What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2021-11-09 · 501 added, 592 removed, 157 unchanged (87% of the section changed)

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.

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, 2020 for an understanding of the following discussion and analysis.

Operating results for the three and nine month

periods ending September 30, 2021 are not necessarily indicative of the results of the full year ending December 31, 2021 or any future period.

(“NBT Holdings”) (collectively referred to herein as the “Company”).

This discussion will focus on results of

operations, financial condition, capital resources and asset/liability management.

Reference should be made to the Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company’s Annual Report

on Form 10‑K for the year ended December 31, 2021 for an understanding of the following discussion and analysis.

Operating results for the three month period ending March 31, 2022 are not necessarily indicative of the results of the full year ending

December 31, 2022 or any future period.

Forward-Looking Statements

Certain statements in this filing and future filings by the NBT Bancorp Inc.

(the “Company”) with the Securities and Exchange

Commission (“SEC”), in the Company’s press releases or other public or stockholder communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private

Securities Litigation Reform Act.

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.

number of factors, many of which are beyond the Company’s control that could cause actual results to differ materially from those contemplated by the forward-looking statements.

Factors that may cause actual results to differ materially from those

contemplated by such forward-looking statements include, among others, the following possibilities:

(1) local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s

assessment of that impact;

(2) changes in the level of nonperforming assets and charge-offs;

(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.

These statements may be identified by the use

of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms.

There are a number of factors, many of which are beyond the Company’s control that could cause

actual results to differ materially from those contemplated by the forward-looking statements.

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following

possibilities:

(1) local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact;

(2) changes in the level of nonperforming assets and

(3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;

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”);

(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

(7) acts of war or terrorism;

(6) political instability;

(7) acts of war, including international military conflicts, or

(8) the timely development and acceptance of new products and services and perceived overall value of these products and services by users;

(9) changes in consumer spending, borrowings and savings habits;

(10) changes in the financial performance and/or condition of the Company’s borrowers;

(10) changes in the financial

performance and/or condition of the Company’s borrowers;

(11) technological changes;

1 unchanged sentence

(13) the ability to increase market share and control expenses;

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 (“FASB”) and other accounting standard setters;

(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;

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 (“FASB”) and other accounting standard

(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;

(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;

economy, including the markets in which we operate,

of the COVID-19 global pandemic;

and (21) the Company’s success at managing the risks involved in the foregoing items.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s

forward-looking statements is the potential adverse effect of the current COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company, its customers and the global economy and financial markets.

The extent to which the COVID-19 pandemic impacts the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, and its impact on the

Company’s customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional

economies, national and local economic activity, the speed and effectiveness of vaccine and treatment developments and their deployment, including public adoption rates of COVID-19 vaccines, and the pace of recovery when the COVID-19 pandemic

subsides, among others.

Moreover, investors are cautioned to interpret many of the risks identified under the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2020 as being heightened as a result of the ongoing and

numerous adverse impacts of the COVID-19 pandemic.

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.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the potential adverse effect of the current

COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company, its customers and the global economy and financial markets.

The extent to which the COVID-19 pandemic impacts the Company will depend on

future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, treatment developments, public adoption rates of COVID-19 vaccines, including booster shots, and

their effectiveness against emerging variants of COVID-19, the impact of the COVID-19 pandemic on the Company’s customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the

impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, and the pace of recovery when the COVID-19 pandemic subsides, among others.

Moreover, investors are

cautioned to interpret many of the risks identified under the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2021 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.

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.

Critical Accounting Policies

The Company has identified policies as being critical because they require management to make particularly difficult,

subjective and/or complex judgments about matters that are inherently uncertain.

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

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

Critical Accounting Policies and Estimates

The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently

The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances.

the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.

These policies relate to the allowance for credit losses, pension

accounting and provision for income taxes.

The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded

Measurement of Credit Losses on Financial Instruments (“CECL”) approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).

The estimate of expected credit losses under the CECL

approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Historical loss experience is generally the starting point for

estimating expected credit losses.

The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from

which historical experience was used.

Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable.

The allowance for 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.

Because of the nature of the judgment and assumptions, actual results could differ

from estimates, which could have a material effect on our financial condition and results of operations.

These policies relate to the allowance for credit losses, pension accounting and provision for income taxes.

The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments.

Measurement of Credit Losses on Financial Instruments (“CECL”)

approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).

The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions,

and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Historical loss experience is generally the starting point for estimating expected credit losses.

The Company then considers whether the historical loss

experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used.

Finally, the Company considers forecasts about future

economic conditions that are reasonable and supportable.

The allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and

reduced by the charge-off of loan amounts, net of recoveries.

The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of

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 policy 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.

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.

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.

Management is required to make various assumptions in valuing the Company’s pension assets and liabilities.

These assumptions

include the expected rate of return on plan assets, the discount rate, the rate of increase in future compensation levels and interest rate of credit for cash balance plans.

These assumptions include the expected rate of return on plan assets, the discount rate,

the rate of increase in future compensation levels and interest rate of credit for cash balance plans.

Changes to these assumptions could impact earnings in future periods.

Company takes into account the plan asset mix, funding obligations and expert opinions in determining the various rates used to estimate pension expense.

The Company also considers market interest rates and discounted cash flows in setting the

appropriate discount rate.

In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.

The Company takes into account the plan asset mix, funding obligations and

expert opinions in determining the various rates used to estimate pension expense.

The Company also considers market interest rates and discounted cash flows in setting the appropriate discount rate.

In addition, the Company reviews expected

inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.

The Company is subject to examinations from various taxing authorities.

Such examinations may result in challenges to the tax

return treatment applied by the Company to specific transactions.

Management believes that the assumptions and judgments used to record tax-related assets or liabilities have been appropriate.

Should tax laws change or the taxing authorities

determine that management’s assumptions were inappropriate, an adjustment may be required which could have a material effect on the Company’s results of operations.

