NBT BANCORP INC 10-Q

Item 1 – FINANCIAL STATEMENTS NBT Bancorp Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) September 30, December 31, 2021 2020 (In thousands, except share and per share data) Assets Cash and due from banks $ 215,032 $ 159,995 Short-term interest-bearing accounts 1,131,074 512,686 Equity securities, at fair value 33,013 30,737 Securities available for sale, at fair value 1,576,030 1,348,698 Securities held to maturity (fair value $ 689,129 and $ 636,827 , respectively) 683,103 616,560 Federal Reserve and Federal Home Loan Bank stock 25,161 27,353 Loans held for sale 1,024 1,119 Loans 7,566,442 7,498,885 Less allowance for loan losses 93,000 110,000 Net loans $ 7,473,442 $ 7,388,885 Premises and equipment, net 71,928 74,206 Goodwill 280,541 280,541 Intangible assets, net 9,578 11,735 Bank owned life insurance 227,451 186,434 Other assets 267,034 293,957 Total assets $ 11,994,411 $ 10,932,906 Liabilities Demand (noninterest bearing) $ 3,748,162 $ 3,241,123 Savings, NOW and money market 5,894,743 5,207,090 Time 552,273 633,479 Total deposits $ 10,195,178 $ 9,081,692 Short-term borrowings 99,715 168,386 Long-term debt 14,020 39,097 Subordinated debt, net 98,380 98,052 Junior subordinated debt 101,196 101,196 Other liabilities 244,465 256,865 Total liabilities $ 10,752,954 $ 9,745,288 Stockholders’ equity Preferred stock, $ 0.01 par value. Authorized 2,500,000 shares at September 30, 2021 and December 31, 2020 $ - $ - Common stock, $ 0.01 par value. Authorized 100,000,000 shares at September 30, 2021 and December 31, 2020 ; issued 49,651,493 at September 30, 2021 and December 31, 2020 497 497 Additional paid-in-capital 577,222 578,082 Retained earnings 831,017 749,056 Accumulated other comprehensive (loss) income ( 14,492 ) 417 Common stock in treasury, at cost, 6,313,800 and 6,022,399 shares at September 30, 2021 and December 31, 2020, respectively ( 152,787 ) ( 140,434 ) Total stockholders’ equity $ 1,241,457 $ 1,187,618 Total liabilities and stockholders’ equity $ 11,994,411 $ 10,932,906 See accompanying notes to unaudited interim consolidated financial statements. 1 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Income (unaudited) Three Months Ended September 30, Nine Months Ended September 30 , 2021 2020 2021 2020 (In thousands, except per share data) Interest, fee and dividend income Interest and fees on loans $ 72,817 $ 74,998 $ 222,705 $ 230,996 Securities available for sale 5,898 5,603 17,204 16,956 Securities held to maturity 2,976 3,734 9,454 11,751 Other 524 659 1,206 2,138 Total interest, fee and dividend income $ 82,215 $ 84,994 $ 250,569 $ 261,841 Interest expense Deposits $ 2,548 $ 4,267 $ 8,582 $ 18,183 Short-term borrowings 28 446 130 3,215 Long-term debt 89 398 301 1,184 Subordinated debt 1,359 1,375 4,077 1,503 Junior subordinated debt 517 565 1,572 2,186 Total interest expense $ 4,541 $ 7,051 $ 14,662 $ 26,271 Net interest income $ 77,674 $ 77,943 $ 235,907 $ 235,570 Provision for loan losses ( 3,342 ) 3,261 ( 11,354 ) 51,741 Net interest income after provision for loan losses $ 81,016 $ 74,682 $ 247,261 $ 183,829 Noninterest income Service charges on deposit accounts $ 3,489 $ 3,087 $ 9,544 $ 9,613 ATM and debit card fees 8,172 7,194 23,343 19,184 Retirement plan administration fees 10,495 9,685 30,372 26,840 Wealth management fees 8,783 7,695 25,099 21,791 Insurance services 3,720 3,742 10,689 11,303 Bank owned life insurance income 1,548 1,255 4,588 4,010 Net securities (losses) gains ( 100 ) 84 568 ( 548 ) Other 4,222 4,985 12,480 15,968 Total noninterest income $ 40,329 $ 37,727 $ 116,683 $ 108,161 Noninterest expense Salaries and employee benefits $ 44,190 $ 40,451 $ 128,462 $ 120,918 Occupancy 5,117 5,294 16,281 16,354 Data processing and communications 3,881 4,058 13,039 12,370 Professional fees and outside services 3,784 3,394 11,403 10,694 Equipment 5,577 5,073 16,247 14,494 Office supplies and postage 1,364 1,530 4,478 4,621 FDIC expense 772 645 2,243 1,949 Advertising 583 530 1,502 1,461 Amortization of intangible assets 663 856 2,157 2,573 Loan collection and other real estate owned, net 706 620 1,959 2,365 Other 6,232 3,857 14,405 14,730 Total noninterest expense $ 72,869 $ 66,308 $ 212,176 $ 202,529 Income before income tax expense $ 48,476 $ 46,101 $ 151,768 $ 89,461 Income tax expense 11,043 10,988 34,193 19,267 Net income $ 37,433 $ 35,113 $ 117,575 $ 70,194 Earnings per share Basic $ 0.86 $ 0.80 $ 2.71 $ 1.61 Diluted $ 0.86 $ 0.80 $ 2.69 $ 1.60 See accompanying notes to unaudited interim consolidated financial statements. 2 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (unaudited) Three Months Ended September 30, Nine Months Ended September 30 , 2021 2020 2021 2020 (In thousands) Net income $ 37,433 $ 35,113 $ 117,575 $ 70,194 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized net holding (losses) gains arising during the period, gross $ ( 7,426 ) $ ( 1,263 ) $ ( 21,329 ) $ 26,509 Tax effect 1,857 316 5,332 ( 6,627 ) Unrealized net holding (losses) gains arising during the period, net $ ( 5,569 ) $ ( 947 ) $ ( 15,997 ) $ 19,882 Reclassification adjustment for net gains in net income, gross $ - $ - $ - $ ( 3 ) Tax effect - - - 1 Reclassification adjustment for net gains in net income, net $ - $ - $ - $ ( 2 ) Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross $ 149 $ 157 $ 434 $ 495 Tax effect ( 38 ) ( 39 ) ( 109 ) ( 124 ) Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net $ 111 $ 118 $ 325 $ 371 Total securities available for sale, net $ ( 5,458 ) $ ( 829 ) $ ( 15,672 ) $ 20,251 Cash flow hedges: Unrealized losses on derivatives (cash flow hedges), gross $ - $ - $ - $ ( 274 ) Tax effect - - - 69 Unrealized losses on derivatives (cash flow hedges), net $ - $ - $ - $ ( 205 ) Reclassification of net unrealized losses on cash flow hedges to interest (income), gross $ - $ 101 $ 21 $ 192 Tax effect - ( 25 ) ( 5 ) ( 48 ) Reclassification of net unrealized losses on cash flow hedges to interest (income), net $ - $ 76 $ 16 $ 144 Total cash flow hedges, net $ - $ 76 $ 16 $ ( 61 ) Pension and other benefits: Amortization of prior service cost and actuarial losses, gross $ 344 $ 381 $ 996 $ 1,143 Tax effect ( 86 ) ( 95 ) ( 249 ) ( 286 ) Amortization of prior service cost and actuarial losses, net $ 258 $ 286 $ 747 $ 857 Total pension and other benefits, net $ 258 $ 286 $ 747 $ 857 Total other comprehensive (loss) income $ ( 5,200 ) $ ( 467 ) $ ( 14,909 ) $ 21,047 Comprehensive income $ 32,233 $ 34,646 $ 102,666 $ 91,241 See accompanying notes to unaudited interim consolidated financial statements. 