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, 2018.
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)
 
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, 2018, there were 43,667,380 shares outstanding of the Registrant’s common stock, $0.01 par value per share.



NBT BANCORP INC.
FORM 10-Q - Quarter Ended September 30, 2018

TABLE OF CONTENTS

 PART I
FINANCIAL INFORMATION

Item 1
Financial Statements
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
9
     
Item 2
35
     
Item 3
48
     
Item 4
48
     
PART II
OTHER INFORMATION
 
     
Item 1
49
Item 1A
49
Item 2
49
Item 3
49
Item 4
49
Item 5
49
Item 6
50
 
51


Item 1 – FINANCIAL STATEMENTS

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

 
 
September 30,
   
December 31,
 
   
2018
   
2017
 
(In thousands, except share and per share data)
           
Assets
           
Cash and due from banks
 
$
171,525
   
$
156,852
 
Short-term interest bearing accounts
   
3,108
     
2,812
 
Equity securities, at fair value
   
24,722
     
-
 
Securities available for sale, at fair value
   
1,101,074
     
1,255,925
 
Securities held to maturity (fair value $645,732 and $481,871, respectively)
   
659,949
     
484,073
 
Trading securities
   
-
     
11,467
 
Federal Reserve and Federal Home Loan Bank stock
   
52,421
     
46,706
 
Loans held for sale
   
5,035
     
1,134
 
Loans
   
6,887,262
     
6,583,639
 
Less allowance for loan losses
   
72,805
     
69,500
 
Net loans
 
$
6,814,457
   
$
6,514,139
 
Premises and equipment, net
   
78,284
     
81,305
 
Goodwill
   
274,769
     
268,043
 
Intangible assets, net
   
16,576
     
13,420
 
Bank owned life insurance
   
176,240
     
172,388
 
Other assets
   
169,124
     
128,548
 
Total assets
 
$
9,547,284
   
$
9,136,812
 
Liabilities
               
Demand (noninterest bearing)
 
$
2,373,027
   
$
2,286,892
 
Savings, NOW and money market
   
4,199,694
     
4,076,978
 
Time
   
868,569
     
806,766
 
Total deposits
 
$
7,441,290
   
$
7,170,636
 
Short-term borrowings
   
811,709
     
719,123
 
Long-term debt
   
73,751
     
88,869
 
Junior subordinated debt
   
101,196
     
101,196
 
Other liabilities
   
125,183
     
98,811
 
Total liabilities
 
$
8,553,129
   
$
8,178,635
 
Stockholders’ equity
               
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at September 30, 2018 and December 31, 2017
 
$
-
   
$
-
 
Common stock, $0.01 par value. Authorized 100,000,000 shares at September 30, 2018 and December 31, 2017; issued 49,651,493 at September 30, 2018 and December 31, 2017
   
497
     
497
 
Additional paid-in-capital
   
575,155
     
574,209
 
Retained earnings
   
603,921
     
543,713
 
Accumulated other comprehensive loss
   
(49,112
)
   
(22,077
)
Common stock in treasury, at cost, 5,990,174 and 6,108,684 shares at September 30, 2018 and December 31, 2017, respectively
   
(136,306
)
   
(138,165
)
Total stockholders’ equity
 
$
994,155
   
$
958,177
 
Total liabilities and stockholders’ equity
 
$
9,547,284
   
$
9,136,812
 
 
See accompanying notes to unaudited interim consolidated financial statements.
 

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

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
(In thousands, except per share data)
                       
Interest, fee and dividend income
                       
Interest and fees on loans
 
$
77,249
   
$
68,086
   
$
221,864
   
$
197,399
 
Securities available for sale
   
6,659
     
7,278
     
20,588
     
21,505
 
Securities held to maturity
   
3,462
     
2,746
     
8,898
     
8,263
 
Other
   
834
     
737
     
2,381
     
2,010
 
Total interest, fee and dividend income
 
$
88,204
   
$
78,847
   
$
253,731
   
$
229,177
 
Interest expense
                               
Deposits
 
$
6,157
   
$
3,648
   
$
15,167
   
$
10,658
 
Short-term borrowings
   
3,000
     
1,870
     
7,421
     
4,375
 
Long-term debt
   
431
     
589
     
1,359
     
1,794
 
Junior subordinated debt
   
1,089
     
810
     
3,030
     
2,308
 
Total interest expense
 
$
10,677
   
$
6,917
   
$
26,977
   
$
19,135
 
Net interest income
 
$
77,527
   
$
71,930
   
$
226,754
   
$
210,042
 
Provision for loan losses
   
6,026
     
7,889
     
22,300
     
22,835
 
Net interest income after provision for loan losses
 
$
71,501
   
$
64,041
   
$
204,454
   
$
187,207
 
Noninterest income
                               
Insurance and other financial services revenue
 
$
6,172
   
$
5,536
   
$
18,502
   
$
17,927
 
Service charges on deposit accounts
   
4,503
     
4,261
     
12,721
     
12,399
 
ATM and debit card fees
   
5,906
     
5,557
     
16,995
     
16,025
 
Retirement plan administration fees
   
7,244
     
5,272
     
19,879
     
14,881
 
Trust
   
4,808
     
4,927
     
14,951
     
14,620
 
Bank owned life insurance
   
1,288
     
1,284
     
3,852
     
3,913
 
Net securities gains (losses)
   
