
2022
    
2021
  
Service charges on deposit accounts
  
$
3,581
    
$
3,489
    
$
11,032
    
$
9,544
  
Card services income
    
5,654
      
9,101
      
24,100
      
25,835
  
Retirement plan administration fees
    
11,496
      
10,495
      
37,451
      
30,372
  
Wealth management
    
8,402
      
8,783
      
25,294
      
25,099
  
Insurance services
    
3,892
      
3,720
      
11,258
      
10,689
  
Bank owned life insurance
    
1,560
      
1,548
      
4,625
      
4,588
  
Net securities (losses) gains
    
(148
)
    
(100
)
    
(914
)
    
568
  
Other
    
2,735
      
3,293
      
8,641
      
9,988
  
Total noninterest income
  
$
37,172
    
$
40,329
    
$
121,487
    
$
116,683
  

Noninterest income for the three months ended September 30, 2022 was $37.2 million, down $4.5 million, or 10.8%, from the prior quarter and down $3.2 million, or 7.8%, from the third quarter of 2021. Excluding net securities (losses) gains, noninterest income for the three months ended September 30, 2022 was $37.3 million, down $4.9 million, or 11.7%, from the prior quarter and down $3.1 million, or 7.7%, from the third quarter of 2021. The decrease from the prior quarter and the third quarter of 2021 was primarily driven by lower card services income driven by the $3.8 million impact from the Company being subject to the statutory price cap provisions of the Durbin Amendment to the Dodd-Frank Act. In addition, the decrease from the prior quarter was impacted by lower retirement plan administration fees driven by market decline and lower activity-based fees partly offset by higher wealth management fees due to seasonal tax preparation services. The decrease from the third quarter of 2021 was also impacted by lower wealth management fees driven primarily by market performance and lower commercial loan swap fees which were partly offset by higher retirement plan administration driven by higher activity-based fees and organic growth.

Noninterest income for the nine months ended September 30, 2022 was $121.5 million, up $4.8 million, or 4.1%, from the same period in 2021. Excluding net securities (losses) gains, noninterest income for the nine months ended September 30, 2022 was $122.4 million, up $6.3 million, or 5.4%, from the same period in 2021. The increase from the prior year was primarily due to an increase in retirement plan administration fees driven by higher activity-based fees continued organic growth as well as the impact of positive equity market returns over the past year and higher service charges on deposit accounts as the volume of transactions has normalized to near pre-pandemic levels. These increases were partly offset by lower card services income driven by the $3.8 million impact from the Company being subject to the statutory price cap provisions of the Durbin Amendment to the Dodd-Frank Act and lower commercial loan swap fees.

Noninterest Expense

Noninterest expenses are also an important factor in the Company’s results of operations. The following table sets forth the major components of noninterest expense for the periods indicated:

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
(In thousands)
  
2022
    
2021
    
2022
    
2021
  
Salaries and employee benefits
  
$
48,371
    
$
44,190
    
$
140,595
    
$
128,462
  
Technology and data services
    
9,096
      
8,421
      
26,588
      
26,154
  
Occupancy
    
6,481
      
6,154
      
19,761
      
19,413
  
Professional fees and outside services
    
3,817
      
3,784
      
11,999
      
11,403
  
Office supplies and postage
    
1,469
      
1,364
      
4,441
      
4,478
  
FDIC expense
    
787
      
772
      
2,399
      
2,243
  
Advertising
    
559
      
583
      
1,943
      
1,502
  
Amortization of intangible assets
    
544
      
663
      
1,725
      
2,157
  
Loan collection and other real estate owned, net
    
549
      
706
      
1,690
      
1,959
  
Other
    
5,021
      
6,232
      
13,815
      
14,405
  
Total noninterest expense
  
$
76,694
    
$
72,869
    
$
224,956
    
$
212,176
  

37
Noninterest expense for the three months ended September 30, 2022 was $76.7 million, up $0.6 million, or 0.8%, from the prior quarter and up $3.8 million, or 5.2%, from the third quarter of 2021. The increase from the prior quarter was primarily driven by higher salaries and employee benefits due to one additional day of payroll in the third quarter and higher levels of incentive compensation accruals which was partly offset by lower other expenses due to seasonal timing of certain expenditures. The increase from the third quarter of 2021 was due to increased salaries and wages including merit pay increases and higher levels of incentive compensation accruals. Technology and data services expense increased from the third quarter of 2021 due to continued investment in digital platform solutions. Other expenses in the third quarter of 2021 included $2.3 million in estimated litigation settlement costs related to a settled lawsuit regarding certain of the Company’s deposit products and related disclosures.