The Company’s policies on the CECL method for allowance for credit losses, pension accounting and provision for income taxes

are disclosed in Note 1 to the consolidated financial statements presented in our 2020 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 2020 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 finance

statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards.

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 Company’s results in 2021 and 2020 have been impacted by the COVID-19 pandemic and the CECL accounting methodology,

including the estimated impact of the COVID-19 pandemic on expected credit losses.

The following information should be considered in connection with the Company’s results for the three and nine months ended September 30, 2021:

net income for the three months ended September 30, 2021 was $37.4 million, up $2.3 million from the third quarter of 2020 and down $2.9 million from the second quarter of 2021 ;

diluted earnings per share of $0.86 for the three months ended September 30, 2021 , up $0.06 from the third quarter of 2020 and down $0.06 from the second quarter of 2021 ;

These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing

In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws.

Quarterly, a review of income tax expense and the carrying value of deferred tax

assets and liabilities is performed and balances are adjusted as appropriate.

We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions.

Although management believes that the

assumptions and judgments used to record tax-related assets or liabilities have been reasonable and appropriate, actual results could differ and we may be exposed to losses or gains that could be material.

Should tax laws change or the taxing

authorities during their examinations determine that their assumptions differ from management’s and we do not prevail in a dispute over interpretations of tax laws, an adjustment may be required which could have a material effect on the Company’s

results of operations.

The Company’s policies on the CECL method for allowance for credit losses, pension accounting and provision for income taxes are disclosed in Note 1 to the consolidated financial statements

presented in our 2021 Annual Report on Form 10-K.

All accounting policies are important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements presented in our 2021

Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported.

Refer to Note 3 to the unaudited interim consolidated finance statements in this Quarterly Report on Form 10-Q for recently adopted

accounting standards.

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 Company’s results in 2022 and 2021 have been impacted by the COVID-19 pandemic and the CECL accounting methodology, including the estimated impact of the COVID-19 pandemic on expected credit

The following information should be considered in connection with the Company’s results for the three months ended March 31, 2022:

net income for the three months ended March 31, 2022 was $39.1 million, up $1.8 million from the fourth quarter of 2021 and down $0.7 million from the first quarter of 2021;

diluted earnings per share of $0.90 for the three months ended March 31, 2022, up $0.04 from the fourth quarter of 2021 and down $0.01 from the first quarter of 2021;

noninterest income for the three months ended March 31, 2022 was $42.7 million, up $1.5 million from the fourth quarter of 2021 and up $5.6 million from the first quarter of 2021;

represents 35% of total

period end loans were $7.6 billion, up 8%, annualized, from December 31, 2021 (11% excluding Paycheck Protection Program (“PPP”) loans);

net charge-offs to average loans of 0.11%, annualized (0.12% excluding PPP loans) and allowance for loan losses to total loans at 1.23% (1.28% excluding PPP loans and related

book value per share of $28.65 at September 30, 2021 ;

tangible book value per share grew 2% for the quarter and 10% from September 30, 2020 to $21.95 (1) .

Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by common shares outstanding.

COVID-19 Pandemic and Company Response

The year 2020 began with overall stable U.S.

economic conditions that were significantly impacted by the COVID-19 pandemic

and subsequent shut-down of non-essential business throughout the Company’s footprint.

A prolonged global pandemic like COVID-19 could adversely affect our operations.

The results of operations and the ultimate effect of pandemic will depend on

numerous factors that are highly uncertain including how long restrictions for business and individuals will last, further information around the severity of the virus itself, additional actions taken by federal, state and local governments to

contain and treat COVID-19 and what, if any, additional government relief will be provided.

The expected impact of the pandemic on the Company’s business, financial condition, results of operations, and its customers has not fully manifested.

fiscal stimulus and relief programs appear to have delayed or mitigated any materially adverse financial impact to the Company.

Once these stimulus programs have been exhausted, the Company’s credit metrics may worsen and loan losses could

ultimately materialize.

Any potential loan losses will be contingent upon the resurgence of the virus, including any new strains, offset by the potency of the vaccine along with its extensive distribution, and the ability for customers and

businesses to return to their prepandemic routines.

However, economic uncertainty remains relatively high and volatility is expected to continue in 2021.

In response, the Company immediately formed an Executive Task Force and engaged its established Incident Response Team under

its Business Continuity Plan to execute a comprehensive pandemic response plan.

The Company has taken significant steps to address the needs of its customers impacted by COVID-19.

The Company provided payment relief for all its customers for 180

days or less, waiving associated late fees while not reporting these payment deferrals as late payments to the credit bureaus for all its consumer customers who were current prior to this event.

The Company has also offered longer payment deferral

options on a limited, case by case basis to address certain customers’ hardships related to the pandemic where we are able to gather information on the ongoing viability of the borrower’s long-term ability to return to full payment.

continues to responsibly lend to qualified consumer and commercial customers and designed special lending programs as well as participating in government sponsored relief programs to respond to customers’ needs during the pandemic.

believes our historically strong underwriting practices, diverse and granular portfolios, and geographic footprint will help to mitigate any adverse impact to the Company.

The Company has been a participant in the Small Business Administration’s Paycheck Protection Program, a loan guarantee

program created under the CARES Act targeted to provide small businesses with support to cover payroll and certain other expenses.

Loans made under the PPP are fully guaranteed by the Small Business Administration (“SBA”), whose guarantee is backed

by the full faith and credit of the United States.

PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll

or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied.

The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any

representations made by PPP borrowers in connection with their requests for loan forgiveness.

strong credit quality metrics including net charge-offs to average loans of 0.14% annualized, and allowance for loan losses to total loans at 1.18%;

book value per share of $27.96 at March 31, 2022;

tangible book value per share (1) was $21.25 at March 31, 2022, $22.26 at

December 31, 2021 and $20.71 at March 31, 2021.

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

COVID-19 Pandemic

The COVID-19 pandemic and countermeasures taken to contain its spread have caused economic and financial disruptions globally.