412
     
(4
)
   
575
     
(2
)
Other
   
3,048
     
3,945
     
11,341
     
10,069
 
Total noninterest income
 
$
33,381
   
$
30,778
   
$
98,816
   
$
89,832
 
Noninterest expense
                               
Salaries and employee benefits
 
$
38,394
   
$
33,674
   
$
112,687
   
$
101,410
 
Occupancy
   
5,380
     
5,174
     
17,034
     
16,528
 
Data processing and communications
   
4,434
     
4,399
     
13,221
     
12,826
 
Professional fees and outside services
   
3,580
     
3,107
     
10,408
     
9,748
 
Equipment
   
4,319
     
3,733
     
12,508
     
11,224
 
Office supplies and postage
   
1,563
     
1,432
     
4,640
     
4,680
 
FDIC expenses
   
1,223
     
1,257
     
3,516
     
3,571
 
Advertising
   
739
     
665
     
1,776
     
1,711
 
Amortization of intangible assets
   
1,054
     
993
     
3,064
     
2,999
 
Loan collection and other real estate owned, net
   
1,234
     
1,684
     
3,479
     
3,627
 
Other
   
4,577
     
4,483
     
13,324
     
13,880
 
Total noninterest expense
 
$
66,497
   
$
60,601
   
$
195,657
   
$
182,204
 
Income before income tax expense
 
$
38,385
   
$
34,218
   
$
107,613
   
$
94,835
 
Income tax expense
   
8,578
     
11,342
     
23,699
     
30,321
 
Net income
 
$
29,807
   
$
22,876
   
$
83,914
   
$
64,514
 
Earnings per share
                               
Basic
 
$
0.68
   
$
0.52
   
$
1.92
   
$
1.48
 
Diluted
 
$
0.68
   
$
0.52
   
$
1.91
   
$
1.47
 

See accompanying notes to unaudited interim consolidated financial statements.


NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
(In thousands)
                       
Net income
 
$
29,807
   
$
22,876
   
$
83,914
   
$
64,514
 
Other comprehensive (loss) income, net of tax:
                               
                                 
Securities available for sale:
                               
Unrealized net holding (losses) gains arising during the period, gross
 
$
(5,798
)
 
$
1,355
   
$
(26,605
)
 
$
4,719
 
Tax effect
   
1,449
     
(518
)
   
6,651
     
(1,823
)
Unrealized net holding (losses) gains arising during the period, net
 
$
(4,349
)
 
$
837
   
$
(19,954
)
 
$
2,896
 
                                 
Reclassification adjustment for net losses in net income, gross
 
$
-
   
$
4
   
$
-
   
$
2
 
Tax effect
   
-
     
(2
)
   
-
     
(1
)
Reclassification adjustment for net losses in net income, net
 
$
-
   
$
2
   
$
-
   
$
1
 
                                 
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross
 
$
168
   
$
212
   
$
533
   
$
675
 
Tax effect
   
(42
)
   
(81
)
   
(133
)
   
(258
)
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net
 
$
126
   
$
131
   
$
400
   
$
417
 
                                 
Reclassification adjustment for an impairment write-down of equity security, gross
 
$
-
   
$
-
   
$
-
   
$
1,312
 
Tax effect
   
-
     
-
     
-
     
(501
)
Reclassification adjustment for an impairment write-down of equity security, net
 
$
-
   
$
-
   
$
-
   
$
811
 
                                 
Total securities available for sale, net
 
$
(4,223
)
 
$
970
   
$
(19,554
)
 
$
4,125
 
                                 
Cash flow hedges:
                               
Unrealized gains (losses) on derivatives (cash flow hedges), gross
 
$
175
   
$
91
   
$
1,647
   
$
(71
)
Tax effect
   
(44
)
   
(35
)
   
(412
)
   
27
 
Unrealized gains (losses) on derivatives (cash flow hedges), net
 
$
131
   
$
56
   
$
1,235
   
$
(44
)
                                 
Reclassification of net unrealized (gains) on cash flow hedges to interest (income) expense, gross
 
$
(638
)
 