Noninterest expense for the nine months ended September 30, 2022 was $225.0 million, up $12.8 million, or 6.0%, from the same period in 2021. The increase from the prior year was driven by higher salaries and employee benefits due to increased salaries and wages including merit pay increases and higher levels of incentive compensation accruals, along with increased professional fees and outside services due to timing of expenditures. Other expenses decreased from the prior year due in to the 2021 $4.0 million estimated litigation settlement costs previously mentioned, partly offset by higher travel and training expenditures along with an increase in the provision for the reserve for unfunded commitments.

Income Taxes

Income tax expense for the three months ended September 30, 2022 was $11.5 million, up $0.5 million from the prior quarter and up $0.5 million from the third quarter of 2021. The effective tax rate was 22.8% for the third quarter of 2022, compared to 22.5% in the prior quarter and 22.8% for the third quarter of 2021.

Income tax expense for the nine months ended September 30, 2022 was $33.6 million, down $0.6 million from the same period of 2021. The effective tax rate was 22.5% for the nine months ended September 30, 2022 and 2021.

ANALYSIS OF FINANCIAL CONDITION

Securities

Total securities increased $62.3 million, or 2.5%, from December 31, 2021 to September 30, 2022. The securities portfolio represented 21.6% of total assets as of September 30, 2022 as compared to 20.4% of total assets as of December 31, 2021.

The following table details the composition of securities available for sale, securities held to maturity and equity securities for the periods indicated:

   
September 30, 2022
    
December 31, 2021
  
Mortgage-backed securities:
            
With maturities 15 years or less
    
14
%
    
18
%
With maturities greater than 15 years
    
11
%
    
8
%
Collateralized mortgage obligations
    
37
%
    
34
%
Municipal securities
    
15
%
    
17
%
U.S. agency notes
    
20
%
    
20
%
Corporate
    
2
%
    
2
%
Equity securities
    
1
%
    
1
%
Total
    
100
%
    
100
%

The Company’s mortgage-backed securities, U.S. agency notes and collateralized mortgage obligations are all guaranteed by Fannie Mae, Freddie Mac, Federal Home Loan Bank, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). GNMA securities are considered similar in credit quality to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in the investment portfolio.

Loans

A summary of the loan portfolio by major categories(1), net of deferred fees and origination costs, for the periods indicated follows:

(In thousands)
  
September 30, 2022
    
December 31, 2021
  
Commercial & industrial
  
$
1,258,871
    
$
1,155,240
  
Commercial real estate
    
2,724,728
      
2,655,367
  
Paycheck protection program
    
3,328
      
101,222
  
Residential real estate mortgages
    
1,626,528
      
1,571,232
  
Indirect auto
    
952,757
      
859,454
  
Residential solar
    
728,898
      
440,016
  
Home equity
    
313,557
      
330,357
  
Other consumer
    
296,117
      
385,571
  
Total loans
  
$
7,904,784
    
$
7,498,459
  

(1)
Loans are summarized by business line which does not align to how the Company assesses credit risk in the estimate for credit losses under CECL.

38
Total loans increased by $406.3 million, or 7.2% annualized, from December 31, 2021 to September 30, 2022. Total PPP loans as of September 30, 2022 were $3.3 million (net of unamortized fees). The following PPP loan activity occurred during the nine months ended September 30, 2022: there were no PPP loan originations, $99.3 million of loans forgiven and $3.6 million of interest and fees recognized into interest income. Excluding PPP loans, period end loans increased $504.2 million from December 31, 2021, or 9.1% annualized. Commercial and industrial loans increased $103.6 million to $1.26 billion; commercial real estate loans increased $69.4 million to $2.72 billion; and total consumer loans increased $331.2 million to $3.92 billion. Total loans represent approximately 67.9% of assets as of September 30, 2022, as compared to 62.4% as of December 31, 2021.

