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 March 31, 2023.

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 or other jurisdiction of incorporation or organization)
 
(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 each class
 
Trading Symbol(s)
 
Name of each 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 (§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.

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 April 28, 2023, there were 42,904,332 shares outstanding of the Registrant’s Common Stock, $0.01 par value per share.



NBT BANCORP INC.
FORM 10-Q - Quarter Ended March 31, 2023

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS (Unaudited)
 
 
3
 
4
 
5
 
6
 
7
 
9
ITEM 2.
29
ITEM 3.
43
ITEM 4.
43
     
PART II
OTHER INFORMATION
 
     
ITEM 1.
44
ITEM 1A.
44
ITEM 2.
44
ITEM 3.
44
ITEM 4.
44
ITEM 5.
44
ITEM 6.
45
     
  46

ITEM 1. FINANCIAL STATEMENTS

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

 
March 31,
   
December 31,
 
   
2023
   
2022
 
(In thousands, except share and per share data)
           
Assets
           
Cash and due from banks
 
$
161,750
   
$
166,488
 
Short-term interest-bearing accounts
   
68,045
     
30,862
 
Equity securities, at fair value
   
32,807
     
30,784
 
Securities available for sale, at fair value
   
1,512,008
     
1,527,225
 
Securities held to maturity (fair value $812,664 and $812,647, respectively)
   
906,824
     
919,517
 
Federal Reserve and Federal Home Loan Bank stock
   
45,342
     
44,713
 
Loans held for sale
   
425
     
562
 
Loans
   
8,264,578
     
8,150,147
 
Less allowance for loan losses
   
100,250
     
100,800
 
Net loans
 
$
8,164,328
   
$
8,049,347
 
Premises and equipment, net
   
67,868
     
69,047
 
Goodwill
   
281,204
     
281,204
 
Intangible assets, net
   
6,955
     
7,341
 
Bank owned life insurance
   
232,514
     
232,409
 
Other assets
   
359,660
     
379,797
 
Total assets
 
$
11,839,730
   
$
11,739,296
 
Liabilities
               
Demand (noninterest bearing)
 
$
3,429,188
   
$
3,617,324
 
Savings, NOW and money market
   
5,467,550
     
5,444,837
 
Time
   
784,467
     
433,772
 
Total deposits
 
$
9,681,205
   
$
9,495,933
 
Short-term borrowings
   
475,226
     
585,012
 
Long-term debt
   
29,790
     
4,815
 
Subordinated debt, net
   
97,036
     
96,927
 
Junior subordinated debt
   
101,196
     
101,196
 
Other liabilities
   
243,618
     
281,859
 
Total liabilities
 
$
10,628,071
   
$
10,565,742
 
Stockholders’ equity
               
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at March 31, 2023 and December 31, 2022
 
$
-
   
$
-
 
Common stock, $0.01 par value. Authorized 100,000,000 shares at March 31, 2023 and December 31, 2022, issued 49,651,493 at March 31, 2023 and December 31, 2022
   
497
     
497
 
Additional paid-in-capital
   
577,952
     
577,853
 
Retained earnings
   
979,722
     
958,433
 
Accumulated other comprehensive loss
   
(173,918
)
   
(190,034
)
Common stock in treasury, at cost, 6,747,161 and 6,793,670 shares at March 31, 2023 and December 31, 2022, respectively
   
(172,594
)
   
(173,195
)
Total stockholders’ equity
 
$
1,211,659
   
$
1,173,554
 
Total liabilities and stockholders’ equity
 
$
11,839,730
   
$
11,739,296
 

See accompanying notes to unaudited interim consolidated financial statements.

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

 
Three Months Ended
March 31,
 
   
2023
   
2022
 
(In thousands, except per share data)
           
Interest, fee and dividend income
           
Interest and fees on loans
 
$
100,899
   
$
73,343
 
Securities available for sale
   
7,616
     
6,840
 
Securities held to maturity
   
5,035
     
3,493
 
Other
   
642
     
525
 
Total interest, fee and dividend income
 
$
114,192
   
$
84,201
 
Interest expense
               
Deposits
 
$
11,144
   
$
1,842
 
Short-term borrowings
   
4,919
     
16
 
Long-term debt
   
47
     
87
 
Subordinated debt
   
1,334
     
1,359
 
Junior subordinated debt
   
1,682
     
549
 
Total interest expense
 
$
19,126
   
$
3,853
 
Net interest income
 
$
95,066
   
$
80,348
 
Provision for loan losses
   
3,909
     
596
 
Net interest income after provision for loan losses
 
$
91,157
   
$
79,752
 
Noninterest income
               
Service charges on deposit accounts
 
$
3,548
   
$
3,688
 
Card services income
   
4,845
     
8,695
 
Retirement plan administration fees
   
11,462
     
13,279
 
Wealth management
   
8,087
     
8,640
 
Insurance services
   
3,931
     
3,788
 
Bank owned life insurance income
   
1,878
     
1,654
 
Net securities (losses)
   
(4,998
)
   
(179
)
Other
   
2,656
     
3,094
 
Total noninterest income
 
$
31,409
   
$
42,659
 
Noninterest expense
               
Salaries and employee benefits
 
$
48,155
   
$
45,508
 
Technology and data services
    9,007       8,547  
Occupancy
   
7,220
     
6,793
 
Professional fees and outside services
   
4,178
     
4,276
 
Office supplies and postage
   
1,628
     
1,424
 
FDIC assessment
   
1,396
     
802
 
Advertising
   
649
     
654
 
Amortization of intangible assets
   
536
     
636
 
Loan collection and other real estate owned, net
   
855
     
384
 
Acquisition expenses
    618       -  
Other
   
5,080
     
3,119
 
Total noninterest expense
 
$
79,322
   
$
72,143
 
Income before income tax expense
 
$
43,244
   
$
50,268
 
Income tax expense
   
9,586
     
11,142
 
Net income
 
$
33,658
   
$
39,126
 
Earnings per share
               
Basic
 
$
0.78
   
$
0.91
 
Diluted
 
$
0.78
   
$
0.90
 

See accompanying notes to unaudited interim consolidated financial statements.

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

 
Three Months Ended
March 31,
 
   
2023
   
2022
 
(In thousands)
           
Net income
 
$
33,658
   
$
39,126
 
Other comprehensive income (loss), net of tax:
               
                 
Securities available for sale:
               
Unrealized net holding gains (losses) arising during the period, gross
 
$
15,725
   
$
(91,030
)
Tax effect
   
(3,931
)
   
22,758
 
Unrealized net holding gains (losses) arising during the period, net
 
$
11,794
   
$
(68,272
)
                 
Reclassification adjustment for net losses in net income, gross
  $ 5,000     $ -  
Tax effect
    (1,250 )     -  
Reclassification adjustment for net losses in net income, net
  $ 3,750     $ -  

               
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross
 
$
114
   
$
137
 
Tax effect
   
(28
)
   
(35
)
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net
 
$
86
   
$
102
 
                 
Total securities available for sale, net
 
$
15,630
   
$
(68,170
)
                 
Pension and other benefits:
               
Amortization of prior service cost and actuarial losses, gross
 
$
649
   
$
186
 
Tax effect
   
(163
)
   
(47
)
Amortization of prior service cost and actuarial losses, net
 
$
486
   
$
139
 
                 
Total pension and other benefits, net
 
$
486
   
$
139
 
                 
Total other comprehensive income (loss)
 
$
16,116
   
$
(68,031
)
Comprehensive income (loss)
 
$
49,774
   
$
(28,905
)

See accompanying notes to unaudited interim consolidated financial statements.

NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

 
Common
Stock
   
Additional
Paid-in-
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
(Loss) Income
   
Common
Stock in
Treasury
   
Total
 
(In thousands, except share and per share data)
                                   
Balance at December 31, 2022
 
$
497
   
$
577,853
   
$
958,433
   
$
(190,034
)
 
$
(173,195
)
 
$
1,173,554
 
Cumulative effect adjustment for ASU 2022-02 implementation as of January 1, 2023
    -       -       502       -       -       502  
Net income
   
-
     
-
     
33,658
     
-
     
-
     
33,658
 
Cash dividends - $0.30 per share
   
-
     
-
     
(12,871
)
   
-
     
-
     
(12,871
)
Net issuance of 46,509 shares to employee and other stock plans
   
-
     
(2,366
)
   
-
     
-
     
601
     
(1,765
)
Stock-based compensation
   
-
     
2,465
     
-
     
-
     
-
     
2,465
 
Other comprehensive income
   
-
     
-
     
-
     
16,116
     
-
     
16,116
 
Balance at March 31, 2023
 
$
497
   
$
577,952
   
$
979,722
   
$
(173,918
)
 
$
(172,594
)
 
$
1,211,659
 
                                                 
Balance at December 31, 2021
 
$
497
   
$
576,976
   
$
856,203
   
$
(23,344
)
 
$
(159,879
)
 
$
1,250,453
 
Net income
   
-
     
-
     
39,126
     
-
     
-
     
39,126
 
Cash dividends - $0.28 per share
   
-
     
-
     
(12,083
)
   
-
     
-
     
(12,083
)
Purchase of 217,100 treasury shares
   
-
     
-
     
-
     
-
     
(8,152
)
   
(8,152
)
Net issuance of 41,411 shares to employee and other stock plans
   
-
     
(2,074
)
   
-
     
-
     
539
     
(1,535
)
Stock-based compensation
   
-
     
2,472
     
-
     
-
     
-
     
2,472
 
Other comprehensive (loss)
   
-
      -      
-
     
(68,031
)
   
-
     
(68,031
)
Balance at March 31, 2022
 
$
497
   
$
577,374
   
$
883,246
   
$
(91,375
)
 
$
(167,492
)
 
$
1,202,250
 

See accompanying notes to unaudited interim consolidated financial statements.