$
(155
)
 
$
(1,537
)
 
$
(96
)
Tax effect
   
159
     
59
     
384
     
37
 
Reclassification of net unrealized (gains) on cash flow hedges to interest (income) expense, net
 
$
(479
)
 
$
(96
)
 
$
(1,153
)
 
$
(59
)
                                 
Total cash flow hedges, net
 
$
(348
)
 
$
(40
)
 
$
82
   
$
(103
)
                                 
Pension and other benefits:
                               
Amortization of prior service cost and actuarial gains, gross
 
$
286
   
$
480
   
$
876
   
$
1,350
 
Tax effect
   
(71
)
   
(183
)
   
(219
)
   
(516
)
Amortization of prior service cost and actuarial gains, net
 
$
215
   
$
297
   
$
657
   
$
834
 
                                 
Total pension and other benefits, net
 
$
215
   
$
297
   
$
657
   
$
834
 
                                 
Total other comprehensive (loss) income
 
$
(4,356
)
 
$
1,227
   
$
(18,815
)
 
$
4,856
 
Comprehensive income
 
$
25,451
   
$
24,103
   
$
65,099
   
$
69,370
 

See accompanying notes to unaudited interim consolidated financial statements.
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 December 31, 2016
 
$
497
   
$
575,078
   
$
501,761
   
$
(21,520
)
 
$
(142,500
)
 
$
913,316
 
Net income
   
-
     
-
     
64,514
     
-
     
-
     
64,514
 
Cash dividends - $0.69 per share
   
-
     
-
     
(30,073
)
   
-
     
-
     
(30,073
)
Net issuance of 271,148 shares to employee and other stock plans
   
-
     
(4,596
)
   
-
     
-
     
4,026
     
(570
)
Stock-based compensation
   
-
     
3,290
     
(95
)
   
-
     
-
     
3,195
 
Other comprehensive income
   
-
     
-
     
-
     
4,856
     
-
     
4,856
 
Balance at September 30, 2017
 
$
497
   
$
573,772
   
$
536,107
   
$
(16,664
)
 
$
(138,474
)
 
$
955,238
 
 
                                               
Balance at December 31, 2017
 
$
497
   
$
574,209
   
$
543,713
   
$
(22,077
)
 
$
(138,165
)
 
$
958,177
 
Net income
   
-
     
-
     
83,914
     
-
     
-
     
83,914
 
Cumulative effect adjustment for ASU 2016-01 implementation
   
-
     
-
     
2,618
     
(2,645
)
   
-
     
(27
)
Cumulative effect adjustment for ASU 2018-02 implementation
   
-
     
-
     
5,575
     
(5,575
)
   
-
     
-
 
Cash dividends - $0.73 per share
   
-
     
-
     
(31,899
)
   
-
     
-
     
(31,899
)
Net issuance of 118,510 shares to employee and other stock plans
   
-
     
(2,511
)
   
-
     
-
     
1,859
     
(652
)
Stock-based compensation
   
-
     
3,457
     
-
     
-
     
-
     
3,457
 
Other comprehensive (loss)
   
-
     
-
     
-
     
(18,815
)
   
-
     
(18,815
)
Balance at September 30, 2018
 
$
497
   
$
575,155
   
$
603,921
   
$
(49,112
)
 
$
(136,306
)
 
$
994,155
 
 
See accompanying notes to unaudited interim consolidated financial statements.

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

   
Nine months ended September 30,
 
   
2018
   
2017
 
(In thousands)
           
Operating activities
           
Net income
 
$
83,914
   
$
64,514
 
Adjustments to reconcile net income to net cash provided by operating activities
               
Provision for loan losses
   
22,300
     
22,835
 
Depreciation and amortization of premises and equipment
   
6,957
     
6,759
 
Net amortization on securities
   
3,108
     
3,628
 
Amortization of intangible assets
   
3,064
     
2,999
 
Excess tax (benefit) on stock-based compensation
   
(507
)
   
(1,697
)
Stock-based compensation expense
   
3,457
     
3,195
 
Bank owned life insurance income
   
(3,852
)
   
(3,913
)
Trading security purchases
   
-
     
(1,470
)
Net unrealized losses on trading securities
   
-
     
(154
)
Proceeds from sales of loans held for sale
   
73,239
     
87,095
 
Originations and purchases of loans held for sale
   
(76,959
)
   
(87,246
)
Net gains on sales of loans held for sale
   
(181
)
   
(292
)
Net security (gains) losses
   
(575
)
   
2
 
Net losses (gains) on sales and write-down of other real estate owned
   
130
     
(189
)
Impairment write-down of equity security
   
-
     
1,312
 
Net change in other assets and other liabilities
   
(14,313
)
   
