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

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.

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.

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.

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.

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
 

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.

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.

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
 

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
 

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
 

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.

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
 

(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
 

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.

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
 

(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.

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
 

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.

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.

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
   

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.

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
)

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.

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.


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.

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.

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.

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.

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.

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

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.

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%.

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%.

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
 

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
 

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.

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.

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
%
       

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.

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.

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.

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.

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.

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

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).

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.