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

 
Three Months Ended
March 31,
 
   
2023
   
2022
 
(In thousands)
           
Operating activities
           
Net income
 
$
33,658
   
$
39,126
 
Adjustments to reconcile net income to net cash provided by operating activities
               
Provision for loan losses
   
3,909
     
596
 
Depreciation and amortization of premises and equipment
   
2,579
     
2,420
 
Net amortization on securities
   
690
     
1,036
 
Amortization of intangible assets
   
536
     
636
 
Amortization of operating lease right-of-use assets
   
1,647
     
1,688
 
Excess tax benefit on stock-based compensation
   
(231
)
   
(168
)
Stock-based compensation expense
   
2,465
     
2,472
 
Bank owned life insurance income
   
(1,878
)
   
(1,654
)
Amortization of subordinated debt issuance costs
   
109
     
109
 
Proceeds from sale of loans held for sale
   
1,571
     
2,106
 
Originations of loans held for sale
   
(1,418
)
   
(1,479
)
Net gain on sale of loans held for sale
   
(16
)
   
(60
)
Net securities losses
   
4,998
     
179
 
Net gains on sale of other real estate owned
   
-
     
(211
)
Net change in other assets and other liabilities
   
(26,772
)
   
(11,392
)
Net cash provided by operating activities
 
$
21,847
   
$
35,404
 
Investing activities
               
Net cash used in acquisitions
  $ (129 )   $ (260 )
Securities available for sale:
               
Proceeds from maturities, calls and principal paydowns
   
30,683
     
72,281
 
Purchases
   
-
     
(139,273
)
Securities held to maturity:
               
Proceeds from maturities, calls and principal paydowns
   
17,870
     
29,028
 
Purchases
   
(5,494
)
   
(191,092
)
Other:
               
Net increase in loans
   
(118,242
)
   
(153,963
)
Proceeds from Federal Home Loan Bank stock redemption
   
38,589
     
93
 
Purchases of Federal Home Loan Bank stock
   
(39,218
)
   
-
 
Proceeds from settlement of bank owned life insurance
   
1,773
     
913
 
Purchases of premises and equipment, net
   
(1,392
)
   
(1,312
)
Proceeds from sales of other real estate owned
   
-
     
378
 
Net cash used in investing activities
 
$
(75,560
)
 
$
(383,207
)
Financing activities
               
Net increase in deposits
 
$
185,272
   
$
227,154
 
Net decrease in short-term borrowings
   
(109,786
)
   
(32,773
)
Proceeds from long-term debt
    25,000       -  
Repayments of long-term debt
   
(25
)
   
(24
)
Cash paid by employer for tax-withholding on stock issuance
   
(1,432
)
   
(1,210
)
Purchase of treasury stock
   
-
     
(8,152
)
Cash dividends
   
(12,871
)
   
(12,083
)
Net cash provided by financing activities
 
$
86,158
   
$
172,912
 
Net increase (decrease) in cash and cash equivalents
 
$
32,445
   
$
(174,891
)
Cash and cash equivalents at beginning of period
   
197,350
     
1,269,071
 
Cash and cash equivalents at end of period
 
$
229,795
   
$
1,094,180
 


NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) (continued)
 
Three Months Ended
March 31,
 
   
2023
   
2022
 
Supplemental disclosure of cash flow information
           
Cash paid during the period for:
           
Interest expense
 
$
17,066
   
$
5,238
 
Income taxes paid, net of refund
   
15,072
     
2,448
 
Acquisitions:                
Fair value of assets acquired   $
150     $
-  

See accompanying notes to unaudited interim consolidated financial statements.

NBT Bancorp Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2023

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 2022 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 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

Recently Adopted Accounting Standards

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2022-02, Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). 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 adopted the ASU on January 1, 2023 (“Day 1”) using the modified retrospective method and recorded a net increase to retained earnings of $0.5 million. The transition adjustment includes a $0.6 million impact to the allowance for credit losses on loans and $0.1 million impact to the deferred tax asset.

4.
Securities

The amortized cost, estimated fair value and unrealized gains (losses) of available for sale (“AFS”) securities are as follows:

(In thousands)
 
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Estimated
Fair Value
 
As of March 31, 2023
                       
U.S. treasury
  $ 132,878     $ -     $ (9,299 )   $ 123,579  
Federal agency
   
248,410
     
-
     
(38,190
)
   
210,220
 
State & municipal
   
96,841
     
17
     
(11,825
)
   
85,033
 
Mortgage-backed:
                               
Government-sponsored enterprises
   
440,537
     
12
     
(48,986
)
   
391,563
 
U.S. government agency securities
   
78,234
     
16
     
(6,235
)
   
72,015
 
Collateralized mortgage obligations:
                               
Government-sponsored enterprises
   
486,538
     
14
     
(51,869
)
   
434,683
 
U.S. government agency securities
   
169,088
     
-
     
(21,410
)
   
147,678
 
Corporate
   
55,414
     
-
     
(8,177
)
   
47,237
 
Total AFS securities
 
$
1,707,940
   
$
59
   
$
(195,991
)
 
$
1,512,008
 
As of December 31, 2022
                               
U.S. treasury
  $ 132,891     $ -     $ (11,233 )   $ 121,658  
Federal agency
   
248,419
     
-
     
(42,000
)
   
206,419
 
State & municipal
   
97,036
     
5
     
(14,190
)
   
82,851
 
Mortgage-backed:
                               
Government-sponsored enterprises
   
454,177
     
9
     
(54,675
)
   
399,511
 
U.S. government agency securities
   
81,844
     
15
     
(7,676
)
   
74,183
 
Collateralized mortgage obligations:
                               
Government-sponsored enterprises
   
498,021
     
9
     
(59,473
)
   
438,557
 
U.S. government agency securities
   
171,090
     
-
     
(21,284
)
   
149,806
 
Corporate
   
60,404
     
-
     
(6,164
)
   
54,240
 
Total AFS securities
 
$
1,743,882
   
$
38
   
$
(216,695
)
 
$
1,527,225
 

There was no allowance for credit losses on AFS securities as of March 31, 2023 and December 31, 2022.

During the three months ended March 31, 2023, the Company incurred a $5.0 million loss on the write-off of an AFS corporate debt security from a subordinated debt investment of a bank that failed. The $5.0 million loss was reclassified out of accumulated other comprehensive income (loss) (“AOCI”) and into earnings in net securities losses in the consolidated statement of income. During the three months ended March 31, 2022 there were no gains or losses reclassified out of AOCI and into earnings.

The amortized cost, estimated fair value and unrealized gains (losses) of held to maturity (“HTM”) securities are as follows:

(In thousands)
 
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Estimated
Fair Value
 
As of March 31, 2023
                       
Federal agency
 
$
100,000
   
$
-
   
$
(19,055
)
 
$
80,945
 
Mortgage-backed:
                               
Government-sponsored enterprises
   
244,670
     
-
     
(33,729
)
   
210,941
 
U.S. government agency securities
   
17,399
     
3
     
(464
)
   
16,938
 
Collateralized mortgage obligations:
                               
Government-sponsored enterprises
   
202,831
     
274
     
(12,236
)
   
190,869
 
U.S. government agency securities
   
65,989
     
-
     
(9,651
)
   
56,338
 
State & municipal
   
275,935
     
147
     
(19,449
)
   
256,633
 
Total HTM securities
 
$
906,824
   
$
424
   
$
(94,584
)
 
$
812,664
 
As of December 31, 2022
                               
Federal agency
 
$
100,000
   
$
-
   
$
(20,678
)
 
$
79,322
 
Mortgage-backed:
                               
Government-sponsored enterprises
   
249,511
     
-
     
(36,819
)
   
212,692
 
U.S. government agency securities
   
18,396
     
4
     
(619
)
   
17,781
 
Collateralized mortgage obligations:
                               
Government-sponsored enterprises
   
207,738
     
200
     
(14,876
)
   
193,062
 
U.S. government agency securities
   
66,628
     
-
     
(9,842
)
   
56,786
 
State & municipal
   
277,244
     
5
     
(24,245
)
   
253,004
 
Total HTM securities
 
$
919,517
   
$
209
   
$
(107,079
)
 
$
812,647
 

At March 31, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022 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 March 31, 2023. Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $4 thousand for the three months ended March 31, 2022.

AFS and HTM securities with amortized costs totaling $1.76 billion at March 31, 2023 and $1.73 billion at December 31, 2022 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at March 31, 2023 and December 31, 2022, AFS and HTM securities with an amortized cost of $142.2 million and $149.5 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

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

 
Three Months Ended March 31,
 
(In thousands)
 
2023
   
2022
 
Net gains and (losses) recognized on equity securities
 
$
2
   
$
(183
)
Less: Net gains and (losses) recognized on equity securities sold during the period
   
-
     
-
 
Unrealized gains and (losses) recognized on equity securities still held
 
$
2
   
$
(183
)

As of March 31, 2023 and December 31, 2022, 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 March 31, 2023 and 2022. There were no impairments, downward or upward adjustments recognized for equity securities without readily determinable fair values during the three months ended March 31, 2023 and 2022.

The following table sets forth information with regard to contractual maturities of debt securities at March 31, 2023:

(In thousands)
 
Amortized
Cost
   
Estimated
Fair Value
 
AFS debt securities:
           
Within one year
 
$
360
   
$
357
 
From one to five years
   
406,527
     
370,571
 
From five to ten years
   
566,555
     
495,942
 
After ten years
   
734,498
     
645,138
 
Total AFS debt securities
 
$
1,707,940
   
$
1,512,008
 
HTM debt securities:
               
Within one year
 
$
51,124
   
$
51,112
 
From one to five years
   
100,684
     
98,539
 
From five to ten years
   
270,074
     
237,794
 
After ten years
   
484,942
     
425,219
 
Total HTM debt securities
 
$
906,824
   
$
812,664
 

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 March 31, 2023 and December 31, 2022.

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 March 31, 2023
                                                     
AFS securities:
                                                     
U.S. treasury
  $ 9,818     $ (114 )     1     $ 113,761     $ (9,185 )     7     $ 123,579     $ (9,299 )     8  
Federal agency
   
-
     
-
     
-
     
210,220
     
(38,190
)
   
16
     
210,220
     
(38,190
)
   
16
 
State & municipal
   
1,454
     
(51
)
   
1
     
82,792
     
(11,774
)
   
65
     
84,246
     
(11,825
)
   
66
 
Mortgage-backed
   
22,278
     
(736
)
   
33
     
440,057
     
(54,485
)
   
134
     
462,335
     
(55,221
)
   
167
 
Collateralized mortgage obligations
   
74,631
     
(2,080
)
   
23
     
504,718
     
(71,199
)
   
97
     
579,349
     
(73,279
)
   
120
 
Corporate
   
13,677
     
(737
)
   
4
     
33,560
     
(7,440
)
   
13
     
47,237
     
(8,177
)
   
17
 
Total securities with unrealized losses
 
$
121,858
   
$
(3,718
)
   
62
   
$
1,385,108
   
$
(192,273
)
   
332
   
$
1,506,966
   
$
(195,991
)
   
394
 
                                                                         
HTM securities:
                                                                       
Federal agency
 
$
-
   
$
-
     
-
   
$
80,945
   
$
(19,055
)
   
4
   
$
80,945
   
$
(19,055
)
   
4
 
Mortgage-backed
   
28,642
     
(1,033
)
   
7
     
199,125
     
(33,160
)
   
27
     
227,767
     
(34,193
)
   
34
 
Collateralized mortgage obligation
    87,826       (3,168 )     17       149,636       (18,719 )     37       237,462       (21,887 )     54  
State & municipal
   
52,808
     
(561
)
   
75
     
131,416
     
(18,888
)
   
134
     
184,224
     
(19,449
)
   
209
 
Total securities with unrealized losses
 
$
169,276
   
$
(4,762
)
   
99
   
$
561,122
   
$
(89,822
)
   
202
   
$
730,398
   
$
(94,584
)
   
301
 
                                                                         
As of December 31, 2022
                                                                       
AFS securities:
                                                                       
U.S. treasury
  $ 55,616     $ (3,864 )     5     $ 66,042     $ (7,369 )     3     $ 121,658     $ (11,233 )     8  
Federal agency
   
-
     
-
     
-
     
206,419
     
(42,000
)
   
16
     
206,419
     
(42,000
)
   