(810
)
Net cash provided by operating activities
 
$
99,782
   
$
96,568
 
Investing activities
               
Net cash used in acquisitions
 
$
(7,884
)
 
$
(4,000
)
Securities available for sale:
               
Proceeds from maturities, calls and principal paydowns
   
213,732
     
205,327
 
Proceeds from sales
   
-
     
9,997
 
Purchases
   
(102,004
)
   
(232,850
)
Securities held to maturity:
               
Proceeds from maturities, calls and principal paydowns
   
73,217
     
86,055
 
Proceeds from sales
   
-
     
764
 
Purchases
   
(249,300
)
   
(53,212
)
Equity securities:
               
Proceeds from sales
   
3,318
     
-
 
Purchases
   
(2
)
   
-
 
Other:
               
Net increase in loans
   
(323,614
)
   
(293,346
)
Proceeds from Federal Home Loan Bank stock redemption
   
186,869
     
177,803
 
Purchases of Federal Reserve and Federal Home Loan Bank stock
   
(192,584
)
   
(175,840
)
Proceeds from settlement of bank owned life insurance
   
-
     
800
 
Purchases of premises and equipment, net
   
(4,256
)
   
(4,177
)
Proceeds from the sales of other real estate owned
   
2,124
     
6,767
 
Net cash (used in) investing activities
 
$
(400,384
)
 
$
(275,912
)
Financing activities
               
Net increase in deposits
 
$
270,654
   
$
257,548
 
Net increase in short-term borrowings
   
92,585
     
248
 
Proceeds from issuance of long-term debt
   
25,000
     
-
 
Repayments of long-term debt
   
(40,117
)
   
(15,174
)
Proceeds from the issuance of shares to employee and other stock plans
   
1,140
     
3,012
 
Cash paid by employer for tax-withholdings on stock issuance
   
(1,792
)
   
(3,582
)
Cash dividends
   
(31,899
)
   
(30,073
)
Net cash provided by financing activities
 
$
315,571
   
$
211,979
 
Net increase in cash and cash equivalents
 
$
14,969
   
$
32,635
 
Cash and cash equivalents at beginning of period
   
159,664
     
149,181
 
Cash and cash equivalents at end of period
 
$
174,633
   
$
181,816
 



   
Nine months ended September 30,
 
   
2018
   
2017
 
Supplemental disclosure of cash flow information
           
Cash paid during the period for:
           
Interest expense
 
$
26,002
   
$
19,771
 
Income taxes paid, net of refund
   
31,077
     
22,230
 
Noncash investing activities:
               
Loans transferred to other real estate owned
 
$
996
   
$
5,227
 
Acquisitions:
               
Fair value of assets acquired
 
$
6,274
   
$
3,096
 

See accompanying notes to unaudited interim consolidated financial statements.


NBT Bancorp Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2018
 
1.          Description of Business
 
NBT Bancorp Inc. (the “Registrant” or 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 Registrant 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”), Hathaway Agency, Inc. and 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 but also through its other subsidiaries, 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 and the southern coastal area of Maine. 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.          Basis of Presentation
 
The accompanying unaudited interim consolidated financial statements include the accounts of the Registrant and its wholly owned subsidiaries, the Bank, NBT Financial and NBT Holdings. Collectively, the Registrant and its subsidiaries are referred to herein as “the Company.” The interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2017 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 intercompany transactions have been eliminated in consolidation. Amounts in the prior period financial statements are reclassified whenever necessary to conform to current period presentation. The Company has evaluated subsequent events for potential recognition and/or disclosure. Refer to footnote 12, Subsequent Events, for more information.

3.          Securities
 
The amortized cost, estimated fair value and unrealized gains (losses) of available for sale (“AFS”) securities are as follows:
 
(In thousands)
 
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Estimated
Fair Value
 
September 30, 2018
                       
Federal agency
 
$
84,974
   
$
-
   
$
1,712
   
$
83,262
 
State & municipal
   
36,841
     
13
     
387
     
36,467
 
Mortgage-backed:
                               
Government-sponsored enterprises
   
479,852
     
207
     
16,171
     
463,888
 
U.S. government agency securities
   
29,422
     
204
     
1,106
     
28,520
 
Collateralized mortgage obligations:
                               
Government-sponsored enterprises
   
461,148
     
222
     
19,860
     
441,510
 
U.S. government agency securities
   
49,208
     
115
     
1,896
     
47,427
 
Total AFS securities
 
$
1,141,445
   
$
761
   
$
41,132
   
$
1,101,074
 
December 31, 2017
                               
Federal agency
 
$
109,862
   
$
-
   
$
963
   
$
108,899
 
State & municipal
   
42,171
     
62
     
277
     
41,956
 
Mortgage-backed:
                               