3 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity (unaudited) Common Stock Additional Paid-in- Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Common Stock in Treasury Total (In thousands, except share and per share data) Balance at June 30, 2021 $ 497 $ 576,732 $ 805,722 $ ( 9,292 ) $ ( 148,603 ) $ 1,225,056 Net income - - 37,433 - - 37,433 Cash dividends - $ 0.28 per share - - ( 12,138 ) - - ( 12,138 ) Purchase of 119,342 treasury shares - - - - ( 4,212 ) ( 4,212 ) Net issuance of 1,672 shares to employee and other stock plans - ( 73 ) - - 28 ( 45 ) Stock-based compensation - 563 - - - 563 Other comprehensive (loss) - - - ( 5,200 ) - ( 5,200 ) Balance at September 30 , 2021 $ 497 $ 577,222 $ 831,017 $ ( 14,492 ) $ ( 152,787 ) $ 1,241,457 Balance at June 30, 2020 $ 497 $ 577,197 $ 703,322 $ 2,488 $ ( 140,852 ) $ 1,142,652 Net income - - 35,113 - - 35,113 Cash dividends - $ 0.27 per share - - ( 11,785 ) - - ( 11,785 ) Net issuance of 3,030 shares to employee and other stock plans - ( 108 ) - - 58 ( 50 ) Stock-based compensation - 648 - - - 648 Other comprehensive (loss) - - - ( 467 ) - ( 467 ) Balance at September 30 , 2020 $ 497 $ 577,737 $ 726,650 $ 2,021 $ ( 140,794 ) $ 1,166,111 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 , 2020 $ 497 $ 578,082 $ 749,056 $ 417 $ ( 140,434 ) $ 1,187,618 Net income - - 117,575 - - 117,575 Cash dividends - $ 0.82 per share - - ( 35,614 ) - - ( 35,614 ) Purchase of 400,000 treasury shares - - - - ( 14,083 ) ( 14,083 ) Net issuance of 108,599 shares to employee and other stock plans - ( 4,679 ) - - 1,730 ( 2,949 ) Stock-based compensation - 3,819 - - - 3,819 Other comprehensive (loss) - - - ( 14,909 ) - ( 14,909 ) Balance at September 30 , 2021 $ 497 $ 577,222 $ 831,017 $ ( 14,492 ) $ ( 152,787 ) $ 1,241,457 Balance at December 31, 2019 $ 497 $ 576,708 $ 696,214 $ ( 19,026 ) $ ( 133,996 ) $ 1,120,397 Net income - - 70,194 - - 70,194 Cumulative effect adjustment for ASU 2016-13 implementation - - ( 4,339 ) - - ( 4,339 ) Cash dividends - $ 0.81 per share - - ( 35,419 ) - - ( 35,419 ) Purchase of 263,507 treasury shares - - - - ( 7,980 ) ( 7,980 ) Net issuance of 78,276 shares to employee and other stock plans - ( 2,928 ) - - 1,182 ( 1,746 ) Stock-based compensation - 3,957 - - - 3,957 Other comprehensive income - - - 21,047 - 21,047 Balance at September 30 , 2020 $ 497 $ 577,737 $ 726,650 $ 2,021 $ ( 140,794 ) $ 1,166,111 See accompanying notes to unaudited interim consolidated financial statements. 4 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, 2021 2020 (In thousands) Operating activities Net income $ 117,575 $ 70,194 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses ( 11,354 ) 51,741 Depreciation and amortization of premises and equipment 7,339 7,378 Net amortization on securities 4,460 2,812 Amortization of intangible assets 2,157 2,573 Amortization of operating lease right-of-use assets 5,401 5,549 Excess tax benefit on stock-based compensation ( 321 ) ( 188 ) Stock-based compensation expense 3,819 3,957 Bank owned life insurance income ( 4,588 ) ( 4,010 ) Amortization of subordinated debt issuance costs 328 121 Proceeds from sale of loans held for sale 48,371 153,732 Originations of loans held for sale ( 47,996 ) ( 144,105 ) Net gains on sale of loans held for sale ( 280 ) ( 1,892 ) Net security (gains) losses ( 568 ) 548 Net gains on sale of other real estate owned ( 44 ) ( 243 ) Net change in other assets and other liabilities 10,951 ( 40,760 ) Net cash provided by operating activities $ 135,250 $ 107,407 Investing activities Net cash used in acquisitions $ - $ ( 3,899 ) Securities available for sale: Proceeds from maturities, calls and principal paydowns 308,688 239,622 Purchases ( 560,884 ) ( 437,827 ) Securities held to maturity: Proceeds from maturities, calls and principal paydowns 149,200 181,143 Proceeds from sales - 996 Purchases ( 216,205 ) ( 215,327 ) Equity securities: Proceeds from calls 1,000 - Other: Net increase in loans ( 73,344 ) ( 436,630 ) Proceeds from Federal Home Loan Bank stock redemption 2,355 58,799 Purchases of Federal Reserve Bank and Federal Home Loan Bank stock ( 163 ) ( 42,663 ) Proceeds from settlement of bank owned life insurance 3,571 531 Purchases of bank owned life insurance ( 40,000 ) - Purchases of premises and equipment, net ( 5,007 ) ( 4,512 ) Proceeds from sales of other real estate owned 784 1,113 Net cash used in investing activities $ ( 430,005 ) $ ( 658,654 ) Financing activities Net increase in deposits $ 1,113,486 $ 1,370,363 Net decrease in short-term borrowings ( 68,671 ) ( 471,803 ) Proceeds from issuance of subordinated debt - 100,000 Payment of subordinated debt issuance costs - ( 2,178 ) Repayments of long-term debt ( 25,077 ) ( 85 ) Proceeds from the issuance of shares to employee and other stock plans 112 184 Cash paid by employer for tax-withholdings on stock issuance ( 1,973 ) ( 1,218 ) Purchase of treasury stock ( 14,083 ) ( 7,980 ) Cash dividends ( 35,614 ) ( 35,419 ) Net cash provided by financing activities $ 968,180 $ 951,864 Net increase in cash and cash equivalents $ 673,425 $ 400,617 Cash and cash equivalents at beginning of period 672,681 216,843 Cash and cash equivalents at end of period $ 1,346,106 $ 617,460 5 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (continued) Nine Months Ended September 30, 2021 2020 Supplemental disclosure of cash flow information Cash paid during the period for: Interest expense $ 17,161 $ 26,373 Income taxes paid, net of refund 39,025 38,137 Noncash investing activities: Loans transferred to other real estate owned $ 141 $ 1,017 Acquisitions: Fair value of assets acquired $ - $ 3,328 See accompanying notes to unaudited interim consolidated financial statements. 6 Table of Contents NBT Bancorp Inc. and Subsidiaries Notes to Unaudited Interim Consolidated Financial Statements September 30, 2021 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, the southern coastal Maine area 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”). The interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2020 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 December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this ASU were effective for the Company on January 1, 2021, and interim periods within those fiscal years. The adoption did not have a material impact on the consolidated financial statements and related disclosures. Accounting Standards Issued Not Yet Adopted In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . On January 7, 2021, the FASB issued ASU 2021-01, which refines the scope of Accounting Standards Codification 848 (“ASC 848”) and clarifies some of its guidance. ASU 2020-04 and related amendments provide temporary optional expedients and exceptions to the existing guidance for applying GAAP to affected contract modifications and hedge accounting relationships in the transition away from the London Interbank Offered Rate (“LIBOR”) or other interbank offered rate on financial reporting. The guidance also allows a one-time election to sell and/or reclassify to available for sale (“AFS”) or trading held to maturity (“HTM”) debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective March 12, 2020 through December 31, 2022 and permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements and does not expect it will have a material impact on the consolidated financial statements . 7 Table of Contents 4. Securities The amortized cost, estimated fair value and unrealized gains (losses) of AFS securities are as follows: (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value As of September 30 , 2021 Federal agency $ 248,462 $ - $ 5,496 $ 242,966 State & municipal 84,636 138 753 84,021 Mortgage-backed: Government-sponsored enterprises 575,884 10,907 3,959 582,832 U.S. government agency securities 65,762 1,710 109 67,363 Collateralized mortgage obligations: Government-sponsored enterprises 438,255 5,002 2,004 441,253 U.S. government agency securities 115,873 1,774 189 117,458 Corporate 38,500 1,637 - 40,137 Total AFS securities $ 1,567,372 $ 21,168 $ 12,510 $ 1,576,030 As of December 31 , 2020 Federal agency $ 245,590 $ 59 $ 2,052 $ 243,597 State & municipal 42,550 630 - 43,180 Mortgage-backed: Government-sponsored enterprises 521,448 17,079 22 538,505 U.S. government agency securities 55,049 2,332 47 57,334 Collateralized mortgage obligations: Government-sponsored enterprises 311,710 7,549 58 319,201 U.S. government agency securities 114,864 3,739 - 118,603 Corporate 27,500 778 - 28,278 Total AFS securities $ 1,318,711 $ 32,166 $ 2,179 $ 1,348,698 There was no allowance