16
 
State & municipal
    3,679       (341 )     2       78,395       (13,849 )     64       82,074       (14,190 )     66  
Mortgage-backed
   
204,447
     
(15,048
)
   
149
     
267,926
     
(47,303
)
   
32
     
472,373
     
(62,351
)
   
181
 
Collateralized mortgage obligations
   
211,612
     
(14,458
)
   
77
     
374,376
     
(66,299
)
   
49
     
585,988
     
(80,757
)
   
126
 
Corporate
    34,434       (2,970 )     12       19,806       (3,194 )     6       54,240       (6,164 )     18  
Total securities with unrealized losses
 
$
509,788
   
$
(36,681
)
   
245
   
$
1,012,964
   
$
(180,014
)
   
170
   
$
1,522,752
   
$
(216,695
)
   
415
 
                                                                         
HTM securities:
                                                                       
Federal agency
 
$
-
   
$
-
     
-
   
$
79,322
   
$
(20,678
)
   
4
   
$
79,322
   
$
(20,678
)
   
4
 
Mortgage-backed
    91,417       (9,096 )     21       138,936       (28,342 )     13       230,353       (37,438 )     34  
Collateralized mortgage obligations
    191,644       (13,863 )     47       48,289       (10,855 )     8       239,933       (24,718 )     55  
State & municipal
   
110,727
     
(4,930
)
   
149
     
82,949
     
(19,315
)
   
76
     
193,676
     
(24,245
)
   
225
 
Total securities with unrealized losses
 
$
393,788
   
$
(27,889
)
   
217
   
$
349,496
   
$
(79,190
)
   
101
   
$
743,284
   
$
(107,079
)
   
318
 

The Company does not believe the AFS securities that were in an unrealized loss position as of March 31, 2023 and December 31, 2022, which consisted of 394 and 415 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 March 31, 2023 and December 31, 2022, 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 $4.1 million at March 31, 2023 and $4.2 million at December 31, 2022 and is excluded from the estimate of credit losses and reported in the other assets financial statement line.

None of the Bank’s HTM debt securities were past due or on nonaccrual status as of March 31, 2023 and December 31, 2022. There was no accrued interest reversed against interest income for the three months ended March 31, 2023 or the year ended December 31, 2022 as all securities remained on accrual status. In addition, there were no collateral-dependent HTM debt securities as of March 31, 2023 and December 31, 2022. As of March 31, 2023 and December 31, 2022, 70% 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, which are widely recognized as “risk-free” and have a long history of zero credit loss. Therefore, the Company did not record an allowance for credit losses for these securities as of March 31, 2023 and December 31, 2022. The remaining HTM debt securities at March 31, 2023 and December 31, 2022 were comprised of state and municipal obligations generally 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 March 31, 2023 and December 31, 2022. AIR on HTM debt securities totaled $3.8 million at March 31, 2023 and December 31, 2022 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 Company’s adoption of ASU 2022-02 resulted in an insignificant change to our methodology for estimating the allowance for credit losses on TDRs. The Day 1 decrease in allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $0.6 million.



The allowance for credit losses totaled $100.3 million at March 31, 2023, compared to $100.8 million at December 31, 2022. The allowance for credit losses as a percentage of loans was 1.21% at March 31, 2023, compared to 1.24% at December 31, 2022.



During the first quarter of 2023, the Company made adjustments to the class segments within the portfolios to better align risk characteristics and reflect the monitoring and assessment of risks as the portfolios continue to evolve. Paycheck Protection Program was consolidated with Commercial & Industrial, as the portfolio had decreased to less than $1 million and no longer warranted a material class segment. The Other Consumer class segment was further separated into Residential Solar and Other Consumer. The growth in our Residential Solar portfolio warranted evaluation of this class separately from the Other Consumer class segments. The change to the class segments was applied retrospectively and did not have a significant impact on the allowance for loan losses. The following table illustrates the portfolio and class segments for the Company’s loan portfolio:


Portfolio Segment
Class
Commercial Loans
Commercial & Industrial
 
Commercial Real Estate
Consumer Loans
Auto
 
Residential Solar
 
Other Consumer
Residential Loans



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 March 31, 2023 incorporates 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. At March 31, 2023, the weightings were 50%, 0% and 50% for the baseline, upside and downside economic forecasts, respectively. The baseline outlook reflected an unemployment rate environment below pre-coronavirus (“COVID-19”) pandemic levels throughout much of the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the second quarter of 2023 at approximately 3.9% and rise to 4.4% before falling slightly to 4.1% by the end of the forecast period. Other utilized economic variables have generally remained stable in their respective forecasts, with the exception of northeast housing starts which deteriorated since December 31, 2022 and served as a counter-balance to the improved unemployment outlook. Key assumptions in the baseline economic outlook included the Federal Reserve raising rates with two more 25 basis point hikes at the May and June meetings bringing the terminal range to 5%-5.25%, recent bank failures not being symptomatic of a serious broader problem in the financial system, the economy remaining at full employment, continued tapering of the Federal Reserve balance sheet, a slowly increasing yield on ten-year treasury securities, and a continued decline in oil prices. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 3.7% in the first quarter of 2023 to a peak of 7.1% in the second quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2023. Additional adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation, and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth, and policy exceptions was also conducted. All these factors were considered through separate quantitative processes and incorporated when applicable into the estimate of current expected credit losses at March 31, 2023.



The quantitative model as of December 31, 2022 incorporates 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. At December 31, 2022, the weightings were 50%, 0% and 50% for the baseline, upside and downside economic forecasts, respectively. The baseline outlook reflected an unemployment rate environment initially around pre-COVID-19 levels at 3.9% that increases slightly during the forecast period to 4.0%. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the first quarter of 2023 at approximately 3.9% and hovering around 4.6% by the end of the forecast period. Other utilized economic variables have generally deteriorated in their respective forecasts, with retail sales and housing starts forecasts declining from the prior year. Key assumptions in the baseline economic outlook included a full employment economy being realized in the near future, continued tapering of the Federal Reserve balance sheet, an increasing yield on ten-year treasury securities, and a gradual decline in global oil prices. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 3.9% in the fourth quarter of 2022 to a peak of 6.9% in the first quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2022. Additional adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation, and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth, and policy exceptions was also conducted. All these factors were considered through separate quantitative processes and incorporated when applicable into the estimate of current expected credit losses at December 31, 2022.

There were no loans purchased with credit deterioration during the three months ended March 31, 2023 or the year ended December 31, 2022. The Company purchased no loans during the three months ended March 31, 2023. During 2022, the Company purchased $11.5 million of residential loans at a 1.53% premium 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. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $25.4 million at March 31, 2023 and $25.0 million at December 31, 2022 and there was no estimated allowance for credit losses related to AIR as of March 31, 2023 and December 31, 2022.

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

(In thousands)
 
Commercial
Loans
   
Consumer
Loans
   
Residential
   
Total
 
Balance as of January 1, 2023 (after adoption of ASC 2022-02)
 
$
34,662
   
$
50,951
   
$
14,539
   
$
100,152
 
Charge-offs
   
(169
)
   
(5,342
)
   
(339
)
   
(5,850
)
Recoveries
   
541
     
1,377
     
121
     
2,039
 
Provision
   
1,006
     
1,834
     
1,069
   
3,909
 
Ending balance as of March 31, 2023
 
$
36,040
   
$
48,820
   
$
15,390
   
$
100,250
 
                                 
Balance as of December 31, 2021
 
$
28,941
   
$
44,253
   
$
18,806
   
$
92,000
 
Charge-offs
   
(588
)
   
(3,591
)
   
(312
)
   
(4,491
)
Recoveries
   
93
     
1,652
     
150
     
1,895
 
Provision
   
111
   
1,277
   
(792
)
   
596
Ending balance as of March 31, 2022
 
$
28,557
   
$
43,591
   
$
17,852
   
$
90,000
 

The decrease in the allowance for credit losses at March 31, 2023 compared to December 31, 2022 was primarily due to a reduction in expected losses in the residential solar portfolios, an improvement in economic forecasts and reduction in allowance on TDRs related to the adoption of ASU 2022-02. These decreases were partly offset by an increase in providing for the increase in loan balances and a decline in prepayment speeds. The decrease in the allowance for credit losses from December 31, 2021 to March 31, 2022 was primarily due to an improvement in the economic forecast, partly offset by providing the increase in loan balances.

Individually Evaluated Loans

As of March 31, 2023, there were two relationships identified to be evaluated for loss on an individual basis which, in aggregate, had an amortized cost basis of $2.3 million, with no allowance for credit loss. As of December 31, 2022, the same two relationships were identified to be evaluated for loss on an individual basis, in aggregate, had an amortized cost basis of $2.4 million, with no allowance for credit loss. The decrease in the amortized cost basis on an individual basis from December 31, 2022 to March 31, 2023 was primarily due to principal payments received during the first quarter of 2023.

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 March 31, 2023
                                         
Commercial loans:
                                         
C&I
 
$
2,676
   
$
181
   
$
-
   
$
2,857
   
$
1,785
   
$
1,261,122
   
$
1,265,764
 
CRE
   
870
     
-
     
-
     
870
     
5,243
     
2,724,001
     
2,730,114
 
Total commercial loans
 
$
3,546
   
$
181
   
$
-
   
$
3,727
   
$
7,028
   
$
3,985,123
   
$
3,995,878
 
Consumer loans:
                                                       
Auto
 
$
6,852
   
$
885
   
$
384
   
$
8,121
   
$
1,693
   
$
992,247
   
$
1,002,061
 
Residential solar
    2,419       773       253       3,445       183       916,456       920,084  
Other consumer
   
3,296
     
1,870
     
1,293
     
6,459
     
98
     
234,516
     
241,073
 
Total consumer loans
 
$
12,567
   
$
3,528
   
$
1,930
   
$
18,025
   
$
1,974
   
$
2,143,219
   
$
2,163,218
 
Residential
 
$
2,403
   
$
462
   
$
398
   
$
3,263
   
$
7,282
   
$
2,094,937
   
$
2,105,482
 
Total loans
 
$
18,516
   
$
4,171
   
$
2,328
   
$
25,015
   
$
16,284
   
$
8,223,279
   
$
8,264,578
 

(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, 2022
                                         
Commercial loans:
                                         
C&I
 
$
342
   
$
99
   
$
4
   
$
445
   
$
2,244
   
$
1,238,468
   
$
1,241,157
 
CRE
   
336
     
96
     
-
     
432
     
5,780
     
2,689,196
     
2,695,408
 
Total commercial loans
 
$
678
   
$
195
   
$
4
   
$
877
   
$
8,024
   
$
3,927,664
   
$
3,936,565
 
Consumer loans:
                                                       
Auto
 
$
8,640
   
$
1,393
   
$
785
   
$
10,818
   
$
1,494
   
$
950,389
   
$
962,701
 
Residential solar
    2,858       731       474       4,063       79       852,656       856,798  
Other consumer
   
3,483
     
1,838
     
1,789
     
7,110
     
94
     
272,384
     
279,588
 
Total consumer loans
 
$
14,981
   
$
3,962
   
$
3,048
   
$
21,991
   
$
1,667
   
$
2,075,429
   
$
2,099,087
 
Residential
 
$
2,496
   
$
555
   
$
771
   
$
3,822
   
$
7,542
   
$
2,103,131
   
$
2,114,495
 
Total loans
 
$
18,155
   
$
4,712
   
$
3,823
   
$
26,690
   
$
17,233
   
$
8,106,224
   
$
8,150,147
 

As of March 31, 2023 and December 31, 2022, there were $1.0 million and $1.1 million, respectively, of loans in nonaccrual that were specifically evaluated for individual expected credit loss 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, enabling recognition and response to problem loans and potential problem loans.