Government-sponsored enterprises
   
530,392
     
1,406
     
3,345
     
528,453
 
U.S. government agency securities
   
26,363
     
334
     
223
     
26,474
 
Collateralized mortgage obligations:
                               
Government-sponsored enterprises
   
496,033
     
254
     
10,114
     
486,173
 
U.S. government agency securities
   
50,721
     
165
     
1,065
     
49,821
 
Equity securities
   
10,623
     
3,672
     
146
     
14,149
 
Total AFS securities
 
$
1,266,165
   
$
5,893
   
$
16,133
   
$
1,255,925
 
 
The amortized cost, estimated fair value and unrealized gains (losses) of held to maturity (“HTM”) securities are as follows:

(In thousands)
 
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Estimated
Fair Value
 
September 30, 2018
                       
Federal agency
 
$
9,995
   
$
-
   
$
46
   
$
9,949
 
Mortgage-backed:
                               
     Government-sponsored enterprises
   
87,743
     
-
     
4,075
     
83,668
 
     U.S. government agency securities
   
15,241
     
36
     
69
     
15,208
 
Collateralized mortgage obligations:
                               
     Government-sponsored enterprises
   
268,044
     
31
     
7,080
     
260,995
 
     U.S. government agency securities
   
29,401
     
4
     
67
     
29,338
 
State & municipal
   
249,525
     
90
     
3,041
     
246,574
 
Total HTM securities
 
$
659,949
   
$
161
   
$
14,378
   
$
645,732
 
December 31, 2017
                               
Mortgage-backed:
                               
     Government-sponsored enterprises
 
$
96,357
   
$
85
   
$
810
   
$
95,632
 
     U.S. government agency securities
   
418
     
57
     
-
     
475
 
Collateralized mortgage obligations:
                               
     Government-sponsored enterprises
   
186,327
     
224
     
2,577
     
183,974
 
State & municipal
   
200,971
     
1,439
     
620
     
201,790
 
Total HTM securities
 
$
484,073
   
$
1,805
   
$
4,007
   
$
481,871
 

AFS and HTM securities with amortized costs totaling $1.6 billion at September 30, 2018 and $1.5 billion at December 31, 2017 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at September 30, 2018 and December 31, 2017, AFS and HTM securities with an amortized cost of $196.4 million and $256.2 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

The following table sets forth information with regard to investment securities with unrealized losses 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, 2018
                                                     
AFS securities:
                                                     
Federal agency
 
$
39,069
   
$
(916
)
   
4
   
$
44,193
   
$
(796
)
   
4
   
$
83,262
   
$
(1,712
)
   
8
 
State & municipal
   
12,347
     
(115
)
   
22
     
16,165
     
(272
)
   
25
     
28,512
     
(387
)
   
47
 
Mortgage-backed
   
297,802
     
(9,061
)
   
72
     
178,186
     
(8,215
)
   
48
     
475,988
     
(17,276
)
   
120
 
Collateralized mortgage obligations
   
83,566
     
(1,816
)
   
16
     
384,459
     
(19,941
)
   
70
     
468,025
     
(21,757
)
   
86
 
Total securities with unrealized losses
 
$
432,784
   
$
(11,908
)
   
114
   
$
623,003
   
$
(29,224
)
   
147
   
$
1,055,787
   
$
(41,132
)
   
261
 
                                                                         
HTM securities:
                                                                       
Federal agency
 
$
9,949
   
$
(46
)
   
2
   
$
-
   
$
-
     
-
   
$
9,949
   
$
(46
)
   
2
 
Mortgage-backed
   
55,712
     
(1,678
)
   
5
     
42,778
     
(2,466
)
   
4
     
98,490
     
(4,144
)
   
9
 
Collateralized mortgage obligations
   
153,768
     
(2,195
)
   
22
     
97,515
     
(4,952
)
   
16
     
251,283
     
(7,147
)
   
38
 
State & municipal
   
84,258
     
(1,276
)
   
134
     
27,384
     
(1,765
)
   
41
     
111,642
     
(3,041
)
   
175
 
Total securities with unrealized losses
 
$
303,687
   
$
(5,195
)
   
163
   
$
167,677
   
$
(9,183
)
   
61
   
$
471,364
   
$
(14,378
)
   
224
 
                                                                         
As of December 31, 2017
                                                                       
AFS securities:
                                                                       
Federal agency
 
$
64,653
   
$
(242
)
   
5
   
$
44,246
   
$
(721
)
   
4
   
$
108,899
   
$
(963
)
   
9
 
State & municipal
   
23,566
     
(200
)
   
39
     
5,994
     
(77
)
   
8
     
29,560
     
(277
)
   
47
 
Mortgage-backed
   
317,630
     
(2,381
)
   