The impact of the COVID-19 pandemic on the Company’s results of

operations and the ultimate effect of the pandemic will depend on numerous factors that are highly uncertain, including how long restrictions for business and individuals will last, further information around the severity of the virus and any

variants, additional actions taken by federal, state and local governments to contain and treat COVID-19 and what, if any, additional government relief will be provided.

The expected impact of the pandemic on the Company’s business, financial

condition, results of operations, and its customers has not fully manifested.

The pandemic appears to be slowly receding, and thus becoming less disruptive on the Company's business, financial condition, results of operations, and its clients as of

March 31, 2022.

However, economic uncertainty remains high and volatility is expected to continue in 2022.

The Company believes its historically strong underwriting practices, diverse and granular portfolios and geographic footprint will help to

mitigate any adverse impact to the Company.

The Company has participated in the Small Business Administration’s (“SBA”) PPP, a loan guarantee program created under the CARES Act and the Consolidated Appropriation Act targeted to provide

small businesses with support to cover payroll and certain other expenses.

Loans made under the PPP are fully guaranteed by the SBA, whose guarantee is backed by the full faith and credit of the United States government.

PPP covered loans also afford

borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other

criteria are satisfied.

The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan

Lenders receive pre-determined fees for processing and servicing PPP loans.

In addition, PPP loans are risk-weighted at zero percent under the

generally-applicable Standardized Approach used to calculate risk-weighted assets for regulatory capital purposes.

The Company processed approximately 3,100 loans totaling $287 million in relief during the nine months ended September 30, 2021 as

compared to 3,000 loans totaling over $548 million in 2020.

The Company is supporting the PPP application and forgiveness processes with online resources, educational webinars and a partnership with a certified public accounting firm.

September 30, 2021, the Company has received payment from the SBA on 2,622 of our loans totaling $449.8 million.

On December 27, 2020, the President signed into law the Consolidated Appropriation Act (“CAA”).

The CAA, among other things,

extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses.

The Company is participating in the CAA’s second round of PPP lending.

In mid-January the Company opened its lending portal and began processing

PPP loan applications from current and new customers.

As of September 30, 2021, the Company has originated $287 million in PPP loans during this round with an average loan size of $93,000.

The Company established a committee to ensure employee and customer safety and a nimble response across geographic and

functional areas.

The five focus areas for the Company’s reopening are employee well-being, alternate work plans, physical workspace, working with customers and vendors, and policies, training and communication.

The Committee monitored state and

local responses and adapted physical locations across its footprint in its re-opening plans and will continue to monitor and adapt its response as the impact of COVID-19 continues to develop.

The Company has taken several steps to address the

safety of its employees and its customers including health and safety protocols to protect branch and onsite workers, full-time remote and hybrid work arrangement, additional benefits for health, childcare/eldercare needs and well-being and new

mobile, online, business banking and mortgage platforms were launched in 2020.

In addition, PPP loans are risk-weighted at zero percent under the generally applicable Standardized Approach used to calculate risk-weighted assets for

regulatory capital purposes.

The Company processed approximately 6,100 loans totaling $835 million in relief.

The Company is supporting the forgiveness process under the PPP with online

resources, educational webinars and a partnership with a certified public accounting firm.

As of March 31, 2022, the Company has received payment from the SBA on 5,479 of our loans totaling $754 million and total forgiveness and paydown is equal to

94% of the original balance.

Results of Operations

Net income for the three months ended September 30, 2021 was $37.4 million, down $2.9 million from $40.3 million for the

second quarter of 2021 and up $2.3 million from $35.1 million for the third quarter of 2020.

Diluted earnings per share for the three months ended September 30, 2021 was $0.86, as compared with $0.92 for the prior quarter, and $0.80 for the third

quarter of 2020.

Return on average assets (annualized) was 1.26% for the three months ended September 30, 2021 as compared to 1.39% for the prior quarter and 1.29% for the same period last year.

Return on average equity (annualized) was 12.04% for

the three months ended September 30, 2021 as compared to 13.42% for the prior quarter and 12.09% for the three months ended September 30, 2020.

Return on average tangible common equity (annualized) was 15.97% for the three months ended September

30, 2021 as compared to 17.93% for the prior quarter and 16.51% for the three months ended September 30, 2020.

Net income for the nine months ended September 30, 2021 was $117.6 million, up $47.4 from $70.2 million for the same period

Diluted earnings per share for the nine months ended September 30, 2021 was $2.69 as compared with $1.60 for the same period in 2020.

Return on average assets (annualized) was 1.37% for the nine months ended September 30, 2021 as

compared to 0.90% for the same period last year.

Return on average equity (annualized) was 13.00% for the nine months ended September 30, 2021 as compared to 8.23% for the nine months ended September 30, 2020.

Return on average tangible common

equity (annualized) was 17.35% for the nine months ended September 30, 2021 as compared to 11.36% for the nine months ended September 30, 2020.

Return on average tangible common equity is a non-GAAP measure and excludes amortization of intangible assets (net of tax)

from net income and average tangible equity calculated as follows:

The Company reported net income of $39.1 million for the three months ended March 31, 2022, up $1.8 million from the fourth quarter of 2021 and down $0.7 million from the first quarter of 2021.

interest income was $80.3 million for the three months ended March 31, 2022, down $4.8 million, or 5.7%, from the fourth quarter of 2021 and up $1.3 million or 1.6% from the first quarter of 2021.

Average interest-earning assets were up $71.9

million, or 0.7%, from the prior quarter and grew $0.9 billion, or 9.3%, from the first quarter of 2021.

The provision for loan losses was $0.6 million for the three months ended March 31, 2022, as compared with $3.1 million in the fourth quarter of

2021 and a net benefit of $2.8 million in the first quarter of 2021.