Commercial Grading System

For Commercial and Industrial (“C&I”) 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 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 (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., 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 Paycheck Protection Program 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 vintage and beginning in 2023 with the Company’s January 1, 2023 adoption of ASU 2022-02 also includes gross charge-offs by loan class by vintage for the three months ended March 31, 2023. Included in other consumer gross charge-offs, the Company recorded $0.2 million in overdrawn deposit accounts reported as 2022 originations, for the three months ended March 31, 2023.

(In thousands)
 
2023
   
2022
   
2021
   
2020
   
2019
   
Prior
   
Revolving
Loans
Amortized
Cost Basis
   
Revolving
Loans
Converted
to Term
   
Total
 
As of March 31, 2023
                                                     
C&I
                                                     
By internally assigned grade:
                                                     
Pass
 
$
58,995
   
$
287,770
   
$
240,751
   
$
154,864
   
$
83,060
   
$
65,062
   
$
323,916
   
$
17,121
   
$
1,231,539
 
Special mention
   
-
     
956
     
524
     
3,925
     
90
     
1,439
     
5,965
     
-
     
12,899
 
Substandard
   
350
     
1,902
     
435
     
534
     
2,301
     
3,489
     
12,230
     
32
     
21,273
 
Doubtful
   
-
     
24
     
-
     
-
     
28
     
1
     
-
     
-
     
53
 
Total C&I
 
$
59,345
   
$
290,652
   
$
241,710
   
$
159,323
   
$
85,479
   
$
69,991
   
$
342,111
   
$
17,153
   
$
1,265,764
 
 Current-period gross charge-offs   $ -     $ (1 )   $ (1 )   $ (3 )   $ -     $ (107 )   $ -     $ -     $ (112 )
CRE
                                                                       
By internally assigned grade:
                                                                       
Pass
 
$
62,072
   
$
364,540
   
$
461,622
   
$
417,952
   
$
333,603
   
$
767,943
   
$
211,630
   
$
42,648
   
$
2,662,010
 
Special mention
   
-
     
2,266
     
6,785
     
3,394
     
2,399
     
9,525
     
3,590
     
-
     
27,959
 
Substandard
   
-
     
309
     
1,265
     
5,671
     
3,298
     
28,277
     
1,325
     
-
     
40,145
 
Total CRE
 
$
62,072
   
$
367,115
   
$
469,672
   
$
427,017
   
$
339,300
   
$
805,745
   
$
216,545
   
$
42,648
   
$
2,730,114
 
Current-period gross charge-offs
  $ -     $ -     $ -     $ -     $ (57 )   $ -     $ -     $ -     $ (57 )
Auto
                                                                       
By payment activity:
                                                                       
Performing
 
$
136,896
   
$
455,757
   
$
216,248
   
$
66,132
   
$
83,483
   
$
41,468
   
$
-
   
$
-
   
$
999,984
 
Nonperforming
   
11
     
550
     
660
     
357
     
363
     
136
     
-
     
-
     
2,077
 
Total Auto
 
$
136,907
   
$
456,307
   
$
216,908
   
$
66,489
   
$
83,846
   
$
41,604
   
$
-
   
$
-
   
$
1,002,061
 
Current-period gross charge-offs
  $ -     $ (318 )   $ (242 )   $ (127 )   $ (77 )   $ (89 )   $ -     $ -     $ (853 )
Residential solar                                                                        
By payment activity:
                                                                       
Performing
  $ 83,543     $ 476,712     $ 189,586     $ 72,221     $ 52,543     $ 45,043     $ -     $ -     $ 919,648  
Nonperforming
    -       198       45       36       54       103       -       -       436  
Total Residential solar   $ 83,543     $ 476,910     $ 189,631     $ 72,257     $ 52,597     $ 45,146     $ -     $ -     $ 920,084  
Current-period gross charge-offs   $ -     $ (272 )   $ (334 )   $ (45 )   $ (26 )   $ (58 )   $ -     $ -     $ (735 )
Other consumer
                                                                       
By payment activity:
                                                                       
Performing
 
$
3,689
   
$
41,754
   
$
95,002
   
$
31,506
   
$
23,595
   
$
26,188
   
$
17,930
   
$
18
   
$
239,682
 
Nonperforming
   
-
     
239
     
663
     
285
     
70
     
113
     
5
     
16
     
1,391
 
Total other consumer
 
$
3,689
   
$
41,993
   
$
95,665
   
$
31,791
   
$
23,665
   
$
26,301
   
$
17,935
   
$
34
   
$
241,073
 
Current-period gross charge-offs
  $ -     $ (988 )   $ (2,005 )   $ (472 )   $ (281 )   $ (8 )   $ -     $ -     $ (3,754 )
Residential
                                                                       
By payment activity:
                                                                       
Performing
 
$
33,490
   
$
257,316
   
$
348,907
   
$
207,985
   
$
154,174
   
$
849,898
   
$
226,644
   
$
19,388
   
$
2,097,802
 
Nonperforming
   
41
     
181
     
384
     
258
     
491
     
6,325
     
-
     
-
     
7,680
 
Total residential
 
$
33,531
   
$
257,497
   
$
349,291
   
$
208,243
   
$
154,665
   
$
856,223
   
$
226,644
   
$
19,388
   
$
2,105,482
 
Current-period gross charge-offs
  $ -     $ -     $ -     $ -     $ -     $ (339 )   $ -     $ -     $ (339 )
Total loans
 
$
379,087
   
$
1,890,474
   
$
1,562,877
   
$
965,120
   
$
739,552
   
$
1,845,010
   
$
803,235
   
$
79,223
   
$
8,264,578
 
Current-period gross charge-offs
  $ -     $ (1,579 )   $ (2,582 )   $ (647 )   $ (441 )   $ (601 )   $ -     $ -     $ (5,850 )

(In thousands)
 
2022
   
2021
   
2020
   
2019
   
2018
   
Prior
   
Revolving
Loans
Amortized
Cost Basis
   
Revolving
Loans
Converted
to Term
   
Total
 
As of December 31, 2022
                                                     
C&I
                                                     
By internally assigned grade:
                                                     
Pass
 
$
296,562
   
$
252,480
   
$
164,976
   
$
91,497
   
$
39,394
   
$
32,413
   
$
327,166
   
$
3,133
   
$
1,207,621
 
Special mention
   
1,044
     
524
     
4,531
     
194
     
1,108
     
417
     
5,234
     
-
     
13,052
 
Substandard
   
76
     
459
     
231
     
3,098
     
91
     
3,969
     
12,348
     
163
     
20,435
 
Doubtful
   
-
     
20
     
-
     
28
     
-
     
1
     
-
     
-
     
49
 
Total C&I
 
$
297,682
   
$
253,483
   
$
169,738
   
$
94,817
   
$
40,593
   
$
36,800
   
$
344,748
   
$
3,296
   
$
1,241,157
 
CRE
                                                                       
By internally assigned grade:
                                                                       
Pass
 
$
374,313
   
$
465,990
   
$
439,012
   
$
333,568
   
$
217,141
   
$
566,783
   
$
201,563
   
$
24,735
   
$
2,623,105
 
Special mention
   
605
     
764
     
868
     
2,641
     
4,649
     
24,023
     
850
     
-
     
34,400
 
Substandard
   
309
     
-
     
2,316
     
3,937
     
1,822
     
23,819
     
713
     
4,987
     
37,903
 
Total CRE
 
$
375,227
   
$
466,754
   
$
442,196
   
$
340,146
   
$
223,612
   
$
614,625
   
$
203,126
   
$
29,722
   
$
2,695,408
 
Auto
                                                                       
By payment activity:
                                                                       
Performing
 
$
488,776
   
$
239,090
   
$
75,853
   
$
99,615
   
$
44,061
   
$
13,027
   
$
-
   
$
-
   
$
960,422
 
Nonperforming
   
590
     
655
     
404
     
385
     
216
     
29
     
-
     
-
     
2,279
 
Total Auto
 
$
489,366
   
$
239,745
   
$
76,257
   
$
100,000
   
$
44,277
   
$
13,056
   
$
-
   
$
-
   
$
962,701
 
Residential solar                                                                        
By payment activity:
                                                                       
Performing
  $
485,942     $
193,971     $
74,532     $
54,662     $
36,119     $
11,019     $
-     $
-     $
856,245  
Nonperforming
    320       98       50       25       16       44       -       -       553  
Total Residential solar   $
486,262     $
194,069     $
74,582     $
54,687     $
36,135     $
11,063     $
-     $
-     $
856,798  
Other consumer
                                                                       
By payment activity:
                                                                       
Performing
 
$
52,545
   
$
110,624
   
$
36,412
   
$
27,383
   
$
15,536
   
$
15,735
   
$
19,218
   
$
250
   
$
277,703
 
Nonperforming
   
238
     
838
     
395
     
247
     
57
     
87
     
8
     
15
     
1,885
 
Total other consumer
 
$
52,783
   
$
111,462
   
$
36,807
   
$
27,630
   
$
15,593
   
$
15,822
   
$
19,226
   
$
265
   
$
279,588
 
Residential
                                                                       
By payment activity:
                                                                       
Performing
 
$
251,012
   
$
349,498
   
$
212,161
   
$
156,957
   
$
157,755
   
$
717,621
   
$
233,056
   
$
28,122
   
$
2,106,182
 
Nonperforming
   
267
     
384
     
408
     
555
     
1,028
     
5,651
     
-
     
20
     
8,313
 
Total residential
 
$
251,279
   
$
349,882
   
$
212,569
   
$
157,512
   
$
158,783
   
$
723,272
   
$
233,056
   
$
28,142
   
$
2,114,495
 
Total loans
 
$
1,952,599
   
$
1,615,395
   
$
1,012,149
   
$
774,792
   
$
518,993
   
$
1,414,638
   
$
800,156
   
$
61,425
   
$
8,150,147
 

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The allowance for losses on unfunded commitments totaled $4.5 million as March 31, 2023, compared to $5.1 million as of December 31, 2022.

Loan Modifications to Borrowers Experiencing Financial Difficulties



As previously mentioned in Note 3 Recent Accounting Pronouncements, the Company’s January 1, 2023 adoption of ASU 2022-02 eliminates the recognition and measurement of TDRs. Upon adoption of this guidance, the Company will no longer recognize an allowance for credit losses for the economic concession granted to a borrower for changes in the timing and amount of contractual cash flows when a loan is restructured. The adoption of ASU 2022-02 results in a change to reporting for loan modifications to borrowers experiencing financial difficulties. With the adoption of ASU 2022-02 these modifications require enhanced reporting on the type of modifications granted and the financial magnitude of the concessions granted.