Allowance for Credit Losses, Provision for Loan Losses and Nonperforming Assets

Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.

The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

Management estimates the allowance for credit losses using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required at each point in the measurement process.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted probability of default (PD) and loss given default (LGD) modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.

Additional information about our Allowance for Loan Losses is included in Note 5 to the consolidated financial statements. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

The allowance for credit losses totaled $96.8 million at September 30, 2022 compared to $93.6 million at June 30, 2022 and $93.0 million at September 30, 2021. The allowance for credit losses as a percentage of loans was 1.22% (1.23% excluding PPP loans) at September 30, 2022, compared to 1.20% (1.21% excluding PPP loans) at June 30, 2022 and 1.23% (1.28% excluding PPP loans) at September 30, 2021. The allowance for credit losses was 443.43% of nonperforming loans at September 30, 2022, compared to 363.23% at June 30, 2022 and 240.45% at September 30, 2021. The allowance for credit losses was 506.86% of nonaccrual loans at September 30, 2022, compared to 395.39% of nonaccrual loans at June 30, 2022 and compared to 260.23% at September 30, 2021. The increase in the allowance for credit losses from June 30, 2022 to September 30, 2022 was primarily due to the deterioration in the forecast of economic conditions, which increased the level of expected credit losses and the increase in loan balances. The increase in allowance for credit losses from September 30, 2021 to September 30, 2022 was primarily due to the slight deterioration in the economic forecast and the increase in loan balances.

39
The provision for loan losses was $4.5 million for three months ended September 30, 2022, compared to $4.4 million in the prior quarter and a net benefit of $3.3 million for the same period in the prior year. Provision expense increased slightly from the prior quarter driven by modest deterioration of the macro-economic forecasts and providing for loan growth. Provision expense increased from the same period in the prior year driven by providing for loan growth and an increase in the level of allowance for loan losses resulting from less favorable economic forecasts in the current quarter relative to improved economic forecasts that took place at the end of the third quarter in 2021. Net charge-offs totaled $1.3 million during the three months ended September 30, 2022, compared to net charge-offs of $0.8 million during the second quarter of 2022 and $2.2 million in the third quarter of 2021. Net charge-offs to average loans was 7 bps for the three months ended September 30, 2022, compared to 4 bps for the second quarter of 2022 and 11 bps for the three months ended September 30, 2021.

The provision for loan losses was $9.5 million for the nine months ended September 30, 2022, compared to a net benefit of $11.4 million for the nine months ended September 30, 2021. Provision expense increased from the same period in the prior year due primarily to deteriorated economic condition forecast in the current year as compared to significant improvements experienced in the economic condition forecast in the prior year and loan growth experienced during the current year. Net charge-offs totaled $4.7 million during the nine months ended September 30, 2022, compared to net charge-offs of $5.6 million during the nine months ended September 30, 2021.

As of September 30, 2022, the unfunded commitment reserve totaled $5.3 million, compared to $5.1 million as of June 30, 2022 and $5.3 million as of September 30, 2021.

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. The threshold for evaluating classified and nonperforming loans specifically evaluated for impairment is $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.

   
September 30, 2022
    
December 31, 2021
  
(Dollars in thousands)
  
Amount
    
%
    
Amount
    
%
  
Nonaccrual loans:
                        
Commercial
  
$
9,427
      
49
%
  
$
15,942
      
53
%
Residential
    
4,907
      
26
%
    
8,862
      
29
%
Consumer
    
1,756
      
9
%
    
1,511
      
5
%
Troubled debt restructured loans
    
3,008
      
16
%
    
3,970
      
13
%
Total nonaccrual loans
  
$
19,098
      
100
%
  
$
30,285
      
100
%
                                 
Loans over 90 days past due and still accruing:
                                