The following table sets forth certain financial highlights:

Three Months Ended

September 30,

Nine Months Ended

September 30,

December 31, 2021

Diluted earnings per share

Return on average assets (2)

Return on average equity (2)

Return on average tangible common equity (2)

Net interest margin, fully taxable equivalent (“FTE”) (2)

Equity to assets

Tangible equity ratio

Book value per share

Tangible book value per share

Leverage ratio

Common equity tier 1 capital ratio

Tier 1 capital ratio

Total risk-based capital ratio

The following tables provide non-GAAP reconciliations:

Three Months Ended

(In thousands)

December 31, 2021

Amortization of intangible assets (net of tax)

3 unchanged sentences

Average tangible common equity

Return on average tangible common equity (2)

Three Months Ended

(In thousands)

December 31, 2021

Stockholder’s equity

Tangible equity ratio

Three Months Ended

(In thousands, except share and per share data)

December 31, 2021

Stockholder’s equity

Tangible equity

Diluted common shares outstanding

Tangible book value

(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 $77.7 million for the third quarter of 2021, down $1.5 million, or 1.9%, from the previous quarter.

PPP loan interest and fees recognized into interest income for the three months ended September 30, 2021 was $2.9 million compared to $4.7 million for the previous quarter.

The fully taxable equivalent (“FTE”) net interest margin was 2.88% for the

three months ended September 30, 2021, a decrease of 12 bps from the previous quarter.

Interest income decreased $1.8 million, or 2.2%, as the yield on average interest-earning assets decreased 13 bps from the prior quarter to 3.05%, while average

interest-earning assets of $10.7 billion increased $96.4 million from the prior quarter, primarily due to an increase in short-term interest-bearing accounts due to higher levels of short-term interest bearing accounts (“excess liquidity”) and an

increase in average investment securities.

Interest expense was down $0.3 million, or 6.7%, as the cost of interest-bearing liabilities decreased 2 bps to 0.27% for the quarter ended September 30, 2021, driven by interest-bearing deposit costs

decreasing 2 bps.

Net interest income was $77.7 million for the third quarter of 2021, down $0.3 million, or 0.3%, from the third quarter of

PPP loan interest and fees recognized into interest income for the three months ended September 30, 2021 was $2.9 million compared to $4.6 million for the third quarter of 2020.

The FTE net interest margin was 2.88% for the three months ended

September 30, 2021, a decrease of 29 bps from the third quarter of 2020.

Interest income decreased $2.8 million, or 3.3%, as the yield on average interest-earning assets decreased 40 bps from the same period in 2020 to 3.05%, while average

interest-earning assets of $10.7 billion increased $0.9 billion from the third quarter of 2020, primarily due to excess liquidity and an increase in average investment securities.

Interest expense was down $2.5 million, or 35.6%, as the cost of

interest-bearing liabilities decreased 18 bps to 0.27% for the quarter ended September 30, 2021, driven by interest-bearing deposit costs decreasing 14 bps along with a 53 bps decrease in short-term borrowings cost.

Net interest income for the first nine months of 2021 was $235.9 million, up $0.3 million, or 0.1%, from the same period in

PPP loan interest and fees recognized into interest income for the nine months ended September 30, 2021 was $13.8 million compared to $8.5 million for the same period in 2020.

FTE net interest margin of 3.01% for the nine months ended

September 30, 2021, was down from 3.35% for the same period in 2020.

Interest income decreased $11.3 million, or 4.3%, as the yield on average interest-earning assets decreased 52 bps from the same period in 2020 to 3.20%, while average

interest-earning assets of $10.5 billion increased $1.1 billion primarily due to excess liquidity and an increase in average investment securities.

Interest expense was down $11.6 million, or 44.2%, for the nine months ended September 30, 2021 as

compared to the same period in 2020 as the cost of interest-bearing liabilities decreased 27 bps to 0.30%, driven by interest-bearing deposit costs decreasing 25 bps along with a 87 bps decrease in short-term borrowings cost.

The Federal Reserve

lowered its target fed funds rate by 150 basis points in the first quarter of 2020.

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

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 $80.3 million for the first quarter of 2022, down $4.8 million, or 5.7%, from the previous quarter.

PPP loan interest and fees recognized into interest income for the three

months ended March 31, 2022 was $2.0 million compared to $7.5 million for the previous quarter.

The FTE net interest margin was 2.95% for the three months ended March 31, 2022, a decrease of 13 bps from the previous quarter.

Interest income decreased

$5.1 million, or 5.7%, as the yield on average interest-earning assets decreased 14 bps from the prior quarter to 3.09%, while average interest-earning assets of $11.1 billion increased $71.9 million from the prior quarter, primarily due to an

increase in average investment securities partly offset by a decrease in short-term interest-bearing accounts (“excess liquidity”).

Interest expense was down $0.3 million, or 6.6%, as the cost of interest-bearing liabilities decreased 1 bps to 0.23%

for the quarter ended March 31, 2022, driven by interest-bearing deposit costs decreasing 2 bps.

Net interest income was $80.3 million for the first quarter of 2022, up $1.3 million, or 1.6%, from the first quarter of 2021.

PPP loan interest and fees recognized into interest income for the

three months ended March 31, 2022 was $2.0 million compared to $6.2 million for the three months ended March 31, 2021.

The FTE net interest margin was 2.95% for the three months ended March 31, 2022, a decrease of 22 bps from the first quarter of

Interest income decreased $0.1 million, or 0.1%, as the yield on average interest-earning assets decreased 29 bps from the same period in 2021 to 3.09%, while average interest-earning assets increased $0.9 billion, or 9.3%, from the first

quarter of 2021, primarily due to excess liquidity and an increase in average investment securities.

Interest expense decreased $1.4 million, or 26.7%, as the cost of interest-bearing liabilities decreased 11 bps to 0.23% for the quarter ended March

31, 2022, driven by interest-bearing deposit costs decreasing 10 bps.

Average Balances and Net Interest Income

The following tables include the condensed consolidated average balance sheet, an analysis of interest income/expense and

average yield/rate for each major category of earning assets and interest-bearing liabilities on a taxable equivalent basis.

The following tables include the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and

interest-bearing liabilities on a taxable equivalent basis.