When the Company modifies a loan with financial difficulty, 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 change in scheduled payment amount; or principal forgiveness.



The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:


   
Three Months Ended March 31, 2023
 
   
Term Extension
 
(Dollars in thousands)
 
Amortized Cost
   
% of Total Class of
Financing Receivables
 
Residential
 
$
43
     
0.0020
%
Total
 
$
43
     
0.0020
%



The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulties:


 
Three Months Ended March 31, 2023
Loan Type
Term Extension
Residential
Added a weighted-average 18 years to the life of loan, which reduced monthly payment amounts for the borrowers



There were no financing receivables that had a payment default during the three months ended March 31, 2023 that were modified to borrowers experiencing financial difficulty since the adoption of ASU 2022-02 effective January 1, 2023.



The following table depicts the performance of loans that have been modified since the adoption of ASU 2022-02 effective January 1, 2023:


   
Payment Status (Amortized Cost Basis)
 
(In thousands)
 
Current
   
31-60 Days Past Due
   
61-90 Days Past Due
   
Greater than 90
Days Past Due
 
March 31, 2023
                       
Loan Type
                       
Residential
 
$
43
   
$
-
   
$
-
   
$
-
 
Total
 
$
43
   
$
-
   
$
-
   
$
-
 

Troubled Debt Restructuring


Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company accounted for loan modifications to borrowers experiencing financial difficulty when concessions were granted as TDRs. The following tables are disclosures related to TDRs in prior periods.

The following table illustrates the recorded investments 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 March 31, 2022
 
(Dollars in thousands)
 
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
 
Residential
   
2
   
$
118
   
$
124
 
Total TDRs
   
2
   
$
118
   
$
124
 

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
March 31, 2022
 
(Dollars in thousands)
 
Number of
Contracts
   
Recorded
Investment
 
Consumer loans:
           
Auto
   
1
   
$
11
 
Total consumer loans
   
1
   
$
11
 
Residential
   
20
   
$
900
 
Total TDRs
   
21
   
$
911
 

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 March 31, 2023. 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, bonds 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 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.”

Accounting standards require an employer to: (1) recognize the overfunded or underfunded status of defined benefit post-retirement plans, which is measured as the difference between plan assets at fair value and the benefit obligation, as an asset or liability in its balance sheet; (2) recognize changes in that funded status in the year in which the changes occur through comprehensive income; and (3) measure the defined benefit plan assets and obligations as of the date of its year-end balance sheet.

The Company made no voluntary contributions to the pension and other benefits plans during the three months ended March 31, 2023 and 2022.

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

 
Pension Benefits
   
Other Benefits
 
   
Three Months Ended
March 31,
   
Three Months Ended
March 31,
 
(In thousands)
 
2023
   
2022
   
2023
   
2022
 
Components of net periodic cost (benefit):
                       
Service cost
 
$
482
   
$
534
   
$
1
   
$
2
 
Interest cost
   
1,010
     
694
     
56
     
41
 
Expected return on plan assets
   
(1,853
)
   
(2,228
)
   
-
     
-
 
Net amortization
   
670
     
185
     
(21
)
   
1
 
Total net periodic cost (benefit)
 
$
309
   
$
(815
)
 
$
36
   
$
44
 

The service cost component of net periodic cost (benefit) 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
March 31,
 
(In thousands, except per share data)
 
2023
   
2022
 
Basic EPS:
           
Weighted average common shares outstanding
   
42,894
     
43,141
 
Net income available to common stockholders
 
$
33,658
   
$
39,126
 
Basic EPS
 
$
0.78
   
$
0.91
 
                 
Diluted EPS:
               
Weighted average common shares outstanding
   
42,894
     
43,141
 
Dilutive effect of common stock options and restricted stock
   
232
     
244
 
Weighted average common shares and common share equivalents
   
43,126
     
43,385
 
Net income available to common stockholders
 
$
33,658
   
$
39,126
 
Diluted EPS
 
$
0.78
   
$
0.90
 

There was a nominal number of weighted average stock options outstanding for the three months ended March 31, 2023 and March 31, 2022, 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 Statements of
Comprehensive Income (Loss)
   
Three Months Ended
   
(In thousands)
 
March 31, 2023
   
March 31, 2022
   
AFS securities:
               
Losses on AFS securities
  $
5,000     $ -   Net securities (gains) losses
Amortization of unrealized gains related to securities transfer
 
114
   
137
 
Interest income
Tax effect
 
$
(1,278
)
 
$
(35
)
Income tax (benefit)
Net of tax
 
$
3,836
   
$
102
   
                      
Pension and other benefits:
                   
Amortization of net losses
 
$
640
   
$
157
 
Other noninterest expense
Amortization of prior service costs
   
9
     
29
 
Other noninterest expense
Tax effect
 
$
(163
)
 
$
(47
)
Income tax (benefit)
Net of tax
 
$
486
   
$
139
 
                      
Total reclassifications, net of tax
 
$
4,322
   
$
241
   

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, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company may enter 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 in 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 clears certain derivative transactions through the Chicago Mercantile Exchange Clearing House (“CME”). 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 March 31, 2023 and December 31, 2022, the Company had fourteen and fifteen 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.

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 March 31, 2023
                           
Derivatives not designated as hedging instruments
                           
Interest rate derivatives
 
$
1,295,719
 
Other assets
 
$
94,171
   
$
1,295,719
 
Other liabilities
 
$
94,171
 
Risk participation agreements
   
67,552
 
Other assets
   
57
     
17,854
 
Other liabilities
   
13
 
Total derivatives not designated as hedging instruments
                       
$
94,228
                         
$
94,184
 
Netting adjustments(1)
             
19,982
               
(177
)
Net derivatives in the balance sheet
                       
$
74,246
                         
$
94,361
 
Derivatives not offset on the balance sheet
                       
$
2,559
                         
$
2,559
 
Cash collateral(2)
             
-
               
-
 
Net derivative amounts
                       
$
71,687
                         
$
91,802
 
As of December 31, 2022
                                   
Derivatives not designated as hedging instruments
                                   
Interest rate derivatives
 
$
1,275,708
 
Other assets
 
$
117,247
   
$
1,275,708
 
Other liabilities
 
$
117,247
 
Risk participation agreements
   
88,963
 
Other assets
   
47
     
18,421
 
Other liabilities
   
10
 
Total derivatives not designated as hedging instruments
                       
$
117,294
                         
$
117,257
 
Netting adjustments(1)
              24,109                 -  
Net derivatives in the balance sheet
                        $ 93,185                           $ 117,257  
Derivatives not offset on the balance sheet
                        $ 352                           $ 352  
Cash collateral(2)
             
-
               
-
 
Net derivative amounts
                       
$
92,833
                         
$
116,905
 

(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.

(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.

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

   
Three Months Ended
March 31,
 
(In thousands)
 
2023
   
2022
 
Derivatives not designated as hedging instruments:
           
Increase (decrease) in other income
 
$
7
   
$
(52
)

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 (i.e., 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 sets 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
   
March 31, 2023
 
Assets:
                       
AFS securities:
                       
U.S. treasury
  $
123,579     $
-     $
-     $
123,579  
Federal agency
 

-
   

210,220
   

-
   

210,220
 
State & municipal
   
-
     
85,033
     
-
     
85,033
 
Mortgage-backed
   
-
     
463,578
     
-
     
463,578
 
Collateralized mortgage obligations
   
-
     
582,361
     
-
     
582,361
 
Corporate
   
-
     
47,237
     
-
     
47,237
 
Total AFS securities
 
$
123,579
   
$
1,388,429
   
$
-
   
$
1,512,008
 
Equity securities
   
31,807
     
1,000
     
-
     
32,807
 
Derivatives
   
-
     
94,228
     
-
     
94,228
 
Total
 
$
155,386
   
$
1,483,657
   
$
-
   
$
1,639,043
 
                                 
Liabilities:
                               
Derivatives
 
$
-
   
$
94,184
   
$
-
   
$
94,184
 
Total
 
$
-
   
$
94,184
   
$
-
   
$
94,184
 

(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
December 31, 2022
 
Assets:
                       
AFS securities:
                       
U.S. treasury
  $
121,658     $
-     $
-     $
121,658  
Federal agency
 

-
   

206,419
   

-
   

206,419
 
State & municipal
   
-
     
82,851
     
-
     
82,851
 
Mortgage-backed
   
-
     
473,694
     
-
     
473,694
 
Collateralized mortgage obligations
   
-
     
588,363
     
-
     
588,363
 
Corporate
   
-
     
54,240
     
-
     
54,240
 
Total AFS securities
 
$
121,658
   
$
1,405,567
   
$
-
   
$
1,527,225
 
Equity securities
   
29,784
     
1,000
     
-
     
30,784
 
Derivatives
   
-
     
93,185
     
-
     
93,185
 
Total
 
$
151,442
   
$
1,499,752
   
$
-
   
$
1,651,194
 
                                 
Liabilities:
                               
Derivatives
 
$
-
   
$
117,257
   
$
-
   
$
117,257
 
Total
 
$
-
   
$
117,257
   
$
-
   
$
117,257
 

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 loans individually evaluated for expected credit losses and HTM securities. The non-recurring fair value measurements recorded during the three month period ended March 31, 2023 and the year ended December 31, 2022 were related to loans individually evaluated for expected credit losses with fair value of $1.0 million and $1.1 million as of March 31, 2023 and December 31, 2022, respectively. 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.

       
March 31, 2023
   
December 31, 2022
 
(In thousands)
 
Fair Value
Hierarchy
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
Financial assets:
                             
HTM securities
   
2
   
$
906,824
   
$
812,664
   
$
919,517
   
$
812,647
 
Net loans
   
3
     
8,164,753
     
7,785,338
     
8,049,909
     
7,840,350
 
Financial liabilities:
                                       
Time deposits
   
2
   
$
784,467
   
$
743,678
   
$
433,772
   
$
413,868
 
Long-term debt
   
2
     
29,790
     
29,469
     
4,815
     
4,539
 
Subordinated debt
   
1
     
98,000
     
91,506
     
98,000
     
92,883
 
Junior subordinated debt
   
2
     
101,196
     
98,443
     
101,196
     
98,372
 

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, and those expected future cash flows also includes 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 creditworthiness. Commitments to extend credit and unused lines of credit totaled $2.43 billion at March 31, 2023 and $2.42 billion at December 31, 2022.

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 $40.9 million at March 31, 2023 and $53.3 million at December 31, 2022. As of March 31, 2023 and December 31, 2022, the fair value of the Company’s standby letters of credit was not significant.