Commercial
  
$
-
      
-
    
$
-
      
-
  
Residential
    
1,184
      
43
%
    
808
      
33
%
Consumer
    
1,548
      
57
%
    
1,650
      
67
%
Total loans over 90 days past due and still accruing
  
$
2,732
      
100
%
  
$
2,458
      
100
%
                                 
Total nonperforming loans
  
$
21,830
            
$
32,743
          
OREO
    
-
              
167
          
Total nonperforming assets
  
$
21,830
            
$
32,910
          
                                 
Total nonaccrual loans to total loans
    
0.24
%
            
0.40
%
        
Total nonperforming loans to total loans
    
0.28
%
            
0.44
%
        
Total nonperforming assets to total assets
    
0.19
%
            
0.27
%
        
Total allowance for loan losses to total nonperforming loans
    
443.43
%
            
280.98
%
        
Total allowance for loan losses to nonaccrual loans
    
506.86
%
            
303.78
%
        

40
Total nonperforming assets were $21.8 million at September 30, 2022, compared to $32.9 million at December 31, 2021 and $39.5 million at September 30, 2021. Nonperforming loans at September 30, 2022 were $21.8 million, or 0.28% of total loans (0.28% excluding PPP loan originations), compared with $32.7 million, or 0.44% of total loans (0.44% excluding PPP loan originations) at December 31, 2021 and $38.7 million, or 0.51% of total loans (0.53% excluding PPP loan originations) at September 30, 2021. The decrease in nonperforming loans primarily resulted from a reduction in commercial and residential mortgage nonaccrual loans. Total nonaccrual loans were $19.1 million or 0.24% of total loans at September 30, 2022, compared to $30.3 million or 0.40% of total loans at December 31, 2021 and compared to $35.7 million or 0.47% of total loans at September 30, 2021. Past due loans as a percentage of total loans was 0.30% at September 30, 2022 (0.29% excluding PPP loan originations), up from 0.29% at December 31, 2021 (0.29% excluding PPP loan originations) and up from 0.46% at September 30, 2021 (0.48% excluding PPP loan originations).

In addition to nonperforming loans discussed above, the Company has also identified approximately $58.4 million in potential problem loans at September 30, 2022 as compared to $74.9 million at December 31, 2021 and $106.3 million at September 30, 2021. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” The decrease in potential problem loans from September 30, 2021 is primarily due to the improved economic conditions which resulted in loans coming off deferral and returning to payment. Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations. As of September 30, 2022, 8.5% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic. Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become over 90 days past due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses. To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.

Deposits

Total deposits were $9.92 billion at September 30, 2022, down $0.32 billion, or 3.1%, from December 31, 2021. Total average deposits increased $0.41 billion, or 4.3%, from the same period last year. The growth was driven primarily by an increase of $195.8 million, or 5.6%, in demand deposits, combined with an increase in interest-bearing deposits of $219.1 million, or 3.5%, due to growth in NOW deposit accounts and savings deposit accounts, partly offset by a decrease in time accounts.

Borrowed Funds

The Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $74.6 million at September 30, 2022 compared to $97.8 million at December 31, 2021. Long-term debt was $3.3 million at September 30, 2022 compared to $14.0 million at December 31, 2021.

For more information about the Company’s borrowing capacity and liquidity position, see “Liquidity Risk” below.

Subordinated Debt

On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated debt issuance cost, which is being amortized on a straight-line basis, was $2.2 million. As of September 30, 2022 and December 31, 2021 the subordinated debt net of unamortized issuance costs was $98.8 million and $98.5 million, respectively.

Capital Resources

Stockholders’ equity of $1.16 billion represented 9.94% of total assets at September 30, 2022 compared with $1.25 billion, or 10.41% of total assets, as of December 31, 2021. Stockholders’ equity decreased $93.9 million from December 31, 2021 driven by the $160.2 million decrease in accumulated other comprehensive income due primarily to the change in market value of securities available for sale, dividends declared of $36.9 million and the repurchase of common stock of $14.7 million, partly offset by net income of $115.9 million for the nine months ending September 30, 2022. The deferred tax asset related to the unrealized losses in investment securities increased $53.6 million from December 31, 2021.