Three Months Ended

September 30, 2021

September 30, 2020

(Dollars in thousands)

Short-term interest-bearing accounts

Securities available for sale (1) (3)

Securities held to maturity (1) (3)

Federal Reserve Bank and FHLB stock

Loans (2) (3)

Total interest-earning assets

Liabilities and stockholders’ equity:

Money market deposit accounts

NOW deposit accounts

Savings deposits

Time deposits

Total interest-bearing deposits

Short-term borrowings

Long-term debt

Subordinated debt

Junior subordinated debt

Total interest-bearing liabilities

Demand deposits

Other liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income (FTE)

Interest rate spread

Net interest margin (FTE)

Taxable equivalent adjustment

Net interest income

Securities are shown at average amortized cost.

For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding.

Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.

Nine Months Ended

September 30, 2021

September 30, 2020

March 31, 2022

December 31, 2021

March 31, 2021

(Dollars in thousands)

Short-term interest-bearing accounts

Securities available for sale (1) (3)

Securities held to maturity (1) (3)

Securities taxable (1)

Securities tax-exempt (1)(3)

Federal Reserve Bank and FHLB stock

Loans (2) (3)

Total interest-earning assets

5 unchanged sentences

Total interest-bearing deposits

Federal funds purchased

Repurchase agreements

Short-term borrowings

15 unchanged sentences

Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.

The following table presents changes in interest income and interest expense attributable to changes in volume (change in

average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume) and the net change in net interest income.

The net change attributable to the combined impact of volume and rate has been allocated to

each in proportion to the absolute dollar amounts of change.

Three Months Ended September 30,

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)

2 unchanged sentences

Short-term interest-bearing accounts

Securities available for sale

Securities held to maturity

Securities taxable

Securities tax-exempt

Federal Reserve Bank and FHLB stock

4 unchanged sentences

Time deposits

Repurchase agreements

Short-term borrowings

4 unchanged sentences

Change in FTE net interest income

Nine Months Ended September 30,

Increase (Decrease)

2021 over 2020

(In thousands)

Short-term interest-bearing accounts

Securities available for sale

Securities held to maturity

Federal Reserve Bank and FHLB stock

Total FTE interest income

Money market deposit accounts

NOW deposit accounts

Savings deposits

Time deposits

Short-term borrowings

Long-term debt

Subordinated debt

Junior subordinated debt

Total FTE interest expense

Change in net FTE interest income

Noninterest Income

Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of

The following table sets forth information by category of noninterest income for the periods indicated:

Three Months Ended

September 30,

Nine Months Ended

September 30,

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)

Service charges on deposit accounts

ATM and debit card fees

Card services income

Retirement plan administration fees

Wealth management fees

Wealth management

Insurance services

Bank owned life insurance

Net securities gains (losses)

Net securities (losses) gains

Total noninterest income

Noninterest income for the three months ended September 30, 2021 was $40.3 million, up $1.0 million, or 2.6%, from the prior

quarter and up $2.6 million, or 6.9%, from the third quarter of 2020.

Excluding net securities gains (losses), noninterest income for the three months ended September 30, 2021 was $40.4 million, up $1.3 million, or 3.4%, from the prior quarter and

up $2.8 million, or 7.4%, from the third quarter of 2020.

The increase from the prior quarter was primarily driven by higher service charges on deposit accounts, higher retirement plan administration fees due to market performance and organic

growth in relationships and higher wealth management fees driven by market performance and organic growth.

The increase from the third quarter of 2020 was primarily due to higher ATM and debit card fees due to increased volume and higher per

transaction rates, higher wealth management fees driven by market performance and organic growth, an increase in retirement plan administration fees driven by driven by market performance and organic growth, and higher service charges on deposit

accounts due to lower overdraft charges during the COVID-19 pandemic, partly offset by lower swap fees and lower mortgage banking income.

Noninterest income for the nine months ended September 30, 2021 was $116.7 million, up $8.5 million, or 7.9%, from the same

period in 2020.

Excluding net securities gains (losses), noninterest income for the nine months ended September 30, 2021 would have been $116.1 million, up $7.4 million, or 6.8%, from the same period in 2020.

The increase from the prior year was

primarily due to higher ATM and debit card fess due to increased volume and higher per transaction rates, higher wealth management fees driven by market performance and organic growth and an increase in retirement plan administration fees driven by

the April 1, 2020 acquisition of Alliance Benefit Group of Illinois, Inc.

(“ABG”), partly offset by lower swap fees and lower mortgage banking income.

Noninterest income for the three months ended March 31, 2022 was $42.7 million, up $1.5 million, or 3.8%, from the prior quarter and up $5.6 million, or 15.2%, from the first quarter of 2021.

Excluding net securities (losses) gains, noninterest income for the three months ended March 31, 2022 was $42.8 million, up $1.7 million, or 4.2% from the prior quarter and up $6.3 million, or 17.1% from the first quarter of 2021.

The increase from

the prior quarter was primarily driven by an increase in retirement plan administration fees driven by higher activity-based fees, continued organic growth as well as the impact of positive equity market returns over the past year.

The increase from

the first quarter of 2021 was primarily due to an increase in retirement plan administration fees driven by higher activity-based fees, continued organic growth as well as the impact of positive equity market returns over the past year, higher wealth

management fees aided by market performance and additional new customers, higher card services income due to increased volume and higher per transaction rates and higher service charges on deposit accounts as the volume of transactions has normalized

to near pre-pandemic levels.

Noninterest Expense

Noninterest expenses are also an important factor in the Company’s results of operations.

The following table sets forth the

major components of noninterest expense for the periods indicated:

Three Months Ended

September 30,

Nine Months Ended

September 30,

The following table sets forth the major components of noninterest expense for the periods indicated:

Three Months Ended March 31,

(In thousands)

Salaries and employee benefits

Data processing and communications

Technology and data services

Professional fees and outside services

Office supplies and postage

FDIC expenses

Amortization of intangible assets

1 unchanged sentence

Total noninterest expense

Noninterest expense for the three months ended September 30, 2021 was $72.9 million, up $1.5 million, or 2.0%, from the prior

quarter and up $6.6 million, or 9.9%, from the third quarter of 2020.