12.
Subsequent Event

On May 4, 2023, the Company sold two subordinated debt securities held in the AFS securities portfolio for a $4.5 million pre-tax loss. These subordinated securities were issued by two regional financial institutions and had an aggregate amortized cost of $7.0 million and a fair value of $4.8 million as of March 31, 2023. During April, the Company was notified that these two issuers debt ratings were downgraded. In early May, both experienced significant declines in their respective equity market capitalizations and the fair values of the Company’s subordinated debt securities for these two issuers also experienced further declines from March 31, 2023. These factors indicated to the Company a higher level of uncertainty relative to their operational and market risks.
28


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, 2022 for an understanding of the following discussion and analysis. Operating results for the three month period ending March 31, 2023 are not necessarily indicative of the results of the full year ending December 31, 2023 or any future period.

Forward-Looking Statements

Certain statements in this filing and future filings by 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, including actual or potential stress in the banking industry, 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 obligations 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

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. The Company follows financial accounting and reporting policies that are in accordance with GAAP. The more significant of these policies are summarized in Note 1 to the consolidated financial statements presented in our 2022 Annual Report on Form 10-K. Refer to Note 3 in this Quarterly Report on Form 10-Q for recently adopted accounting standards. Not all significant accounting policies require management to make difficult, subjective or complex judgments. The allowance for credit losses and the allowance for unfunded commitments policies noted below are deemed to meet the SEC’s definition of a critical accounting estimate.

The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. The measurement of Current Expensed Credit Losses (“CECL”) on financial instruments 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 judgments 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 March 31, 2023, the model incorporated a baseline economic outlook along with an alternative downside scenario, which were equally weighted. The baseline outlook reflected an unemployment rate environment below pre-COVID-19 levels throughout much of the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the second quarter of 2023 at approximately 3.9% and rise to 4.4% before falling slightly to 4.1% by the end of the forecast period. The alternative downside scenario assumed northeast unemployment rises from 3.7% in the first quarter of 2023 to a peak of 7.1% in the second quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2023. 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 March 31, 2023, 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. To further demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of March 31, 2023, the Company increased the downside scenario to 100% which resulted in a 17% 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 2022 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 2022 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 months ended March 31, 2023:


net income of $33.7 million, or $0.78 diluted earnings per share;

noninterest income, excluding securities losses, was $36.4 million, up $2.1 million, or 6.1% from the fourth quarter of 2022 and down $6.4 million, or 15.0% from the first quarter of 2022; represents 28% of total revenues;

noninterest expense, excluding $0.6 million of acquisition expenses in the first quarter of 2023 and $1.0 million in the fourth quarter of 2022, was comparable to the previous quarter and up 9.1% from the first quarter of 2022;

period end loans were $8.26 billion, up 5.7%, annualized, from December 31, 2022;

credit quality metrics including net charge-offs to average loans of 0.19%, annualized, and allowance for loan losses to total loans at 1.21%;

period end deposits were $9.68 billion, up 2.0% from December 31, 2022;

book value per share of $28.24 at March 31, 2023; tangible book value per share(1) was $21.52 at March 31, 2023, $20.65 at December 31, 2022 and $21.25 at March 31, 2022;

the Company incurred a $5.0 million securities loss on the write-off of a subordinated debt security of a failed bank.

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

Results of Operations

Net income for the three months ended March 31, 2023 was $33.7 million, or $0.78 per diluted common share, down $2.5 million from $36.1 million, or $0.84 per diluted common share for the three months ended December 31, 2022 and down $5.5 million from $39.1 million, or $0.90 per diluted common share for the first quarter of 2022.


Net interest income for the three months ended March 31, 2023 was $95.1 million, down $4.7 million, or 4.7% from the fourth quarter of 2022 and up $14.7 million, or 18.3%, from the first quarter of 2022, primarily due to higher yields on earning assets due to increases in the Federal Reserve’s targeted Federal Funds rate as well as the new loan volume pricing, which was partially offset by the higher cost of interest-bearing liabilities. The first quarter of 2022 also included $2.0 million ($0.04 per diluted share) of income from the Paycheck Protection Program (“PPP”).


The Company recorded a provision for loan losses of $3.9 million ($0.07 per diluted share) for the three months ended March 31, 2023, compared to $0.6 million ($0.01 per diluted share) in the first quarter of 2022 and $7.7 million ($0.14 per diluted share) in the fourth quarter of 2022.

Card services income was comparable to the three months ended December 31, 2022 and approximately $4.0 million ($0.07 per diluted share) lower than the first quarter of 2022 driven by the impact of the statutory price cap provisions of the Durbin Amendment to the Dodd-Frank Act (“Durbin Amendment”).

The Company incurred acquisition expenses of $0.6 million ($0.01 per diluted share) and $1.0 million ($0.02 per diluted share) related to the pending merger with Salisbury Bancorp, Inc. (“Salisbury”) in the first quarter of 2023 and the fourth quarter of 2022, respectively.

The following table sets forth certain financial highlights:

   
Three Months Ended
 
   
March 31,
2023
   
December 31,
2022
   
March 31,
2022
 
Performance:
                 
Diluted earnings per share
 
$
0.78
   
$
0.84
   
$
0.90
 
Return on average assets(2)
   
1.16
%
   
1.23
%
   
1.32
%
Return on average equity(2)
   
11.47
%
   
12.30
%
   
12.78
%
Return on average tangible common equity(2)
   
15.31
%
   
16.54
%
   
16.87
%
Net interest margin, fully taxable equivalent (“FTE”)(2)
   
3.55
%
   
3.68
%
   
2.95
%
Capital:
                       
Equity to assets
   
10.23
%
   
10.00
%
   
9.90
%
Tangible equity ratio
   
7.99
%
   
7.73
%
   
7.70
%
Book value per share
 
$
28.24
   
$
27.38
   
$
27.96
 
Tangible book value per share
 
$
21.52
   
$
20.65
   
$
21.25
 
Leverage ratio
   
10.43
%
   
10.32
%
   
9.52
%
Common equity tier 1 capital ratio
   
12.28
%
   
12.12
%
   
12.23
%
Tier 1 capital ratio
   
13.34
%
   
13.19
%
   
13.39
%
Total risk-based capital ratio
   
15.53
%
   
15.38
%
   
15.64
%

The following tables provide non-GAAP reconciliations:

   
Three Months Ended
 
(In thousands, except per share data)
 
March 31,
2023
   
December 31,
2022
   
March 31,
2022
 
Return on average tangible common equity:
                 
Net income
 
$
33,658
   
$
36,121
   
$
39,126
 
Amortization of intangible assets (net of tax)
   
402
     
404
     
477
 
Net income, excluding intangible amortization
 
$
34,060
   
$
36,525
   
$
39,603
 
Average stockholders’ equity
 
$
1,190,316
   
$
1,164,916
   
$
1,241,188
 
Less: average goodwill and other intangibles
   
288,354
     
288,856
     
289,218
 
Average tangible common equity
 
$
901,962
   
$
876,060
   
$
951,970
 
Return on average tangible common equity(2)
   
15.31
%
   
16.54
%
   
16.87
%
Tangible equity ratio:
                       
Stockholders’ equity
 
$
1,211,659
   
$
1,173,554
   
$
1,202,250
 
Intangibles
   
288,159
     
288,545
     
288,832
 
Assets
 
$
11,839,730
   
$
11,739,296
   
$
12,147,833
 
Tangible equity ratio
   
7.99
%
   
7.73
%
   
7.70
%
Tangible book value per share:
                       
Stockholders’ equity
 
$
1,211,659
   
$
1,173,554
   
$
1,202,250
 
Intangibles
   
288,159
     
288,545
     
288,832
 
Tangible equity
 
$
923,500
   
$
885,009
   
$
913,418
 
Diluted common shares outstanding
   
42,904
     
42,858
     
42,992
 
Tangible book value per share
 
$
21.52
   
$
20.65
   
$
21.25
 
(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 $95.1 million for the first quarter of 2023, down $4.7 million, or 4.7%, from the previous quarter, and included two less days in the first quarter of 2023 compared to the fourth quarter of 2022. The FTE net interest margin was 3.55% for the three months ended March 31, 2023, a decrease of 13 basis points (“bps”) from the previous quarter. Interest income increased $5.0 million, or 4.6%, as the yield on average interest-earning assets increased 24 bps from the prior quarter to 4.26%, while average interest-earning assets of $10.91 billion increased $108.8 million from the prior quarter, primarily due to an increase in average loans partially offset by a decrease in investment securities. Interest expense was up $9.7 million, or 103.6%, as the cost of interest-bearing liabilities increased 57 bps to 1.14% for the quarter ended March 31, 2023, driven by interest-bearing deposit costs increasing 47 bps, as well as higher balances in short-term borrowings and the rates paid on those borrowings.

Net interest income was $95.1 million for the first quarter of 2023, up $14.7 million, or 18.3%, from the first quarter of 2022. The first quarter of 2022 included $2.0 million of PPP loan interest and fees recognized into interest income. The FTE net interest margin was 3.55% for the three months ended March 31, 2023, an increase of 60 bps from the first quarter of 2022. Interest income increased $30.1 million, or 35.6%, as the yield on average interest-earning assets increased 117 bps from the same period in 2022 to 4.26%, while average interest-earning assets decreased $179.2 million, or 1.6%, from the first quarter of 2022, primarily due to a decrease in excess liquidity was partially offset by an increase in loans and investment securities. Interest expense increased $15.3 million, or 396.4%, as the cost of interest-bearing liabilities increased 91 bps to 1.14% for the quarter ended March 31, 2023, driven by interest-bearing deposit costs increasing 63 bps, as well as higher balances in short-term borrowings and the rates paid on those borrowings.