The Company purchased 400,000 shares of its common stock in the first and second quarter of 2022 at an average price of $36.78 per share under its previously announced share repurchase program. As of September 30, 2022, there were 1,600,000 shares available for repurchase under this plan authorized on December 20, 2021 and set to expire on December 31, 2023.

The Board of Directors considers the Company’s capital levels, earnings position and earnings potential when making dividend decisions. The Board of Directors approved a fourth-quarter 2022 cash dividend of $0.30 per share at a meeting held on October 24, 2022. The dividend, which represents an increase of $0.02 per share, or 7.1%, from the amount paid in the fourth quarter of 2021 will be paid on December 15, 2022 to stockholders of record as of December 1, 2022.

41
As the capital ratios in the following table indicate, the Company remained “well capitalized” at September 30, 2022 under applicable bank regulatory requirements. Capital measurements are well in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based capital ratios must be 5%, 6.5%, 8% and 10%, respectively.

Capital Measurements
  
September 30, 2022
    
December 31, 2021
  
Tier 1 leverage ratio
    
10.21
%
    
9.41
%
Common equity tier 1 capital ratio
    
12.17
%
    
12.25
%
Tier 1 capital ratio
    
13.27
%
    
13.43
%
Total risk-based capital ratio
    
15.50
%
    
15.73
%
Cash dividends as a percentage of net income
    
31.85
%
    
30.82
%
Per common share:
                
Book value
  
$
27.00
    
$
28.97
  
Tangible book value(1)
  
$
20.25
    
$
22.26
  
Tangible equity ratio(2)
    
7.64
%
    
8.20
%

(1)
Stockholders’ equity less goodwill and intangible assets divided by common shares outstanding.
(2)
Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets.

In March 2020, the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”) announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses (after-tax) has been deferred and will phase into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, the Company is allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020 and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020 and December 31, 2021, will also phase into regulatory capital at 25% per year commencing January 1, 2022. The Company adopted the capital transition relief over the permissible five-year period.

42
Liquidity and Interest Rate Sensitivity Management

Market Risk

Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations.

Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.

To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s Asset Liability Committee (“ALCO”) meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

In adjusting the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.

The primary tool utilized by the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (e.g., no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk.

In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors. In the rising rate scenarios, net interest income is projected to experience an increase from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, money market deposit accounts and time accounts. Net interest income for the next twelve months in the +200/+100/-200 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% reduction in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the September 30, 2022 balance sheet position:

Interest Rate Sensitivity Analysis
  
Change in interest rates
Percent change in
(in bps points)
net interest income
+200
3.78%
+100
2.02%
-200
(5.72%)

The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of the recovery from the recent economic downturn, related inflationary pressures and FOMC monetary policy. In response to the economic impact of the pandemic, the federal funds rate was reduced by 150 bps in March 2020, term interest rates fell sharply across the yield curve and the Company reduced deposit rates. Inflationary pressures have resulted in a higher overall yield curve, Fed Funds increases of 300 bps so far in 2022 and expectations for continued increases to short-term interest rates. With deposit rates near their historic lows, the Company will focus on managing deposit expense in a rising rate environment while allowing assets to reprice upward.

43
Liquidity Risk

Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources. The objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. ALCO is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies, along with regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. Management continually monitors marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.

The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At September 30, 2022, the Company’s Basic Surplus measurement was 19.1% of total assets, or $2.22 billion, as compared to the December 31, 2021 Basic Surplus of 28.5%, or $3.43 billion, and was above the Company’s minimum of 5% (calculated at $582.0 million and $600.6 million, of period end total assets as September 30, 2022 and December 31, 2021, respectively) set forth in its liquidity policies.

At September 30, 2022 and December 31, 2021, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $3.3 million and $14.0 million, respectively. At September 30, 2022 and December 31, 2021, the Bank had $8.0 million and $81.0 million, respectively, of collateral encumbered by municipal letters of credit. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.70 billion at September 30, 2022 and $1.67 billion at December 31, 2021. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $0.92 billion and $1.00 billion at September 30, 2022 and December 31, 2021, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $1.98 billion at September 30, 2022 and $2.03 billion at December 31, 2021. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral. At September 30, 2022 and December 31, 2021, the Bank had the capacity to borrow $588.2 million and $580.8 million, respectively, from this program. The Company’s internal policies authorize borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $2.88 billion at September 30, 2022 and $2.89 billion at December 31, 2021.