The increase from the prior quarter was due to higher salaries and employee benefits due to one additional day of payroll in the third quarter, increased medical expenses and

higher incentive compensation accruals.

Other expenses increased due to $2.3 million in non-recurring costs, primarily from estimated litigation settlement costs related to a pending lawsuit regarding certain of the Company’s deposit products and

related disclosures.

The Company does not anticipate further material accruals related to this legal matter.

The increase in noninterest expense from the third quarter of 2020 was due to higher salaries and employee benefits due to annual merit pay

increases, increased medical expenses and higher incentive compensation accrual.

Higher equipment expense due to higher technology costs associated with several digital upgrades.

Other expenses increased due to $2.3 million in non-recurring costs,

including the previously mentioned estimated litigation settlement costs.

Noninterest expense for the nine months ended September 30, 2021 was $212.2 million, up $9.6 million, or 4.8%, from the same

period in 2020.

The increase from the prior year was driven by higher salaries and employee benefits due to annual merit pay increases, the ABG acquisition and higher medical expenses, increase in data processing communication expense driven by

continued investments in digital platform solutions including a PPP specific platform, an increase in professional fees and outside services as a result of projects paused during the COVID-19 pandemic, higher equipment expense due to higher

technology costs associated with several digital upgrades.

Income tax expense for the three months ended September 30, 2021 was $11.0 million, down $1.0 million from the prior quarter

and up $0.1 million from the third quarter of 2020.

The effective tax rate was 22.8% for the third quarter of 2021, 22.9% in the prior quarter and 23.8% for the third quarter of 2020.

The lower effective tax rate compared to the third quarter of

2020 was due to the change in the level of taxable income to bring the nine months ended September 30, 2020 estimated effective tax rate to 21.75%.

Income tax expense for the nine months ended September 30, 2021 was $34.2 million, up $14.9 million from the same period of

The effective tax rate of 22.5% for the first nine months of 2021 was up from 21.5% for the same period in the prior year.

The increase in income tax expense from the prior year was due to a higher level of taxable income as a result of the

COVID-19 pandemic and decreased provision for loan losses.

Noninterest expense for the three months ended March 31, 2022 was $72.1 million, down $3.0 million, or 3.9%, from the prior quarter and up $4.3 million, or 6.3%, from the first quarter of 2021.

decrease from the prior quarter was primarily driven by lower other expenses due principally to the seasonal timing of certain items, lower professional fees and outside services due to timing of cost associated with several digital and other

technology-related initiatives, lower loan collection and other real estate owned due to the gain on the sale of a property in the first quarter of 2022 and a write-down of a property in the prior quarter.

The decrease from the prior quarter was

partly offset by the increase in salaries and employee benefits due to seasonally higher payroll taxes and stock-based compensation expenses, partly offset by two less payroll days.

The increase from the first quarter of 2021 was due to higher

salaries and employee benefits due to increased salaries and wages including merit pay increases and higher levels of incentive compensation and higher professional fees and outside services due to timing of cost associated with several digital and

other technology-related initiatives.

Income tax expense for the three months ended March 31, 2022 was $11.1 million, up $0.4 million from the prior quarter and comparable to the first quarter of 2021.

The effective tax rate was 22.2%

for the first quarter of 2022 compared to 22.4% for the fourth quarter of 2021 and 21.9% for the first quarter of 2021.

ANALYSIS OF FINANCIAL CONDITION

Total securities increased $296.2 million, or 14.8%, from December 31, 2020 to September 30, 2021.

The securities portfolio

represented 19.1% of total assets as of September 30, 2021 as compared to 18.3% of total assets as of December 31, 2020.

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

securities for the periods indicated:

September 30, 2021

Total securities increased $136.1 million, or 5.5%, from December 31, 2021 to March 31, 2022.

The securities portfolio represents 21.3% of total assets as of March 31, 2022 as compared to 20.4% of

total assets as of December 31, 2021.

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

March 31, 2022

December 31, 2021

2 unchanged sentences

With maturities greater than 15 years

Collateralized mortgage obligations

Collateral mortgage obligations

Municipal securities

1 unchanged sentence

The Company’s mortgage-backed securities, U.S.

agency notes and collateralized mortgage obligations are all guaranteed by

Fannie Mae, Freddie Mac, Federal Home Loan Bank, Federal Farm Credit Banks or Ginnie Mae (“GNMA”).

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.

Currently, there are no subprime mortgages in our investment portfolio.

A summary of loans, net of deferred fees and origination costs, by type (1)

for the periods indicated follows:

Currently, there are no subprime mortgages in our investment

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

(In thousands)

September 30, 2021

March 31, 2022

December 31, 2021

6 unchanged sentences

(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 $67.6 million from December 31, 2020 to September 30, 2021.

Total PPP loans as of September 30, 2021

were $276.2 million (net of unamortized fees).

The following PPP loan activity occurred during the nine months ended September 30, 2021:

$286.6 million in PPP loan originations, $449.8 million of loans forgiven and $13.8 million of interest and

fees recognized into interest income.

Excluding PPP loans, period end loans increased $222.2 million from December 31, 2020.

Total loans increased by $151.4 million, or 8.2% annualized, from December 31, 2021 to March 31, 2022.

Total PPP loans as of March 31, 2022 were $51.0 million (net of unamortized fees).

following PPP loan activity occurred during three months ended March 31, 2022;

there were no PPP loan originations, $48.4 million of loans forgiven and $2.0 million of interest and fees recognized into interest income.

Excluding PPP loans, period end

loans increased $201.6 million from December 31, 2021.

Commercial and industrial loans increased $59.6 million to $1.2 billion;

commercial real estate loans increased $123.9

million to $2.3 billion;

and total consumer loans increased $83.3 million to $3.5 billion.

Total loans represent approximately 63.1% of assets as of September 30, 2021, as compared to 68.6% as of December 31, 2020.