55
     
58,316
     
(1,187
)
   
24
     
375,946
     
(3,568
)
   
79
 
Collateralized mortgage obligations
   
227,917
     
(2,658
)
   
35
     
275,303
     
(8,521
)
   
42
     
503,220
     
(11,179
)
   
77
 
Equity securities
   
-
     
-
     
-
     
2,959
     
(146
)
   
1
     
2,959
     
(146
)
   
1
 
Total securities with unrealized losses
 
$
633,766
   
$
(5,481
)
   
134
   
$
386,818
   
$
(10,652
)
   
79
   
$
1,020,584
   
$
(16,133
)
   
213
 
 
                                                                       
HTM securities:
                                                                       
Mortgage-backed
 
$
15,477
   
$
(140
)
   
2
   
$
33,703
   
$
(670
)
   
2
   
$
49,180
   
$
(810
)
   
4
 
Collateralized mortgage obligations
   
118,476
     
(1,064
)
   
17
     
37,614
     
(1,513
)
   
6
     
156,090
     
(2,577
)
   
23
 
State & municipal
   
22,387
     
(132
)
   
40
     
15,720
     
(488
)
   
24
     
38,107
     
(620
)
   
64
 
Total securities with unrealized losses
 
$
156,340
   
$
(1,336
)
   
59
   
$
87,037
   
$
(2,671
)
   
32
   
$
243,377
   
$
(4,007
)
   
91
 
 
Declines in the fair value of HTM securities below their amortized cost, less any current period credit loss, that are deemed to be other-than-temporary are reflected in earnings as realized losses or in other comprehensive income (“OCI”). This classification is dependent upon whether the Company intends to sell the security, or whether it is more likely than not, that the Company will be required to sell the security before recovery. The other-than-temporary impairment (“OTTI”) shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be separated into (i) the amount representing the credit loss and (ii) the amount related to all other factors. The amount of the total OTTI related to the credit loss shall be recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in OCI, net of applicable taxes.

In estimating OTTI losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the historical and implied volatility of the fair value of the security.

Management has the intent to hold the securities classified as HTM until they mature, at which time it is believed the Company will receive full value for the securities. The unrealized losses on HTM debt securities are due to increases in market interest rates over yields at the time the underlying securities were purchased. When necessary, the Company has performed a discounted cash flow analysis to determine whether or not it will receive the contractual principal and interest on certain securities. The fair value is expected to recover as the bond approaches its maturity date or repricing date or if market yields for such investments declines.

Management also has the intent to hold and will not be required to sell, the debt securities classified as AFS for a period of time sufficient for a recovery of cost, which may be until maturity. The unrealized losses on AFS debt securities are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. When necessary, the Company has performed a discounted cash flow analysis to determine whether or not it will receive the contractual principal and interest on certain securities. For AFS debt securities, OTTI losses are recognized in earnings if the Company intends to sell the security. In other cases the Company considers the relevant factors noted above, as well as the Company’s intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value and whether evidence exists to support a realizable value equal to or greater than the cost basis. Any impairment loss on an equity security is equal to the full difference between the cost basis and the fair value of the security.

As of September 30, 2018 and December 31, 2017, management believes the impairments detailed in the table above are temporary. There were no OTTI losses realized in the Company’s unaudited interim consolidated statements of income for the three and nine months ended September 30, 2018 or in the three months ended September 30, 2017. For the nine months ended September 30, 2017, a $1.3 million impairment loss on an equity investment was realized in the Company’s unaudited interim consolidated statements of income.

There were no sales of HTM securities in the three and nine months ended September 30, 2018. During the three and nine months ended September 30, 2017, the Company sold HTM securities with an amortized cost of $0.8 million and an unrealized loss of $2 thousand. Due to significant deterioration in the creditworthiness of the issuers of the HTM securities, the circumstances caused the Company to change its intent to hold the HTM securities sold to maturity, which did not affect the Company’s intent to hold the remainder of the HTM portfolio to maturity.

The following tables set forth information with regard to gains and losses on equity securities at September 30, 2018:

(In thousands)
 
Three months ended
September 30, 2018
   
Nine months ended
September 30, 2018
 
Net gains and losses recognized on equity securities
 
$
412
   
$
575
 
Less: Net gains and losses recognized during the period on equity securities sold during the period
   
511
     
555
 
Unrealized gains and losses recognized on equity securities still held
 
$
(99
)
 
$
20
 
 
As of September 30, 2018, the carrying value of equity securities without readily determinable fair values was $4.0 million. The Company performed a qualitative assessment to determine whether the investments were impaired and identified no areas of concern as of September 30, 2018. 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, 2018.