for credit losses on AFS securities as of September 30, 2021 and December 31, 2020. During the three and nine months ended September 30, 2021 there were no gains or losses reclassified out of accumulated other comprehensive income (loss) (“AOCI”) and into earnings. During the three months ended September 30, 2020 there were no gains or losses reclassified out of AOCI and into earnings. During the nine months ended September 30, 2020, there were $ 3 thousand of gross realized gains reclassified out of AOCI and into earnings. Included in net realized gains (losses) on AFS securities, the Company recorded gains from calls of approximately $ 3 thousand for the nine months ended September 30, 2020. The amortized cost, estimated fair value and unrealized gains (losses) of HTM securities are as follows: (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value As of September 30 , 2021 Federal agency $ 100,000 $ - $ 3,821 $ 96,179 Mortgage-backed: Government-sponsored enterprises 121,040 2,851 568 123,323 U.S. government agency securities 9,121 659 - 9,780 Collateralized mortgage obligations: Government-sponsored enterprises 75,852 3,050 - 78,902 U.S. government agency securities 54,587 679 341 54,925 State & municipal 322,503 5,021 1,504 326,020 Total HTM securities $ 683,103 $ 12,260 $ 6,234 $ 689,129 As of December 31 , 2020 Federal agency $ 100,000 $ - $ 1,658 $ 98,342 Mortgage-backed: Government-sponsored enterprises 107,914 4,583 - 112,497 U.S. government agency securities 11,533 979 - 12,512 Collateralized mortgage obligations: Government-sponsored enterprises 103,105 4,477 - 107,582 U.S. government agency securities 79,145 3,950 - 83,095 State & municipal 214,863 7,953 17 222,799 Total HTM securities $ 616,560 $ 21,942 $ 1,675 $ 636,827 8 Table of Contents At September 30, 2021 and December 31, 2020, all of the mortgaged-backed HTM securities were comprised of U.S. government agency and Government-sponsored enterprises securities. There was no allowance for credit losses on HTM securities as of September 30, 2021 and December 31, 2020. Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $ 14 thousand for the three months ended September 30, 2021 and approximately $ 29 thousand for the nine months ended September 30, 2021. Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $ 11 thousand for the three months ended September 30, 2020 and approximately $ 15 thousand for the nine months ended September 30, 2020. There were no sales of HTM securities during the three and nine months ended September 30, 2021. During the nine months ended September 30, 2020, the Company sold HTM securities with an amortized cost of $ 1.0 million and resulted in a realized loss of $ 1 thousand. Due to significant deterioration in the creditworthiness of the issuer of the HTM securities, the circumstances caused the Company to change its intent to hold the HTM securities sold to maturity, which did not affect the Company’s intent to hold the remainder of the HTM portfolio to maturity. AFS and HTM securities with amortized costs totaling $ 1.6 billion at September 30, 2021 and $ 1.4 billion at December 31, 2020 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at September 30, 2021 and December 31, 2020, AFS and HTM securities with an amortized cost of $ 149.2 million and $ 305.2 million, respectively, were pledged as collateral for securities sold under repurchase agreements. The following tables set forth information with regard to gains and (losses) on equity securities: Three Months Ended September 30, (In thousands) 2021 2020 Net (losses) and gains recognized on equity securities $ ( 114 ) $ 73 Less: Net (losses) and gains recognized on equity securities sold during the period - - Unrealized (losses) and gains recognized on equity securities still held $ ( 114 ) $ 73 Nine Months Ended September 30, (In thousands) 2021 2020 Net gains and (losses) recognized on equity securities $ 539 $ ( 565 ) Less: Net gains and (losses) recognized on equity securities sold during the period - - Unrealized gains and (losses) recognized on equity securities still held $ 539 $ ( 565 ) As of September 30, 2021 and December 31, 2020, the carrying value of equity securities without readily determinable fair values was $ 1.0 million and $ 2.0 million, respectively. The Company performed a qualitative assessment to determine whether the investments were impaired and identified no areas of concern as of September 30, 2021 and 2020. There were no impairments, downward or upward adjustments recognized for equity securities without readily determinable fair values during the three and nine months ended September 30, 2021 and 2020. The following table sets forth information with regard to contractual maturities of debt securities at September 30, 2021: (In thousands) Amortized Cost Estimated Fair Value AFS debt securities: Within one year $ 1,258 $ 1,262 From one to five years 56,017 56,596 From five to ten years 642,112 639,238 After ten years 867,985 878,934 Total AFS debt securities $ 1,567,372 $ 1,576,030 HTM debt securities: Within one year $ 97,203 $ 97,239 From one to five years 56,120 57,485 From five to ten years 226,478 227,026 After ten years 303,302 307,379 Total HTM debt securities $ 683,103 $ 689,129 9 Table of Contents Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Except for U.S. government securities and government-sponsored enterprises securities , there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at September 30, 2021 and December 31, 2020. 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 at September 30, 2021, segregated according to the length of time the securities had been in a continuous unrealized loss position: Less Than 12 Months 12 Months or Longer Total (In thousands) Fair Value Unrealized Losses Number of Positions Fair Value Unrealized Losses Number of Positions Fair Value Unrealized Losses Number of Positions As of September 30 , 2021 AFS securities: Federal agency $ 101,674 $ ( 1,799 ) 7 $ 141,292 $ ( 3,697 ) 9 $ 242,966 $ ( 5,496 ) 16 State & municipal 68,492 ( 753 ) 45 - - - 68,492 ( 753 ) 45 Mortgage-backed 239,779 ( 4,060 ) 18 761 ( 8 ) 4 240,540 ( 4,068 ) 22 Collateralized mortgage obligations 247,618 ( 1,793 ) 24 12,816 ( 400 ) 2 260,434 ( 2,193 ) 26 Total securities with unrealized losses $ 657,563 $ ( 8,405 ) 94 $ 154,869 $ ( 4,105 ) 15 $ 812,432 $ ( 12,510 ) 109 HTM securities: Federal agency $ - $ - - $ 96,179 $ ( 3,821 ) 4 $ 96,179 $ ( 3,821 ) 4 Mortgage-backed 56,996 ( 568 ) 5 - - - 56,996 ( 568 ) 5 Collateralized mortgage obligation 31,809 ( 341 ) 5 - - - 31,809 ( 341 ) 5 State & municipal 67,806 ( 1,381 ) 50 3,453 ( 123 ) 4 71,259 ( 1,504 ) 54 Total securities with unrealized losses $ 156,611 $ ( 2,290 ) 60 $ 99,632 $ ( 3,944 ) 8 $ 256,243 $ ( 6,234 ) 68 As of December 31 , 2020 AFS securities: Federal agency $ 148,537 $ ( 2,052 ) 10 $ - $ - - $ 148,537 $ ( 2,052 ) 10 Mortgage-backed 47,269 ( 60 ) 3 800 ( 9 ) 4 48,069 ( 69 ) 7 Collateralized mortgage obligations 17,837 ( 58 ) 6 - - - 17,837 ( 58 ) 6 Total securities with unrealized losses $ 213,643 $ ( 2,170 ) 19 $ 800 $ ( 9 ) 4 $ 214,443 $ ( 2,179 ) 23 HTM securities: Federal agency $ 98,342 $ ( 1,658 ) 4 $ - $ - - $ 98,342 $ ( 1,658 ) 4 State & municipal 4,805 ( 17 ) 5 - - - 4,805 ( 17 ) 5 Total securities with unrealized losses $ 103,147 $ ( 1,675 ) 9 $ - $ - - $ 103,147 $ ( 1,675 ) 9 The Company does not believe the AFS securities that were in an unrealized loss position as of September 30, 2021 and December 31, 2020, which consisted of 109 and 23 individual securities, respectively, represented a credit loss impairment. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. As of September 30, 2021 and December 31, 2020, 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 $ 3.3 million at September 30, 2021 and December 31, 2020 and is excluded from the estimate of credit losses and reported in the financial statement line for other assets. 10 Table of Contents None of the bank’s HTM debt securities were past due or on non-accrual status as of September 30, 2021 and December 31, 2020. There was no accrued interest reversed against interest income for the three and nine months ended September 30, 2021 or the year-ended December 31, 2020 as all securities remained on accrual status. In addition, there were no collateral-dependent HTM debt securities as of September 30, 2021 and December 31, 2020. As of September 30, 2021 and December 31, 2020, 53 % and 65 %, respectively, of the Company’s HTM debt securities were issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Therefore, the Company did not record an allowance for credit losses for these securities as of September 30, 2021 and December 31, 2020. The remaining HTM debt securities at September 30, 2021 and December 31, 2020 were comprised of state and municipal obligations with bond ratings of A to AAA. Utilizing the Current Expected Credit Losses (“CECL”) approach, the Company determined that the expected credit loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit loss was recorded as of September 30, 2021 and December 31, 2020. AIR on HTM debt securities totaled $ 2.6 million and $ 2.7 million at September 30, 2021 and December 31, 2020, respectively, and is excluded from the estimate of credit losses and reported in the other assets financial statement line. 5. Allowance for Credit Losses and Credit Quality of Loans The allowance for credit losses totaled $ 93.0 million at September 30, 2021, compared to $ 110.0 million at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.23 % at September 30, 2021, compared to 1.47 % at December 31, 2020. The Day 1 increase in the allowance for credit loss on loans relating to adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments was $ 3.0 million, which decreased retained earnings by $ 2.3 million and increased the deferred tax asset by $ 0.7 million. The September 30, 2021, June 30, 2021, December 31, 2020, September 30, 2020 and Day 1 allowance for credit losses calculation incorporated a 6-quarter forecast period to account for forecast economic conditions under each scenario utilized in the measurement. For periods beyond the 6-quarter forecast, the model reverts to long-term economic conditions over a 4-quarter reversion period on a straight-line basis. The Company considers a baseline, upside and downside economic forecast in measuring the allowance. The quantitative model as of September 30, 2021 incorporated a baseline economic outlook along with alternative upside and downside scenarios sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment initially above pre-COVID-19 levels although steadily improving to below 4% mid-way through the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the fourth quarter of 2021 at approximately 10% and steadily fall back down to normalized levels by the end of 2022. Other utilized economic variables showed mixed changes in their respective forecasts, with retail sales and business output declining from the prior quarter and housing starts increasing from the prior quarter’s forecast. Key assumptions in the baseline economic outlook included abatement of the coronavirus (“COVID-19”) pandemic in November, additional legislation focused on infrastructure and social benefits programs enacted by the end of 2021 totaling $2.5 trillion, and full employment reached by the end of 2022. The alternative downside scenario assumed deteriorated economic and epidemiological conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 6.2% in the third quarter of 2021 to a peak of 8.2% in the fourth quarter of 2022, remaining above 7% for the entire forecast period. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with a swift return to full employment by the first quarter of 2022 and with northeast unemployment moving down to 3.1% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of September 30, 2021. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in the second and third quarters of 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government sponsored loan programs. The Company also continued to monitor the level of criticized and classified loans in the third quarter of 2021 compared to the level contemplated by the model during similar, historical economic conditions, and an adjustment was made to estimate potential additional losses above modeled losses. Additionally, a qualitative adjustment was made for isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates. These factors were considered through separate quantitative processes and incorporated into the estimate of current expected credit losses at September 30, 2021. 11 Table of Contents The quantitative model as of June 30, 2021 incorporated a baseline economic outlook along with alternative upside and downside scenarios sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment above pre-COVID-19 levels for the entire forecast period, though steadily improving to below 4% by the end of 2022. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start in the second half of 2021 in the high single digits (9.86%) and steadily fall back down to normalized levels by the end of 2022. Other utilized economic variables showed mixed changes in their respective forecasts, with retail sales and business output being relatively unchanged and housing starts lowered from the prior quarter forecast. Key assumptions in the baseline economic outlook included herd “resiliency” expected by summer-2021, additional legislation focused on infrastructure and social benefits enacted in the second half of 2021 and high, near-term GDP growth expectations. The alternative downside scenario assumed deteriorated economic and epidemiological conditions from the baseline outlook. Under this scenario, northeast unemployment rose from 8.1% in the third quarter of 2021 to a peak of 8.7% in the second quarter of 2022, remaining above 8% for the entire forecast period. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with a swift return to full employment by the first quarter of 2022 and down to a low of 3.5% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of June 30, 2021. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in the second and third quarters of 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government sponsored loan programs. The Company also continued to identify a slightly higher level of criticized and classified loans in the second quarter of 2021 than those contemplated by the model during similar, historical economic conditions for which an adjustment was made to estimate potential additional losses above modeled losses. Additionally, a qualitative adjustment was made for isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates. These factors were considered through separate quantitative processes and incorporated into the estimate of current expected credit losses at June 30, 2021. The quantitative model as of December 31, 2020 incorporated a baseline economic outlook, along with alternative upside and downside scenarios sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment above pre-COVID-19 levels for the entire forecast period, though steadily improving, before returning to low single digits by the end of 2023. Northeast GDP’s annual growth was expected to start 2021 in the low to mid-single digits, with a peak growth rate of 8% in the fourth quarter of 2021 and steadily falling back down to normalized levels through 2023 and 2024. Other utilized economic variables show improvement in their respective forecasts, namely business output. Key assumptions in the baseline economic outlook included an additional stimulus package passed at the same timing and a comparable level to that of the actual $900 billion COVID-19 relief package passed in December 2020 along with no significant secondary surge in COVID-19 cases or pandemic-related business closures. The alternative downside scenario assumed deteriorated economic and epidemiological conditions from the baseline outlook. In the same way, the alternative upside scenario assumed a faster economic recovery and more effective management of the COVID-19 virus from the baseline outlook. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2020. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government-sponsored loan programs. The commercial & industrial and consumer segment models were based upon percent change in unemployment with modeled values as of December 31, 2020 well outside the observed historical experience. Therefore, adjustments were required to produce outputs more aligned with default expectations given the forecast economic environment. Additionally, the Company identified a slightly higher level of criticized and classified loans during 2020 than those contemplated by the model during similar economic conditions in the past for which an adjustment was made for estimated expected additional losses above modeled output. These factors were considered through a separate quantitative process and incorporated into the estimate for allowance for credit losses at December 31, 2020. On August 3, 2020, the Federal Financial Institutions Examination Council (“FFIEC”) issued a joint statement on additional loan accommodations related to COVID-19. The joint statement clarifies that for loan modifications in which Section 4013 is being applied, subsequent modifications could also be eligible under section 4013 (“Section 4013”) of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Accordingly, the Company is offering modifications made in response to COVID-19 to borrowers who were current and otherwise not past due in accordance with the criteria stated in Section 4013. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment. Accordingly, the Company did not account for such loan modifications as TDRs. As of September 30, 2021, there were $ 2.0 million in loans in modification programs related to COVID-19. On December 27, 2020, the Consolidated Appropriations Act amended section 2014 of the CARES Act extending the exemption of qualified loan modifications from classification as a troubled debt restructuring as defined by GAAP to the earlier of January 1, 2022, or 60 days after the National Emergency concerning COVID-19 ends. There were no loans purchased with credit deterioration during the nine months ended September 30, 2021 or the year ended December 31, 2020. During 2021, the Company purchased $ 52.4 million of residential loans at a 2 % premium and $ 60.3 million in consumer loans at par. The allowance for credit losses recorded for these loans on the purchase date was $ 4.6 million. During 2020, the Company purchased $ 51.9 million of consumer loans at a 1 % discount. The allowance for credit losses recorded for these loans on the purchase date was $ 3.6 million. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $ 20.4 million at September 30, 2021 and $ 23.7 million at December 31, 2020 and was included in the allowance for loan credit losses to estimate the impact of accrued interest receivable related to loans with modifications due to the pandemic as the length of time between interest recognition and the write-off of uncollectible interest could exceed 120 days , exempting these loans from our policy election for accrued interest receivable. There was no estimated allowance for credit losses related to AIR at September 30, 2021 and $ 0.6 million at December 31, 2020. 12 Table of Contents The following tables present the activity in the allowance for credit losses by portfolio segment: (In thousands) Commercial Loans Consumer Loans Residential Total Balance as of June 30, 2021 $ 44,191 $ 34,881 $ 19,428 $ 98,500 Charge-offs ( 1,492 ) ( 3,083 ) ( 312 ) ( 4,887 ) Recoveries 354 2,143 232 2,729 Provision ( 9,875 ) 7,130 ( 597 ) ( 3,342 ) Ending balance as of September 30, 2021 $ 33,178 $ 41,071 $ 18,751 $ 93,000 Balance as of June 30, 2020 $ 50,386 $ 40,094 $ 23,020 $ 113,500 Charge-offs ( 624 ) ( 4,097 ) ( 58 ) ( 4,779 ) Recoveries 333 2,123 62 2,518 Provision 1,651 442 1,168 3,261 Ending balance as of September 30 , 2020 $ 51,746 $ 38,562 $ 24,192 $ 114,500 (In thousands) Commercial Loans Consumer Loans Residential Total Balance as of December 31, 2020 $ 50,942 $ 37,803 $ 21,255 $ 110,000 Charge-offs ( 2,123 ) ( 10,702 ) ( 731 ) ( 13,556 ) Recoveries 533 6,506 871 7,910 Provision ( 16,174 ) 7,464 ( 2,644 ) ( 11,354 ) Ending balance as of September 30, 2021 $ 33,178 $ 41,071 $ 18,751 $ 93,000 Balance as of January 1, 2020 (after adoption of ASC 326) $ 27,156 $ 32,122 $ 16,721 $ 75,999 Charge-offs ( 2,353 ) ( 17,166 ) ( 863 ) ( 20,382 ) Recoveries 674 6,168 300 7,142 Provision 26,269 17,438 8,034 51,741 Ending balance as of September 30 , 2020 $ 51,746 $ 38,562 $ 24,192 $ 114,500 The decrease in the allowance for credit losses from December 31, 2020 to June 30, 2021 and September 30, 2021 was primarily due to an improvement in the economic forecast. The increase in the allowance for credit losses from Day 1 to June 30, 2020 and September 30, 2020 was primarily due to the deterioration of macroeconomic factors surrounding the COVID-19 pandemic. Individually Evaluated Loans As of September 30, 2021, there were five relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of $ 12.5 million. These loans’ allowance for credit loss was $ 1.3 million and was determined by an estimate of the fair value of the collateral which consisted of business assets (accounts receivable, inventory, machinery and equipment). As of December 31, 2020, these same five relationships were identified to be evaluated for loss on an individual basis with an amortized cost basis of $ 15.2 million and an allowance for credit loss of $ 3.2 million. The decrease in the allowance for credit losses evaluated on an individual basis from December 31, 2020 to September 30, 2021 was primarily due to decrease in the amortized cost basis on the loans due to a principal payments and charge-offs. The following table sets forth information with regard to past due and nonperforming loans by loan segment: (In thousands) 31-60 Days Past Due Accruing 61-90 Days Past Due Accruing Greater Than 90 Days Past Due Accruing Total Past Due Accruing Nonaccrual Current Recorded Total Loans As of September 30 , 2021 Commercial loans: C&I $ 2,518 $ 106 $ - $ 2,624 $ 4,261 $ 1,110,920 $ 1,117,805 CRE 11,759 1,754 441 13,954 16,084 2,528,193 2,558,231 PPP - - - - - 276,195 276,195 Total commercial loans $ 14,277 $ 1,860 $ 441 $ 16,578 $ 20,345 $ 3,915,308 $ 3,952,231 Consumer loans: Auto $ 6,455 $ 1,110 $ 580 $ 8,145 $ 1,407 $ 829,585 $ 839,137 Other consumer 3,473 2,003 810 6,286 210 748,241 754,737 Total consumer loans $ 9,928 $ 3,113 $ 1,390 $ 14,431 $ 1,617 $ 1,577,826 $ 1,593,874 Residential $ 1,879 $ 734 $ 1,109 $ 3,722 $ 13,775 $ 2,002,840 $ 2,020,337 Total loans $ 26,084 $ 5,707 $ 2,940 $ 34,731 $ 35,737 $ 7,495,974 $ 7,566,442 13 Table of Contents (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, 2020 Commercial loans: C&I $ 2,235 $ 2,394 $ 23 $ 4,652 $ 4,278 $ 1,116,686 $ 1,125,616 CRE 682 - 470 1,152 19,971 2,391,162 2,412,285 PPP - - - - - 430,810 430,810 Total commercial loans $ 2,917 $ 2,394 $ 493 $ 5,804 $ 24,249 $ 3,938,658 $ 3,968,711 Consumer loans: Auto $ 9,125 $ 1,553 $ 866 $ 11,544 $ 2,730 $ 877,831 $ 892,105 Other consumer 3,711 1,929 1,272 6,912 290 640,952 648,154 Total consumer loans $ 12,836 $ 3,482 $ 2,138 $ 18,456 $ 3,020 $ 1,518,783 $ 1,540,259 Residential $ 2,719 $ 309 $ 518 $ 3,546 $ 17,378 $ 1,968,991 $ 1,989,915 Total loans $ 18,472 $ 6,185 $ 3,149 $ 27,806 $ 44,647 $ 7,426,432 $ 7,498,885 As of September 30, 2021 and December 31, 2020, there were no loans in non-accrual 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”), Paycheck Protection Program (“PPP”) and Commercial Real Estate (“CRE”) loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass. Doubtful A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss. Substandard Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity 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, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent. Pass Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality. Pass loans also include any portion of a government guaranteed loan, including PPP loans. 14 Table of Contents Consumer and Residential Grading System Consumer and Residential loans are graded as either Nonperforming or Performing. Nonperforming Nonperforming loans are loans that are (1) over 90 days past due and interest is still accruing or (2) on nonaccrual status. Performing All loans not meeting any of the above criteria are considered Performing. The following tables illustrate the Company’s credit quality by loan class by vintage: (In thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of September 30 , 2021 C&I By internally assigned grade: Pass $ 258,044 $ 256,285 $ 127,995 $ 71,024 $ 23,541 $ 40,962 $ 282,471 $ 6,724 $ 1,067,046 Special mention 163 4,277 5,157 3,339 3,063 3,381 8,477 - 27,857 Substandard 14 367 7,286 1,684 2,675 2,939 2,796 4,829 22,590 Doubtful - - - 126 185 1 - - 312 Total C&I $ 258,221 $ 260,929 $ 140,438 $ 76,173 $ 29,464 $ 47,283 $ 293,744 $ 11,553 $ 1,117,805 CRE By internally assigned grade: Pass $ 325,092 $ 453,138 $ 390,834 $ 249,362 $ 264,620 $ 486,685 $ 152,622 $ 16,661 $ 2,339,014 Special mention 796 933 21,467 4,747 20,344 67,530 1,140 - 116,957 Substandard - 79 15,692 15,555 12,541 50,428 1,239 - 95,534 Doubtful - - - - - 6,726 - - 6,726 Total CRE $ 325,888 $ 454,150 $ 427,993 $ 269,664 $ 297,505 $ 611,369 $ 155,001 $ 16,661 $ 2,558,231 PPP By internally assigned grade: Pass $ 256,940 $ 19,255 $ - $ - $ - $ - $ - $ - $ 276,195 Total PPP $ 256,940 $ 19,255 $ - $ - $ - $ - $ - $ - $ 276,195 Auto By payment activity: Performing $ 280,805 $ 145,585 $ 211,921 $ 121,108 $ 59,047 $ 18,684 $ - $ - $ 837,150 Nonperforming 148 320 712 538 269 - - - 1,987 Total auto $ 280,953 $ 145,905 $ 212,633 $ 121,646 $ 59,316 $ 18,684 $ - $ - $ 839,137 Other consumer By payment activity: Performing $ 298,505 $ 166,111 $ 128,954 $ 88,311 $ 34,858 $ 18,447 $ 18,516 $ 15 $ 753,717 Nonperforming 96 290 235 96 191 109 3 - 1,020 Total other consumer $ 298,601 $ 166,401 $ 129,189 $ 88,407 $ 35,049 $ 18,556 $ 18,519 $ 15 $ 754,737 Residential By payment activity: Performing $ 263,254 $ 229,961 $ 187,776 $ 185,798 $ 155,725 $ 722,718 $ 248,727 $ 11,494 $ 2,005,453 Nonperforming - 1,530 733 1,772 1,632 9,086 39 92 14,884 Total residential $ 263,254 $ 231,491 $ 188,509 $ 187,570 $ 157,357 $ 731,804 $ 248,766 $ 11,586 $ 2,020,337 Total loans $ 1,683,857 $ 1,278,131 $ 1,098,762 $ 743,460 $ 578,691 $ 1,427,696 $ 716,030 $ 39,815 $ 7,566,442 15 Table of Contents (In thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of December 31, 2020 C&I By internally assigned grade: Pass $ 331,921 $ 182,329 $ 91,230 $ 41,856 $ 32,625 $ 32,609 $ 322,674 $ 412 $ 1,035,656 Special mention 20,064 6,534 5,053 4,702 1,624 2,830 13,614 - 54,421 Substandard 338 6,364 10,219 3,388 791 4,272 9,945 14 35,331 Doubtful - - - 207 - 1 - - 208 Total C&I $ 352,323 $ 195,227 $ 106,502 $ 50,153 $ 35,040 $ 39,712 $ 346,233 $ 426 $ 1,125,616 CRE By internally assigned grade: Pass $ 469,919 $ 361,187 $ 256,154 $ 271,874 $ 212,197 $ 383,690 $ 113,128 $ 4,034 $ 2,072,183 Special mention 2,051 44,034 22,260 55,039 36,830 43,537 1,297 11,524 216,572 Substandard 536 5,307 18,298 15,691 6,018 62,168 1,501 4,642 114,161 Doubtful - 1,897 - - - 7,472 - - 9,369 Total CRE $ 472,506 $ 412,425 $ 296,712 $ 342,604 $ 255,045 $ 496,867 $ 115,926 $ 20,200 $ 2,412,285 PPP By internally assigned grade: Pass $ 430,810 $ - $ - $ - $ - $ - $ - $ - $ 430,810 Total PPP $ 430,810 $ - $ - $ - $ - $ - $ - $ - $ 430,810 Auto By payment activity: Performing $ 197,881 $ 314,034 $ 201,850 $ 115,977 $ 45,495 $ 13,250 $ 22 $ - $ 888,509 Nonperforming 359 1,140 1,135 525 437 - - - 3,596 Total auto $ 198,240 $ 315,174 $ 202,985 $ 116,502 $ 45,932 $ 13,250 $ 22 $ - $ 892,105 Other consumer By payment activity: Performing $ 234,628 $ 178,411 $ 127,549 $ 55,676 $ 14,255 $ 17,414 $ 18,588 $ 71 $ 646,592 Nonperforming 339 418 307 265 90 133 10 - 1,562 Total other consumer $ 234,967 $ 178,829 $ 127,856 $ 55,941 $ 14,345 $ 17,547 $ 18,598 $ 71 $ 648,154 Residential By payment activity: Performing $ 237,338 $ 210,505 $ 213,437 $ 182,993 $ 164,424 $ 684,495 $ 268,878 $ 9,991 $ 1,972,061 Nonperforming 1,245 659 2,318 2,535 902 10,195 - - 17,854 Total residential $ 238,583 $ 211,164 $ 215,755 $ 185,528 $ 165,326 $ 694,690 $ 268,878 $ 9,991 $ 1,989,915 Total loans $ 1,927,429 $ 1,312,819 $ 949,810 $ 750,728 $ 515,688 $ 1,262,066 $ 749,657 $ 30,688 $ 7,498,885 16 Table of Contents Allowance for Credit Losses on Off-Balance Sheet Credit Exposures As of September 30, 2021, the allowance for losses on unfunded commitments totaled $ 5.3 million, compared to $ 6.4 million as of December 31, 2020. Troubled Debt Restructuring When the Company modifies a loan in a troubled debt restructuring (“TDR”), such modifications generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; or change in scheduled payment amount. Residential and Consumer TDRs occurring during 2021 and 2020 were due to the reduction in the interest rate or extension of the term. An allowance for impaired commercial and consumer loans that have been modified in a TDR is measured based on the present value of the expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan an impairment charge would be recorded. The Company began offering loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act, along with a joint agency statement issued by banking regulatory agencies, provides that modifications made in response to COVID-19 do not need to be accounted for as a TDR. The Company evaluated the modification programs provided to its borrowers and has concluded the modifications were generally made in accordance with the CARES Act guidance to borrowers who were in good standing prior to the COVID-19 pandemic and are not required to be designated as TDRs. The following tables illustrate the recorded investment and number of modifications designated as TDRs, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring: Three Months Ended September 30, 2021 Three Months Ended September 30 , 2020 (Dollars in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Consumer loans: Auto 1 $ 20 $ 20 - $ - $ - Total consumer