This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considers its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2022. Higher interest rates could result in deposit declines as depositors have alternative opportunities for yield on their excess funds. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Significant monetary and fiscal policy actions taken by the federal government have helped to mitigate these risks. Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.

At September 30, 2022, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.

The Company’s primary source of funds is the Bank. Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends. The approval of the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations. At September 30, 2022, approximately $133.2 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.

44
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4 - CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2022, the Company’s disclosure controls and procedures were effective.

45
PART II OTHER INFORMATION

Item 1 – LEGAL PROCEEDINGS

There are no material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is subject, except as described in the Company’s 2021 Annual Report on Form 10-K.

Item 1A – RISK FACTORS

There are no material changes to the risk factors as previously discussed in Part I, Item 1A of our 2021 Annual Report on Form 10-K.

Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)
Not applicable

(b)
Not applicable

(c)
None

Item 3 – DEFAULTS UPON SENIOR SECURITIES

None

Item 4 – MINE SAFETY DISCLOSURES

None

Item 5 – OTHER INFORMATION

None

46
Item 6 – EXHIBITS

3.1
Restated Certificate of Incorporation of NBT Bancorp Inc. as amended through July 1, 2015 (filed as Exhibit 3.1 to Registrant’s Form 10-Q, filed on August 10, 2015 and incorporated herein by reference).
3.2
Amended and Restated Bylaws of NBT Bancorp Inc. effective May 22, 2018 (filed as Exhibit 3.1 to Registrant’s Form 8-K, filed on May 23, 2018 and incorporated herein by reference).
3.3
Certificate of Designation of the Series A Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4.1 of the Registrant’s Form 8-K, filed on November 18, 2004 and incorporated herein by reference).
Certification by the Chief Executive Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
Certification by the Chief Financial Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

47
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this 9th day of November 2022.

 
NBT BANCORP INC.
  
     
By:
/s/ Scott A. Kingsley
    
 
Scott A. Kingsley
  
 
Chief Financial Officer
  


48
EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John H. Watt, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of NBT Bancorp Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 9, 2022

By:
/s/ John H. Watt, Jr.
    
 
John H. Watt, Jr.
  
 
Chief Executive Officer
  


EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott A. Kingsley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of NBT Bancorp Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 9, 2022

By:
/s/ Scott A. Kingsley
    
 
Scott A. Kingsley
  
 
Chief Financial Officer
  


EXHIBIT 32.1

Written Statement of the Chief Executive Officer Pursuant to Section 906 of the SARBANES-OXLEY ACT OF 2002

The undersigned, the Chief Executive Officer of NBT Bancorp Inc. (the "Company"), hereby certifies that to his knowledge on the date hereof:

(a) the Form 10-Q of the Company for the Quarterly Period Ended September 30, 2022, filed on the date hereof with the Securities and Exchange Commission (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
/s/ John H. Watt, Jr.
  
 
John H. Watt, Jr.
  
 
Chief Executive Officer
  
 
November 9, 2022
  

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to NBT Bancorp Inc. and will be retained by NBT Bancorp Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2

Written Statement of the Chief Financial Officer Pursuant to Section 906 of the SARBANES-OXLEY ACT OF 2002

The undersigned, the Chief Financial Officer of NBT Bancorp Inc. (the "Company"), hereby certifies that to his knowledge on the date hereof:

(a) the Form 10-Q of the Company for the Quarterly Period Ended September 30, 2022, filed on the date hereof with the Securities and Exchange Commission (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
/s/ Scott A. Kingsley
  
 
Scott A. Kingsley
  
 
Chief Financial Officer
  
 
November 9, 2022
  

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to NBT Bancorp Inc. and will be retained by NBT Bancorp Inc. and furnished to the Securities and Exchange Commission or its staff upon request.