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
 
March 31, 2023
   
December 31, 2022

 
March 31, 2022
 
(Dollars in thousands)
 
Average
Balance
   
Interest
   
Yield/
Rates
   
Average
Balance
   
Interest
   
Yield/
Rates
   
Average
Balance
   
Interest
   
Yield/
Rates
 
Assets:
                                                     
Short-term interest-bearing accounts
 
$
34,215
   
$
191
     
2.26
%
 
$
39,573
   
$
330
     
3.31
%
 
$
990,319
   
$
403
     
0.17
%
Securities taxable(1)
   
2,442,732
     
11,543
     
1.92
%
   
2,480,959
     
11,770
     
1.88
%
   
2,284,578
     
9,407
     
1.67
%
Securities tax-exempt(1) (3)
   
202,321
     
1,402
     
2.81
%
   
208,238
     
1,406
     
2.68
%
   
258,513
     
1,172
     
1.84
%
Federal Reserve Bank and FHLB stock
   
41,144
     
451
     
4.45
%
   
32,903
     
341
     
4.11
%
   
25,026
     
122
     
1.98
%
Loans(2) (3)
   
8,189,520
     
101,000
     
5.00
%
   
8,039,442
     
95,717
     
4.72
%
   
7,530,674
     
73,382
     
3.95
%
Total interest-earning assets
 
$
10,909,932
   
$
114,587
     
4.26
%
 
$
10,801,115
   
$
109,564
     
4.02
%
 
$
11,089,110
   
$
84,486
     
3.09
%
Other assets
   
836,879
                     
855,410
                     
947,578
                 
Total assets
 
$
11,746,811
                   
$
11,656,525
                   
$
12,036,688
                 
Liabilities and stockholders’ equity:
                                                                       
Money market deposit accounts
 
$
2,081,210
   
$
6,264
     
1.22
%
 
$
2,169,192
   
$
2,153
     
0.39
%
 
$
2,720,338
   
$
1,022
     
0.15
%
NOW deposit accounts
   
1,598,834
     
1,433
     
0.36
%
   
1,604,096
     
1,341
     
0.33
%
   
1,583,091
     
192
     
0.05
%
Savings deposits
   
1,781,465
     
142
     
0.03
%
   
1,823,056
     
150
     
0.03
%
   
1,794,549
     
143
     
0.03
%
Time deposits
   
639,645
     
3,305
     
2.10
%
   
432,110
     
448
     
0.41
%
   
494,632
     
485
     
0.40
%
Total interest-bearing deposits
 
$
6,101,154
   
$
11,144
     
0.74
%
 
$
6,028,454
   
$
4,092
     
0.27
%
 
$
6,592,610
   
$
1,842
     
0.11
%
Federal funds purchased
   
44,334
     
538
     
4.92
%
   
56,576
     
575
     
4.03
%
   
-
     
-
     
-
 
Repurchase agreements
   
71,340
     
14
     
0.08
%
   
76,334
     
21
     
0.11
%
   
72,768
     
16
     
0.09
%
Short-term borrowings
   
357,200
     
4,367
     
4.96
%
   
177,533
     
1,914
     
4.28
%
   
-
     
-
     
-
 
Long-term debt
   
7,299
     
47
     
2.61
%
   
3,817
     
21
     
2.18
%
   
13,979
     
87
     
2.52
%
Subordinated debt, net
   
96,966
     
1,334
     
5.58
%
   
97,839
     
1,346
     
5.46
%
   
98,531
     
1,359
     
5.59
%
Junior subordinated debt
   
101,196
     
1,682
     
6.74
%
   
101,196
     
1,424
     
5.58
%
   
101,196
     
549
     
2.20
%
Total interest-bearing liabilities
 
$
6,779,489
   
$
19,126
     
1.14
%
 
$
6,541,749
   
$
9,393
     
0.57
%
 
$
6,879,084
   
$
3,853
     
0.23
%
Demand deposits
   
3,502,489
                     
3,658,965
                     
3,710,124
                 
Other liabilities
   
274,517
                     
290,895
                     
206,292
                 
Stockholders’ equity
   
1,190,316
                     
1,164,916
                     
1,241,188
                 
Total liabilities and stockholders’ equity
 
$
11,746,811
                   
$
11,656,525
                   
$
12,036,688
                 
Net interest income (FTE)
         
$
95,461
                   
$
100,171
                   
$
80,633
         
Interest rate spread
                   
3.12
%
                   
3.45
%
                   
2.86
%
Net interest margin (FTE)
                   
3.55
%
                   
3.68
%
                   
2.95
%
Taxable equivalent adjustment
         
$
395
                   
$
392
                   
$
285
         
Net interest income
         
$
95,066
                   
$
99,779
                   
$
80,348
         

(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 an 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 March 31,
 
Increase (Decrease)
2023 over 2022
 
(In thousands)
 
Volume
   
Rate
   
Total
 
Short-term interest-bearing accounts
 
$
(738
)
 
$
526
   
$
(212
)
Securities taxable
   
682
     
1,454
     
2,136
 
Securities tax-exempt
   
(294
)
   
524
     
230
 
Federal Reserve Bank and FHLB stock
   
112
     
217
     
329
 
Loans
   
6,843
     
20,775
     
27,618
 
Total FTE interest income
 
$
6,605
   
$
23,496
   
$
30,101
 
Money market deposit accounts
 
$
(295
)
 
$
5,537
   
$
5,242
 
NOW deposit accounts
   
2
     
1,239
     
1,241
 
Savings deposits
   
(1
)
   
-
     
(1
)
Time deposits
   
181
     
2,639
     
2,820
 
Federal funds purchased
   
538
     
-
     
538
 
Repurchase agreements
   
-
     
(2
)
   
(2
)
Short-term borrowings
   
4,367
     
-
     
4,367
 
Long-term debt
   
(43
)
   
3
     
(40
)
Subordinated debt, net
   
(22
)
   
(3
)
   
(25
)
Junior subordinated debt
   
-
     
1,133
     
1,133
 
Total FTE interest expense
 
$
4,727
   
$
10,546
   
$
15,273
 
Change in FTE net interest income
 
$
1,878
   
$
12,950
   
$
14,828
 

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 March 31,
 
(In thousands)
 
2023
   
2022
 
Service charges on deposit accounts
 
$
3,548
   
$
3,688
 
Card services income
   
4,845
     
8,695
 
Retirement plan administration fees
   
11,462
     
13,279
 
Wealth management
   
8,087
     
8,640
 
Insurance services
   
3,931
     
3,788
 
Bank owned life insurance income
   
1,878
     
1,654
 
Net securities (losses)
   
(4,998
)
   
(179
)
Other
   
2,656
     
3,094
 
Total noninterest income
 
$
31,409
   
$
42,659
 

Noninterest income for the three months ended March 31, 2023 was $31.4 million, down $2.7 million, or 7.9%, from the fourth quarter of 2022 and down $11.3 million, or 26.4%, from the first quarter of 2022. During the three months ended March 31, 2023, the Company incurred a $5.0 million securities loss on the write-off of a subordinated debt security of a failed bank. Excluding net securities losses, noninterest income for the three months ended March 31, 2023 was $36.4 million, up $2.1 million, or 6.1% from the prior quarter and down $6.4 million, or 15.0% from the first quarter of 2022. The increase from the prior quarter was primarily driven by an increase in retirement plan administration fees driven by seasonal revenues. The decrease from the first quarter of 2022 was driven by lower card services income from the impact of the statutory price cap provisions of the Durbin Amendment of approximately $4.0 million. In addition, the decrease from the prior year was impacted by lower retirement plan administration fees driven by unfavorable market performance and a decrease in certain activity-based fees along with a decrease in wealth management fees driven primarily by a decline in market performance.

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 March 31,
 
(In thousands)
 
2023
   
2022
 
Salaries and employee benefits
 
$
48,155
   
$
45,508
 
Technology and data services
   
9,007
     
8,547
 
Occupancy
   
7,220
     
6,793
 
Professional fees and outside services
   
4,178
     
4,276
 
Office supplies and postage
   
1,628
     
1,424
 
FDIC assessment
   
1,396
     
802
 
Advertising
   
649
     
654
 
Amortization of intangible assets
   
536
     
636
 
Loan collection and other real estate owned, net
   
855
     
384
 
Acquisition expenses
   
618
     
-
 
Other
   
5,080
     
3,119
 
Total noninterest expense
 
$
79,322
   
$
72,143
 

Noninterest expense for the three months ended March 31, 2023 was $79.3 million, down $0.2 million, or 0.2%, from the prior quarter and up $7.2 million, or 10.0%, from the first quarter of 2022. The Company incurred acquisition expenses of $0.6 million and $1.0 million related to the pending merger with Salisbury in the first quarter of 2023 and the fourth quarter of 2022, respectively. Excluding acquisition expenses, noninterest expense for the three months ended March 31, 2023 was $78.7 million, up $0.2 million, or 0.2%, from the prior quarter and up $6.6 million, or 9.1%, from the first quarter of 2022. The increase from the prior quarter was primarily driven by higher salaries and employee benefits due to seasonally higher payroll taxes, seasonally higher stock-based compensation expenses and merit pay increases. In addition, the increase in occupancy costs was due to seasonal costs including utility expenses and the increase in FDIC assessment expense was due to the statutory increase in the FDIC assessment rate. The increase from the prior quarter was partially offset by lower professional fees and outside services driven by seasonal expenses and timing of external services for several tactical and strategic initiatives incurred in the prior quarter and other expenses declined from the seasonally higher linked fourth quarter of 2022. The increase from the first quarter of 2022 was driven by increased salaries and wages, including merit pay increases, higher benefit plan expenses and staff additions. In addition, the increase in technology and data services was due to continued investment in digital platform solutions, the increase in FDIC assessment expense was driven by the statutory increase in the FDIC assessment rate, and other expenses were higher due to the increase in actuarially determined expenses related to the Company’s retirement plans and higher travel and training expenses due to increased activity compared to the pandemic-impacted first quarter of 2022.

Income Taxes

Income tax expense for the three months ended March 31, 2023 was $9.6 million, down $1.0 million from the prior quarter and down $1.6 million from the first quarter of 2022. The effective tax rate was 22.2% for the first quarter of 2023 compared to 22.6% for the fourth quarter of 2022 and 22.2% for the first quarter of 2022.

ANALYSIS OF FINANCIAL CONDITION

Securities

Total securities decreased $25.9 million, or 1.0%, from December 31, 2022 to March 31, 2023. The securities portfolio represents 20.7% of total assets as of March 31, 2023 as compared to 21.1% of total assets as of December 31, 2022.

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

   
March 31, 2023
   
December 31, 2022
 
Mortgage-backed securities:
           
With maturities 15 years or less
   
13
%
   
13
%
With maturities greater than 15 years
   
11
%
   
11
%
Collateral mortgage obligations
   
37
%
   
37
%
Municipal securities
   
15
%
   
15
%
U.S. agency notes
   
21
%
   
21
%
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, the 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 our 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)
 
March 31, 2023
   
December 31, 2022
 
Commercial & industrial
 
$
1,278,291
   
$
1,266,031
 
Commercial real estate
   
2,845,631
     
2,807,941
 
Residential real estate
   
1,651,918
     
1,649,870
 
Indirect auto
   
1,031,315
     
989,587
 
Residential solar
   
920,084
     
856,798
 
Home equity
   
308,219
     
314,124
 
Other consumer
   
229,120
     
265,796
 
Total loans
 
$
8,264,578
   
$
8,150,147
 

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

Total loans increased by $114.4 million, or 5.7% annualized, from December 31, 2022 to March 31, 2023. Commercial and industrial loans increased $12.3 million to $1.28 billion; commercial real estate loans increased $37.7 million to $2.85 billion; and total consumer loans increased $64.5 million to $4.14 billion. Total loans represent approximately 69.8% of assets as of March 31, 2023, as compared to 69.4% as of December 31, 2022.

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

Beginning January 1, 2023, the Company adopted Accounting Standards Updates (“ASU”) 2022-02 Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures which resulted in an insignificant change to the Company’s methodology for estimating the allowance for credit losses on Troubled Debt Restructurings (“TDRs”) since December 31, 2022. The January 1, 2023 decrease in allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $0.6 million, which increased retained earnings by $0.5 million and decreased the deferred tax asset by $0.1 million.