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

Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy

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.

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.

The allowance for credit losses totaled $93.0 million at September 30, 2021, compared to $98.5 million at June 30, 2021 and

$114.5 million at September 30, 2020.

The allowance for credit losses as a percentage of loans was 1.23% (1.28% excluding PPP loans) at September 30, 2021, compared to 1.31% (1.38% excluding PPP loans) at June 30, 2021 and 1.51% (1.62% excluding

PPP loans) at September 30, 2020.

The decrease in the allowance for credit losses from June 30, 2021 and September 30, 2020 to September 30, 2021 was primarily due to the improved economic conditions in the CECL forecast.

The provision for loan losses was a net benefit of $3.3 million for three months ended September 30, 2021, compared to a net

benefit of $5.2 million in the prior quarter and a provision expense of $3.3 million for the same period in the prior year.

Provision expense increased from the prior quarter due primarily to increased net charge-offs and higher reserves

established due to change in loan mix, partly offset by continued improvement in economic conditions in the CECL forecast.

Provision expense decreased from the same period in the prior year due primarily to the improved economic condition forecast

in the current quarter as compared to deterioration of the economic forecast that took place at the end of the third quarter in 2020 due to COVID-19.

Net charge-offs totaled $2.2 million during the three months ended September 30, 2021, compared to

net charge-offs of $1.3 million during the second quarter of 2021 and $2.3 million in the third quarter of 2020.

The provision for loan losses was a net benefit of $11.4 million for the nine months ended September 30, 2021, compared to a

provision expense of $51.7 million for the nine months ended September 30, 2020.

Provision expense decreased from the same period in the prior year due primarily to the improved economic condition forecast in the current quarter as compared to

significant deterioration of the economic forecast that took place at the end of the nine months ended September 30, 2020 due to COVID-19.

Net charge-offs totaled $5.6 million during the nine months ended September 30, 2021, compared to net

charge-offs of $13.2 million during the nine months ended September 30, 2020.

As of September 30, 2021, the unfunded commitment reserve totaled $5.3 million, compared to $5.8 million as of June 30, 2021

and $5.5 million as of September 30, 2020.

Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due and still accruing, restructured loans,

other real estate owned (“OREO”) and nonperforming securities.

Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection.

Loans may also be

placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments.

The threshold for evaluating classified and nonperforming loans specifically evaluated for impairment is $1.0

OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.

September 30, 2021

commercial real estate loans increased $54.2 million to $2.7 billion;

and total consumer loans increased $87.8 million to

$3.7 billion.

Total loans represent approximately 63.0% of assets as of March 31, 2022, as compared to 62.4% as of December 31, 2021.

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

Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy 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).

It replaces the incurred loss approach’s threshold that required recognition of a

credit loss when it was probable a loss event was incurred.

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

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.

considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable

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.

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

The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically

weighted external economic forecasts.

Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized

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 $90.0 million at March 31, 2022, compared to $92.0 million at December 31, 2021 and $105.0 million at March 31, 2021.

The allowance for credit losses as a

percentage of loans was 1.18% (1.18% excluding PPP loans) at March 31, 2022, compared to 1.23% (1.24% excluding PPP loans) at December 31, 2021 and 1.38% (1.48% excluding PPP loans) at March 31, 2021.

The allowance for credit losses was 324.25% of

nonperforming loans at March 31, 2022, compared to 280.98% at December 31, 2021 and 230.50% at March 31, 2021.

The allowance for credit losses was 348.68% of nonaccrual loans at March 31, 2022, compared to 303.78% of nonaccrual loans at December 31,

2021 and compared to 241.94% at March 31, 2021.

The decrease in allowance for credit losses from December 31, 2021 and March 31, 2021 to March 31, 2022 was primarily due to the improved economic conditions in the CECL forecast, partly offset by

providing for the increase in loan balances.

The provision for loan losses was $0.6 million for three months ended March 31, 2022, compared to $3.1 million in the prior quarter and a net benefit of $2.8 million for the same period in the

Provision expense decreased from the prior quarter due to reductions in the reserve due to improved economic conditions in the CECL forecast, partly offset by providing for the increase in loan balances and a decline in net charge-offs in

the current quarter.

Provision expense increased from the same period in the prior year due primarily to the stable economic condition forecast in the current quarter as compared to improvements in the significantly deteriorated economic conditions

that took place at the end of first quarter in 2020 due to COVID-19.

Net charge-offs totaled $2.6 million during the three months ended March 31, 2022, compared to net charge-offs of $4.1 million during the fourth quarter of 2021 and $2.2 million in the first

quarter of 2021.

Net charge-offs to average loans was 14 bps for the three months ended March 31, 2022, compared to 22 bps for the fourth quarter of 2021 and 12 bps for the three months ended March 31, 2021.

As of March 31, 2022, the unfunded commitment reserve totaled $4.8 million, compared to $5.1 million as of December 31, 2021 and $5.9 million as of March 31, 2021.

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities.

generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection.

Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be

unable to meet the contractual principal or interest payments.

The threshold for evaluating classified and nonperforming loans specifically evaluated for impairment is $1.0 million.

OREO represents property acquired through foreclosure and is valued

at the lower of the carrying amount or fair value, less any estimated disposal costs.

March 31, 2022

December 31, 2021

(Dollars in thousands)

Nonaccrual loans:

N onaccrual loans:

Troubled debt restructured loans

Total nonaccrual loans

Loans 90 days or more past due and still accruing:

Total loans 90 days or more past due and still accruing

Loans over 90 days past due and still accruing:

Total loans over 90 days past due and still accruing

Total nonperforming loans

Total nonperforming assets

Total nonaccrual loans to total loans

Total nonperforming loans to total loans

Total nonperforming assets to total assets

Allowance for loan losses to total nonperforming loans

Total nonperforming assets were $ 39.5 million at September

30, 2021 , compared to $ 49.3 million at December 31, 2020 and $40.1 million at September 30, 2020 .