The following tables set forth information with regard to contractual maturities of debt securities at September 30, 2018:
 
(In thousands)
 
Amortized
Cost
   
Estimated
Fair Value
 
AFS debt securities:
           
Within one year
 
$
46,641
   
$
46,521
 
From one to five years
   
86,348
     
84,188
 
From five to ten years
   
176,260
     
171,240
 
After ten years
   
832,196
     
799,125
 
Total AFS debt securities
 
$
1,141,445
   
$
1,101,074
 
HTM debt securities:
               
Within one year
 
$
89,011
   
$
89,011
 
From one to five years
   
53,217
     
53,177
 
From five to ten years
   
215,931
     
209,974
 
After ten years
   
301,790
     
293,570
 
Total HTM debt securities
 
$
659,949
   
$
645,732
 
 
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, there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at September 30, 2018 and December 31, 2017.

4.          Allowance for Loan Losses and Credit Quality of Loans

Allowance for Loan Losses

The allowance for loan losses is maintained at a level estimated by management to provide adequately for probable incurred losses inherent in the current loan portfolio. The appropriateness of the allowance for loan losses is continuously monitored. It is assessed for appropriateness using a methodology designed to ensure the level of the allowance reasonably reflects the loan portfolio’s risk profile. It is evaluated to ensure that it is sufficient to absorb all reasonably estimable credit losses inherent in the current loan portfolio.

To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three segments, each with different risk characteristics and methodologies for assessing risk. Those segments are further segregated between our loans accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired in a business combination (referred to as “acquired” loans). Each portfolio segment is broken down into class segments where appropriate. Class segments contain unique measurement attributes, risk characteristics and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type and risk characteristics define each class segment. 

During the first quarter of 2018, the Company made adjustments to the class segments within the portfolios to better align risk characteristics and reflect the monitoring and assessment of risks as the portfolios continue to evolve. Agricultural and Agricultural Real Estate were consolidated with Commercial and Industrial and Commercial Real Estate, respectively. Agricultural loans are a type of Commercial loan with some specific underwriting guidelines; however, as of March 31, 2018, the portfolio had decreased to less than 3% of the Commercial portfolio and separation was no longer warranted. The Indirect class segment was further separated into Dealer Finance and Specialty Lending class segments. The growth in our Specialty Lending portfolio to 21% of Consumer Loans as of March 31, 2018 warranted evaluation of this class separately due to different risk characteristics from Dealer Finance class segments. The Direct and Home Equity class segments were consolidated into Direct to reflect common management, similar underwriting and in-market focus. The change to the class segments in the allowance methodology did not have a significant impact on the allowance for loan losses. The following table illustrates the portfolio and class segments for the loan portfolio in 2018 compared to 2017:

Portfolio
Class - 2018
Class - 2017
Commercial Loans
Commercial and Industrial
Commercial
 
Commercial Real Estate
Commercial Real Estate
 
Business Banking
Agricultural
 
 
Agricultural Real Estate
 
 
Business Banking
Consumer Loans
Dealer Finance
Indirect
 
Specialty Lending
Home Equity
 
Direct
Direct
Residential Real Estate

Commercial Loans

The Company offers a variety of Commercial loan products including Commercial and Industrial, Commercial Real Estate and Business Banking loans. The Company’s underwriting analysis for Commercial loans typically includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows.

Commercial and Industrial (“C&I”)The Company offers a variety of loan options to meet the specific needs of our C&I customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion, equipment purchases, livestock purchases and finance seasonal crop expenses. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. These loans typically carry a higher risk than Commercial Real Estate loans due to the nature of the underlying collateral, which can be business assets such as equipment, accounts receivable and perishable agricultural products, which are generally less liquid than real estate and exposed to industry price volatility. To reduce these risks, management also attempts to obtain personal guarantees of the owners or obtain government loan guarantees to provide further support. In 2018, the Commercial and Agricultural class segments were combined to create the C&I class segment.

Commercial Real Estate (“CRE”) – The Company offers CRE loans to finance real estate purchases, refinancings, expansions and improvements to commercial and agricultural properties. CRE loans are made to finance the purchases and improvements of real property, which generally consists of real estate with completed structures. These CRE loans are secured by liens on the real estate, which may include both owner occupied and non-owner-occupied properties, such as apartments, commercial structures, health care facilities and other facilities. These loans are typically less risky than C&I loans, since they are secured by real estate. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 80% of the appraised value of the property and no more than 75% of the appraised value of the agricultural property. Government loan guarantees may be obtained to provide further support for agricultural property. In 2018, the Commercial Real Estate and Agricultural Real Estate class segments were combined to create the CRE segment.