Management considers the accounting policy relating to the allowance for credit losses to be a critical 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 balance 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 and loss given default 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 $100.3 million at March 31, 2023, compared to $100.8 million at December 31, 2022 and $90.0 million at March 31, 2022. The allowance for credit losses as a percentage of loans was 1.21% at March 31, 2023, compared to 1.24% at December 31, 2022 and 1.18% at March 31, 2022. The allowance for credit losses was 538.63% of nonperforming loans at March 31, 2023, compared to 478.72% at December 31, 2022 and 324.25% at March 31, 2022. The allowance for credit losses was 615.63% of nonaccrual loans at March 31, 2023, compared to 584.92% of nonaccrual loans at December 31, 2022 and 348.68% at March 31, 2022. The decrease in allowance for credit losses from December 31, 2022 compared to March 31, 2023 was primarily due to a reduction in expected net losses in the residential solar portfolios, an improvement in economic forecasts and a reduction in allowance on TDRs related to the adoption of ASU 2022-02. These decreases were partially offset by an increase in providing for the increase in loan balances and declining prepayment speeds. The increase in allowance for credit losses from March 31, 2022 to March 31, 2023 was primarily due to an increase in providing for the increase in loan balances.

The provision for loan losses was $3.9 million for three months ended March 31, 2023, compared to $7.7 million in the prior quarter and $0.6 million for the same period in the prior year. Provision expense decreased from the prior quarter due to a lower level of loan growth in the first quarter, generally stable economic forecasts and portfolio mix composition and quality. The increase in provision expense from March 31, 2022, was driven by higher net charge-offs and stable economic conditions, in contrast to improved economic conditions in the CECL forecast in the same period in the prior year. Net charge-offs totaled $3.8 million during the three months ended March 31, 2023, compared to net charge-offs of $3.7 million during the fourth quarter of 2022 and $2.6 million in the first quarter of 2022. Net charge-offs to average loans was 19 bps for the three months ended March 31, 2023, compared to 18 bps for the fourth quarter of 2022 and 14 bps for the three months ended March 31, 2022.

As of March 31, 2023, the unfunded commitment reserve totaled $4.5 million, compared to $5.1 million as of December 31, 2022 and $4.8 million as of March 31, 2022.

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, troubled loans modifications, 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 individual credit loss 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.

   
March 31, 2023
   
December 31, 2022
 
(Dollars in thousands)
 
Amount
   
%
   
Amount
   
%
 
Nonaccrual loans:
                       
Commercial
 
$
7,028
     
43
%
 
$
7,664
     
44
%
Residential
   
7,239
     
45
%
   
4,835
     
28
%
Consumer
   
1,974
     
12
%
   
1,667
     
10
%
Troubled loan modifications (TDRs prior to 2023)
   
43
     
0
%
   
3,067
     
18
%
Total nonaccrual loans
 
$
16,284
     
100
%
 
$
17,233
     
100
%
                                 
Loans over 90 days past due and still accruing:
                               
Commercial
 
$
-
     
-
   
$
4
     
-
 
Residential
   
398
     
17
%
   
771
     
20
%
Consumer
   
1,930
     
83
%
   
3,048
     
80
%
Total loans over 90 days past due and still accruing
 
$
2,328
     
100
%
 
$
3,823
     
100
%
                                 
Total nonperforming loans
 
$
18,612
           
$
21,056
         
OREO
   
105
             
105
         
Total nonperforming assets
 
$
18,717
           
$
21,161
         
                                 
Total nonaccrual loans to total loans
   
0.20
%
           
0.21
%
       
Total nonperforming loans to total loans
   
0.23
%
           
0.26
%
       
Total nonperforming assets to total assets
   
0.16
%
           
0.18
%
       
Total allowance for loan losses to total nonperforming loans
   
538.63
%
           
478.72
%
       
Total allowance for loan losses to nonaccrual loans
   
615.63
%
           
584.92
%
       

Total nonperforming assets were $18.7 million at March 31, 2023, compared to $21.2 million at December 31, 2022 and $27.8 million at March 31, 2022. Nonperforming loans at March 31, 2023 were $18.6 million, or 0.23% of total loans, compared with $21.1 million, or 0.26% of total loans at December 31, 2022 and $27.8 million, or 0.36% of total loans at March 31, 2022. The decrease in nonperforming loans primarily resulted from a reduction in consumer past due loans 90 days past due and still accruing and a reduction in commercial loans in nonaccrual. Total nonaccrual loans were $16.3 million or 0.20% of total loans at March 31, 2023, compared to $17.2 million or 0.21% of total loans at December 31, 2022 and $25.8 million or 0.34% of total loans at March 31, 2022. Past due loans as a percentage of total loans was 0.30% at March 31, 2023, down from 0.33% at December 31, 2022 and up from 0.24% at March 31, 2022.

In addition to nonperforming loans discussed above, the Company has also identified approximately $55.9 million in potential problem loans at March 31, 2023 as compared to $52.0 million at December 31, 2022 and $66.7 million at March 31, 2022. 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 March 31, 2022 is primarily due to the improved economic conditions. Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations. As of March 31, 2023, 8.4% 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 troubled loans modifications 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 $9.68 billion at March 31, 2023, up $185.3 million, or 2.0%, from December 31, 2022. The increase in deposits was concentrated in time and money market accounts with seasonal municipal deposit inflows during the first quarter of 2023. Total average deposits decreased $0.70 billion, or 6.8%, from the same period last year. The decrease was driven primarily by a decrease of $207.6 million, or 5.6%, in demand deposits, combined with a decrease in interest-bearing deposits of $491.5 million, or 7.5%, due to decreases in money market accounts, partially offset by an increase in time accounts. The decrease in average balances was due primarily to larger commercial customers taking advantage of higher yielding investment opportunities in both the Company’s wealth management solutions as well as other attractive offerings in the market. As of March 31, 2023 and December 31, 2022 the estimated amounts of uninsured deposits based on the same methodologies and assumptions used for the bank regulatory reporting was $3.7 billion and $3.6 billion, respectively.

Borrowed Funds

The Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $475.2 million at March 31, 2023 compared to $585.0 million at December 31, 2022. Long-term debt was $29.8 million at March 31, 2023 compared to $4.8 million at December 31, 2022.

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 (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated debt issuance cost of $2.2 million are being amortized on a straight-line basis into interest expense over five years. As of March 31, 2023 and December 31, 2022 the subordinated debt net of unamortized issuance costs was $97.0 million and $96.9 million, respectively. The Company repurchased $2.0 million of the subordinated notes during the year ended December 31, 2022 at a discount of $0.1 million.

Capital Resources

Stockholders’ equity of $1.21 billion represented 10.23% of total assets at March 31, 2023 compared with $1.17 billion, or 10.00% of total assets, as of December 31, 2022. Stockholders’ equity increased $38.1 million from December 31, 2022 driven by net income of $33.7 million for the three months ending March 31, 2023 and a $16.1 million increase in accumulated other comprehensive income due primarily to the change in market value of securities available for sale, partially offset by dividends declared of $12.9 million. The deferred tax asset related to the unrealized losses in investment securities decreased $5.1 million from December 31, 2022.

The Company did not purchase shares of its common stock during the three months ended March 31, 2023. As of March 31, 2023, there were 1,600,000 shares available for repurchase under the Company's share repurchase plan, which was authorized on December 20, 2021 and is set to expire on December 31, 2023.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at March 31, 2023 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
 
March 31, 2023
   
December 31, 2022
 
Tier 1 leverage ratio
   
10.43
%
   
10.32
%
Common equity tier 1 capital ratio
   
12.28
%
   
12.12
%
Tier 1 capital ratio
   
13.34
%
   
13.19
%
Total risk-based capital ratio
   
15.53
%
   
15.38
%
Cash dividends as a percentage of net income
   
38.24
%
   
32.74
%
Per common share:
               
Book value
 
$
28.24
   
$
27.38
 
Tangible book value(1)
 
$
21.52
   
$
20.65
 
Tangible equity ratio(2)
   
7.99
%
   
7.73
%

(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 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) was deferred and was phased into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, the Company was 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, was also phased 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 (i.e. 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 March 31, 2023 balance sheet position:

Interest Rate Sensitivity Analysis
 
 
Change in interest rates
(in bps)
  
Percent change in
net interest income
  
+200    
2.08
%
+100    
1.31
%
-200    
(2.86
%)

The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of short to mid-term interest rates which are heavily driven by inflationary pressures and FOMC monetary policy. In response to the economic impact of the pandemic, the federal funds rate was reduced to near zero in March 2020, term interest rates fell sharply across the yield curve and the Company reduced deposit rates. Post-pandemic, inflationary pressures have resulted in a higher overall yield curve with Fed Funds increases of 425 bps in 2022. Expectations for continued increases to short-term interest rates in 2023 have been tempered by weakness in the financial sector of the economy. With deposit rates coming off their historic lows, the Company continues to focus on managing deposit expense in an environment with elevated interest rates and heightened demand for deposits.

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 March 31, 2023, the Company’s Basic Surplus measurement was 14.6% of total assets, or $1.73 billion, as compared to the December 31, 2022 Basic Surplus of 13.2%, or $1.55 billion, and was above the Company’s minimum of 5% (calculated at $592.0 million and $587.0 million of period end total assets at March 31, 2023 and December 31, 2022, respectively) set forth in its liquidity policies.

At March 31, 2023 and December 31, 2022, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $457.8 million and $443.8 million, respectively. At March 31, 2023 and December 31, 2022, the Bank had $8.0 million 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 $1.16 billion at March 31, 2023 and $1.17 billion at December 31, 2022. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $835.7 million and $898.1 million at March 31, 2023 and December 31, 2022, 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 $1.87 billion at March 31, 2023 and $1.92 billion at December 31, 2022. 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 March 31, 2023 and December 31, 2022, the Bank had the capacity to borrow $654.2 million and $622.7 million, respectively, from this program. The Company’s internal policies authorize borrowings up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $2.48 billion at March 31, 2023 and $2.41 billion at December 31, 2022.

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 2023. 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 during the COVID-19 pandemic 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 March 31, 2023, 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 March 31, 2023, approximately $91.4 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 March 31, 2023, 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.

ITEM 1A.
RISK FACTORS

There are no material changes to the risk factors as previously discussed in Part I, Item 1A. of our 2022 Annual Report on Form 10-K, except as described below.

Risks Related to Our Business and Industry

Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.

The recent high-profile bank failures have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks like the Company. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company's liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve and the FDIC have made statements ensuring that depositors of the recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.

Rising interest rates have decreased the value of the Company's held-to-maturity securities portfolio, and the Company would realize losses if it were required to sell such securities to meet liquidity needs.

As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company's, resulting in unrealized losses embedded in the held-to-maturity portion of U.S. banks' securities portfolios. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company's capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.

Risks Related to Legal, Governmental and Regulatory Changes

Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company's expenses and affect the Company's operations.

The Company also anticipates increased regulatory scrutiny - in the course of routine examinations and otherwise - and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company's costs of doing business and reduce its profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits. The cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

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 10th day of May 2023.

 
NBT BANCORP INC.

   
By:
/s/ Scott A. Kingsley

 
Scott A. Kingsley

 
Chief Financial Officer


46


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: May 10, 2023
 
     
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: May 10, 2023
 
     
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 March 31, 2023, 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
 
 
May 10, 2023
 

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 March 31, 2023, 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
 
 
May 10, 2023
 
 
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.