loans 1 $ 20 $ 20 - $ - $ - Residential 3 $ 460 $ 507 10 $ 659 $ 715 Total TDRs 4 $ 480 $ 527 10 $ 659 $ 715 Nine Months Ended September 30, 2021 Nine Months Ended September 30 , 2020 (Dollars in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Consumer loans: Auto 2 $ 38 $ 38 1 $ 44 $ 44 Total consumer loans 2 $ 38 $ 38 1 $ 44 $ 44 Residential 9 $ 1,071 $ 1,183 24 $ 1,619 $ 1,745 Total TDRs 11 $ 1,109 $ 1,221 25 $ 1,663 $ 1,789 17 Table of Contents The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period: Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 (Dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Residential 19 $ 1,401 9 $ 299 Total TDRs 19 $ 1,401 9 $ 299 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 (Dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Commercial loans: C&I - $ - 1 $ 387 CRE - - 1 168 Total commercial loans - $ - 2 $ 555 Consumer loans: Auto 2 $ 18 - $ - Total consumer loans 2 $ 18 - $ - Residential 39 $ 2,356 45 $ 2,280 Total TDRs 41 $ 2,374 47 $ 2,835 18 Table of Contents 6. Defined Benefit Post-Retirement Plans The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at September 30, 2021. Benefits paid from the plan are based on age, years of service, compensation and social security benefits and are determined in accordance with defined formulas. The Company’s policy is to fund the Plan in accordance with Employee Retirement Income Security Act of 1974 standards. Assets of the Plan are invested in publicly traded stocks and mutual funds. In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives. The Company also assumed supplemental retirement plans for former executives of Alliance Financial Corporation (“Alliance”) when the Company acquired Alliance. These supplemental employee retirement plans and the Plan are collectively referred to herein as “Pension Benefits”. In addition, the Company provides certain health care benefits for retired employees. Benefits were accrued over the employees’ active service period. Only employees that were employed by the Company on or before January 1, 2000 are eligible to receive post-retirement health care benefits. In addition, the Company assumed post-retirement medical life insurance benefits for certain Alliance employees, retirees and their spouses, if applicable, in the Alliance acquisition. These post-retirement benefits are referred to herein as “Other Benefits”. The Company made no voluntary contributions to the pension and other benefits plans during the three and nine months ended September 30, 2021 and 2020. The components of expense for Pension Benefits and Other Benefits are set forth below: Pension Benefits Other Benefits Three Months Ended September 30, Three Months Ended September 30, (In thousands) 2021 2020 2021 2020 Components of net periodic (benefit) cost: Service cost $ 517 $ 446 $ 2 $ 2 Interest cost 679 809 45 55 Expected return on plan assets ( 2,197 ) ( 2,105 ) - - Net amortization 331 368 13 13 Total net periodic (benefit) cost $ ( 670 ) $ ( 482 ) $ 60 $ 70 Pension Benefits Other Benefits Nine Months Ended September 30, Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Components of net periodic (benefit) cost: Service cost $ 1,486 $ 1,338 $ 6 $ 6 Interest cost 2,034 2,427 135 165 Expected return on plan assets ( 6,602 ) ( 6,315 ) - - Net amortization 957 1,104 39 39 Total net periodic (benefit) cost $ ( 2,125 ) $ ( 1,446 ) $ 180 $ 210 The service cost component of the net periodic (benefit) cost is included in Salaries and Employee Benefits and the interest cost, expected return on plan assets and net amortization components are included in Other Noninterest Expense on the unaudited interim consolidated statements of income. 19 Table of Contents 7. Earnings Per Share Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company’s dilutive stock options and restricted stock units). The following is a reconciliation of basic and diluted EPS for the periods presented in the unaudited interim consolidated statements of income: Three Months Ended September 30, (In thousands, except per share data) 2021 2020 Basic EPS: Weighted average common shares outstanding 43,360 43,643 Net income available to common stockholders $ 37,433 $ 35,113 Basic EPS $ 0.86 $ 0.80 Diluted EPS: Weighted average common shares outstanding 43,360 43,643 Dilutive effect of common stock options and restricted stock 271 299 Weighted average common shares and common share equivalents 43,631 43,942 Net income available to common stockholders $ 37,433 $ 35,113 Diluted EPS $ 0.86 $ 0.80 Nine Months Ended September 30, (In thousands, except per share data) 2021 2020 Basic EPS: Weighted average common shares outstanding 43,464 43,704 Net income available to common stockholders $ 117,575 $ 70,194 Basic EPS $ 2.71 $ 1.61 Diluted EPS: Weighted average common shares outstanding 43,464 43,704 Dilutive effect of common stock options and restricted stock 305 293 Weighted average common shares and common share equivalents 43,769 43,997 Net income available to common stockholders $ 117,575 $ 70,194 Diluted EPS $ 2.69 $ 1.60 There was a nominal number of stock options outstanding for the three and nine months ended September 30, 2021 and September 30, 2020, 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. 20 Table of Contents 8. Reclassification Adjustments Out of Other Comprehensive Income (Loss) The following table summarizes the reclassification adjustments out of AOCI: Detail About AOCI Components Amount Reclassified from AOCI Affected Line Item in the Consolidated Statement of Comprehensive Income (Loss) Three Months Ended (In thousands) September 30, 2021 September 30, 2020 AFS securities: Gains on AFS securities $ - $ - Net securities (gains) losses Amortization of unrealized gains related to securities transfer $ 149 $ 157 Interest income Tax effect $ ( 38 ) $ ( 39 ) Income tax (benefit) Net of tax $ 111 $ 118 Cash flow hedges: Net unrealized losses on cash flow hedges reclassified to interest expense $ - $ 101 Interest expense Tax effect $ - $ ( 25 ) Income tax (benefit) Net of tax $ - $ 76 Pension and other benefits: Amortization of net losses $ 317 $ 359 Other noninterest expense Amortization of prior service costs 27 22 Other noninterest expense Tax effect $ ( 86 ) $ ( 95 ) Income tax (benefit) Net of tax $ 258 $ 286 Total reclassifications, net of tax $ 369 $ 480 Detail About AOCI Components Amount Reclassified from AOCI Affected Line item in the Consolidated Statement of Comprehensive Income (Loss) Nine Months Ended (In thousands) September 30, 2021 September 30, 2020 AFS securities: Gains on AFS securities $ - $ ( 3 ) Net securities (gains) losses Amortization of unrealized gains related to securities transfer 434 495 Interest income Tax effect $ ( 109 ) $ ( 123 ) Income tax (benefit) Net of tax $ 325 $ 369 Cash flow hedges: Net unrealized losses on cash flow hedges reclassified to interest expense $ 21 $ 192 Interest expense Tax effect $ ( 5 ) $ ( 48 ) Income tax (benefit) Net of tax $ 16 $ 144 Pension and other benefits: Amortization of net losses $ 913 $ 1,075 Other noninterest expense Amortization of prior service costs 83 68 Other noninterest expense Tax effect $ ( 249 ) $ ( 286 ) Income tax (benefit) Net of tax $ 747 $ 857 Total reclassifications, net of tax $ 1,088 $ 1,370 21 Table of Contents 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 enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used 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 principally related to certain fixed rate borrowings. The Company also 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 