Business Banking  The Company offers a variety of loan options to meet the specific needs of our Business Banking customers including term loans, Business Banking mortgages and lines of credit. Such loans are generally less than $750 thousand and are made available to businesses for working capital such as inventory and receivables, business expansion, equipment purchases and agricultural needs. Generally, a collateral lien is placed on assets owned by the borrower and can include real estate, equipment, inventory, receivables or other business assets. These loans carry a higher risk than C&I and CRE loans due to the smaller size of the borrower and lower levels of capital. To reduce these risks, the Company obtains personal guarantees of the owners for a majority of the loans.

Consumer Loans

The Company offers a variety of Consumer loan products including Dealer Finance, Specialty Lending and Direct loans.

Dealer Finance – The Company maintains relationships with many dealers primarily in the communities that we serve. Through these relationships, the Company primarily finances the purchases of automobiles and recreational vehicles (such as campers, boats, etc.) indirectly through dealer relationships. Approximately 95% of the Dealer Finance relationships represent automobile financing. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to six years, based upon the nature of the collateral and the size of the loan. The majority of Dealer Finance Consumer loans are underwritten on a secured basis using the underlying collateral being financed. In 2018, the Indirect class segment was further separated into Dealer Finance and Specialty Lending class segments (see above and below).

Specialty Lending The Company offers unsecured Consumer loans across a national footprint originated through our relationships with national technology-driven consumer lending companies to finance such things as dental and medical procedures, K-12 tuition, solar energy installations and other consumer purpose loans. Advances of credit through this specialty lending business line are subject to the Company’s underwriting standards including criteria such as FICO score and debt to income thresholds. In 2018, the Indirect class segment has been further separated into Dealer Finance (see above) and Specialty Lending class segments.

Direct – The Company offers a variety of consumer installment loans to finance vehicle purchases, mobile home purchases and personal expenditures. In addition to installment loans, the Company also offers personal lines of credit, overdraft protection, home equity lines of credit and second mortgage loans (loans secured by a lien position on one-to-four family residential real estate) to finance home improvements, debt consolidation, education and other uses. Most of the consumer installment loans carry a fixed rate of interest with principal repayment terms typically ranging from one to ten years, based upon the nature of the collateral and the size of the loan. For home equity loans, consumers are able to borrow up to 85% of the equity in their homes. These loans carry a higher risk than first mortgage residential loans as they are often in a second position with respect to collateral. Consumer installment loans are often secured with collateral consisting of a perfected lien on the asset being purchased or a perfected lien on a consumer’s deposit account. A minimal amount of consumer installment loans are unsecured, which carry a higher risk of loss. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower’s financial condition and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate. In 2018, the Home Equity segment was consolidated into the Direct class segment.

Residential Real Estate

Residential real estate loans consist primarily of loans secured by a first or second mortgage on primary residences. We originate adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. When market conditions are favorable, for longer term, fixed-rate residential real estate mortgages without escrow, the Company retains the servicing, but sells the right to receive principal and interest to Freddie Mac. This practice allows the Company to manage interest rate risk, liquidity risk and credit risk. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 85% of the purchase price or appraised value (whichever is lower) or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period.
 
Allowance for Loan Loss Calculation

For purposes of evaluating the adequacy of the allowance, the Company considers a number of significant factors that affect the collectability of the portfolio. For individually impaired loans, these include estimates of impairment, if any, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans, estimates of the Company’s exposure to credit loss reflect a current assessment of a number of factors, which could affect collectability. These factors include: past loss experience, size, trend, composition and nature of loans; changes in lending policies and procedures, including underwriting standards and collection, charge-offs and recoveries; trends experienced in nonperforming and delinquent loans; current economic conditions in the Company’s market; portfolio concentrations that may affect loss experienced across one or more components of the portfolio; the effect of external factors such as competition, legal and regulatory requirements; and the experience, ability and depth of lending management and staff. In addition, various regulatory agencies, as an integral component of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make loan grade changes as well as recognize additions to the allowance based on their examinations.
 
After a thorough consideration of the factors discussed above, any required additions or reductions to the allowance for loan losses are made periodically by charges or credits to the provision for loan losses. These charges are necessary to maintain the allowance at a level that management believes is reflective of overall level of incurred loss in the portfolio. While management uses available information to recognize losses on loans, additions and reductions of the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content or changes in management’s assessment of any or all of the determining factors discussed above.
 
The following tables illustrate the changes in the allowance for loan losses by our portfolio segments:
 
(In thousands)
 
Commercial
Loans
   
Consumer
Loans
   
Residential
Real Estate
   
Total
 
Balance as of June 30, 2018
 
$
31,059
   
$
36,479
   
$
4,912
   
$
72,450
 
Charge-offs
   
(823
)
   
(6,818
)
   
(123
)
   
(7,764
)
Recoveries