incom e. The Company is subject to over-the-counter derivative clearing requirements, which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company began to clear certain derivative transactions through the Chicago Mercantile Exchange Clearing House (“CME”) in January 2021. The CME requires the Company to post initial and variation margin payments to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company’s financial statements are not equal and offsetting. As of September 30, 2021 and December 31, 2020, the Company had eighteen and seventeen 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 institution s. Derivatives Designated as Hedging Instruments The Company has previously entered into interest rate swaps to modify the interest rate characteristics of certain short-term Federal Home Loan Bank (“FHLB”) advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges. 22 Table of Contents T he following table summarizes the derivatives outstanding: (In thousands) Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value As of September 30, 2021 Derivatives not designated as hedging instruments Interest rate derivatives $ 1,346,853 Other assets $ 71,246 $ 1,346,853 Other liabilities $ 71,246 Risk participation agreements 91,348 Other assets 235 37,852 Other liabilities 68 Total derivatives not designated as hedging instruments $ 71,481 $ 71,314 Netting adjustments (1) - 3,684 Net derivatives in the balance sheet $ 71,481 $ 67,630 Derivatives not offset on the balance sheet $ 4,869 $ 4,869 Cash collateral (2) - 55,730 Net derivative amounts $ 66,612 $ 7,031 As of December 31, 2020 Derivatives designated as hedging instruments Interest rate derivatives $ - Other assets $ - $ 25,000 Other liabilities $ 34 Derivatives not designated as hedging instruments Interest rate derivatives $ 1,223,584 Other assets $ 108,487 $ 1,223,584 Other liabilities $ 108,487 Risk participation agreements 72,528 Other assets 292 39,785 Other liabilities 125 Total derivatives not designated as hedging instruments $ 108,779 $ 108,612 Cash collateral (2) - 107,350 Net derivative amounts $ 108,779 $ 1,262 (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. Company began to clear certain derivative transactions through the CME in 2021. (2) Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. F or derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s short-term rate borrowings. During the three months ended March 31, 2021 the Company’s final cash flow hedge of interest rate risk matured and the remaining balance was reclassified from AOCI as a reduction to interest expense. There is no additional amount that will be reclassified from AOCI as a reduction to interest expense . The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of income: Three Months Ended September 30, Nine Months Ended September 30 , (In thousands) 2021 2020 2021 2020 Derivatives designated as hedging instruments: Interest rate derivatives - included component Amount of (loss) recognized in other comprehensive income $ - $ - $ - $ ( 274 ) Amount of loss reclassified from AOCI into interest expense - 101 21 192 23 Table of Contents The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship: Three Months Ended September 30, Nine Months Ended September 30 , (In thousands) 2021 2020 2021 2020 Derivatives not designated as hedging instruments: (Decrease) increase in other income $ ( 307 ) $ ( 20 ) $ ( 382 ) $ 127 10. Fair Value Measurements and Fair Value of Financial Instruments G AAP 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; 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 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 in pricing the securities by its third-party providers. 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 flow s. 24 Table of Contents The following tables set forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted for at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement: (In thousands) Level 1 Level 2 Level 3 September 30, 2021 Assets: AFS securities Federal agency $ - $ 242,966 $ - $ 242,966 State & municipal - 84,021 - 84,021 Mortgage-backed - 650,195 - 650,195 Collateralized mortgage obligations - 558,711 - 558,711 Corporate - 40,137 - 40,137 Total AFS securities $ - $ 1,576,030 $ - $ 1,576,030 Equity securities 32,013 1,000 - 33,013 Derivatives - 71,481 - 71,481 Total $ 32,013 $ 1,648,511 $ - $ 1,680,524 Liabilities: Derivatives $ - $ 71,314 $ - $ 71,314 Total $ - $ 71,314 $ - $ 71,314 (In thousands) Level 1 Level 2 Level 3 December 31, 2020 Assets: AFS securities Federal agency $ - $ 243,597 $ - $ 243,597 State & municipal - 43,180 - 43,180 Mortgage-backed - 595,839 - 595,839 Collateralized mortgage obligations - 437,804 - 437,804 Corporate - 28,278 - 28,278 Total AFS securities $ - $ 1,348,698 $ - $ 1,348,698 Equity securities 28,737 2,000 - 30,737 Derivatives - 108,779 - 108,779 Total $ 28,737 $ 1,459,477 $ - $ 1,488,214 Liabilities: Derivatives $ - $ 108,646 $ - $ 108,646 Total $ - $ 108,646 $ - $ 108,646 25 Table of Contents G AAP requires disclosure of assets and liabilities measured and recorded at fair value on a non-recurring basis such as goodwill, loans held for sale, other real estate owned, collateral-dependent impaired loans, mortgage servicing rights and HTM securities. The non-recurring fair value measurements recorded during the three and nine month periods ended September 30, 2021 and the year ended December 31, 2020 were related to impaired loans, write-downs of other real estate owned and write-down of branch assets to fair value. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the allowance for credit losses for individually evaluated collateral dependent loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10 % to 50 %. Based on the valuation techniques used, the fair value measurements for collateral dependent individually evaluated loans are classified as Level 3. A s of September 30, 2021, the Company had collateral dependent individually evaluated loans with a carrying value of $ 12.5 million, which had an estimated allowance for credit loss of $ 1.3 million . As of December 31, 2020, the Company had collateral dependent individually evaluated loans with a carrying value of $ 15.2 million, which had an estimated allowance for credit loss of $ 3.2 million. The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, AFS securities, equity securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and derivatives. September 30, 2021 December 31, 2020 (In thousands) Fair Value Hierarchy Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: HTM securities 2 $ 683,103 $ 689,129 $ 616,560 $ 636,827 Net loans 3 7,474,466 7,615,405 7,390,004 7,530,033 Financial liabilities: Time deposits 2 $ 552,273 $ 553,125 $ 633,479 $ 638,721 Long-term debt 2 14,020 14,376 39,097 39,820 Subordinated debt 1 100,000 107,684 100,000 103,277 Junior subordinated debt 2 101,196 109,001 101,196 108,926 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. 26 Table of Contents 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, which 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 credit worthiness. Commitments to extend credit and unused lines of credit totaled $ 2.3 billion at September 30, 2021 and $ 2.2 billion at December 31, 2020. 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 $ 50.6 million at September 30, 2021 and $ 54.0 million at December 31, 2020. A s of September 30, 2021 and December 31, 2020 , the fair value of the Company’s standby letters of credit was not significant. 27 Table of Contents BANCORP INC. AND SUBSIDIARIES