Nonperforming loans at September 30, 2021

were $ 38.7 million, or 0.51% , of total loans (0.53% excluding PPP loan originations), compared with $ 47.8 million, or 0.64% of total loans (0.68% excluding PPP loan originations) at December 31, 2020 and $38.5 million, or 0.51% of total loans (0.55% excluding PPP loan originations) at September 30, 2020 .

Nonperforming loans were consistent compared to a year ago.

Past due loans as a percentage of total loans was 0.46% at

September 30, 2021 (0.48% excluding PPP loan originations), up from 0.37% at December 31, 2020 (0.39% excluding PPP loan originations) and up from 0.26% at September 30, 2020 (0.28% excluding PPP loan originations).

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic.

The CARES Act,

along with a joint agency statement issued by banking regulatory agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a troubled debt restructuring (“TDR”).

The Company evaluated the

short-term modification programs provided to its borrowers and has concluded the modifications were generally made to borrowers who were in good standing prior to the COVID-19 pandemic and the modifications were temporary and minor in nature and

therefore do not qualify for designation as TDRs.

As of September 30, 2021, $2.0 million of total loans outstanding were in payment deferral programs, of which 71% are commercial borrowers and 29% are consumer borrowers.

As of December 31, 2020,

$106.0 million of total loans outstanding were in payment deferral programs, of which 80% were commercial borrowers and 20% were consumer borrowers.

In addition to nonperforming loans discussed above, the Company has also identified approximately $105.7 million in potential

problem loans at September 30, 2021 as compared to $136.6 million at December 31, 2020 and $117.7 million at September 30, 2020.

The increase in potential problem loans from September 30, 2020 is primarily due to the Company’s proactive approach to

risk ratings throughout the deferral process and relates to higher risk industries impacted by the COVID-19 pandemic.

Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations.

As of September 30, 2021, 8.7%

of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic.

Total allowance for loan losses to total nonperforming loans

Total allowance for loan losses to nonaccrual loans

Total nonperforming assets were $27.8 million at March 31, 2022, compared to $32.9 million at December 31, 2021 and $46.9 million at March 31, 2021.

Nonperforming loans at March 31, 2022 were $27.8

million, or 0.36% of total loans (0.37% excluding PPP loan originations), compared with $32.7 million, or 0.44% of total loans (0.44% excluding PPP loan originations) at December 31, 2021 and $45.6 million, or 0.60% of total loans (0.64% excluding

PPP loan originations) at March 31, 2021.

The decrease in nonperforming loans primarily resulted from a reduction in commercial and residential mortgage nonaccrual loans.

Total nonaccrual loans were $25.8 million or 0.33% of total loans at March 31,

2022, compared to $30.3 million or 0.40% of total loans at December 31, 2021 and compared to $43.4 million or 0.57% of total loans at March 31, 2021.

Past due loans as a percentage of total loans was 0.24% at March 31, 2022 (0.25% excluding PPP loan

originations), down from 0.29% at December 31, 2021 (0.29% excluding PPP loan originations) and up slightly from 0.22% at March 31, 2021 (0.23% excluding PPP loan originations).

In addition to nonperforming loans discussed above, the Company has also identified approximately $66.7 million in potential problem loans at March 31, 2022 as compared to $74.9 million at December

31, 2021 and $136.7 million at March 31, 2021.

Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected.

Such loans may need to be

disclosed as nonperforming at some time in the future.

Potential problem loans are classified by the Company’s loan rating system as “substandard.” 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 90 days or more past due, be placed on nonaccrual, become restructured or require increased allowance coverage and

provision for loan losses.

To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.

Total deposits were $ 10.2 billion at September 30,

2021 , up $ 1.1 billion, or 12.3% , from

December 31, 2020 .

Such loans may need to be disclosed as nonperforming at some time in the

Potential problem loans are classified by the Company’s loan rating system as “substandard.” The decrease in potential problem loans from March 31, 2021 is primarily due to the improved economic conditions which resulted in loans coming off

deferral and returning to payment.

Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations.

As of March 31, 2022, 8.8% of the Company’s outstanding loans were in higher risk industries due to the COVID-19

Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans.

Accordingly, there can be no assurance that other loans will not become over 90 days

past due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses.

To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular

industry and originates loans primarily within its footprint.

Total deposits were $10.5 billion at March 31, 2022, up $227.2 million, or 2.2%, from December 31, 2021.

Total average deposits increased $1.0 billion, or 10.5%, from the same period last year.

The growth was driven primarily by an increase of $ 713.7 million, or 25.5% , in demand deposits, combined with an increase in interest-bearing deposits of $ 639.3 million, or 11.5% , due to growth in money market deposit accounts (“MMDA”), NOW deposit accounts and savings deposit accounts, partly

offset by a decrease in time accounts.

growth was driven primarily by an increase of $391.1 million, or 11.8%, in demand deposits, combined with an increase in interest-bearing deposits of $586.2 million, or 9.8%, due to growth in money market deposit account (“MMDA”), NOW deposit account

and savings deposit accounts, partly offset by a decrease in time accounts.

The high rate of deposit growth was primarily due to funding of PPP loans and various government support programs.

1 unchanged sentence

The Company’s borrowed funds consist of short-term borrowings and long-term debt.

Short-term borrowings totaled $99.7 million

at September 30, 2021 compared to $168.4 million at December 31, 2020.

The notional value of interest rate swaps hedging cash flows related to short-term borrowings totaled $25.0 million at December 31, 2020 and matured during the nine months

ended September 30, 2021.

Long-term debt was $14.0 million at September 30, 2021 and $39.1 million at December 31, 2020.

Short-term borrowings totaled $65.0 million at March 31, 2022 compared to $97.8 million at December 31, 2021.

Long-term debt was $14.0 million at March 31, 2022 and December 31, 2021.

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

1 unchanged sentence

On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030.

subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing

Rate plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025.

The subordinated 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, which is being amortized on a straight-line basis, was $2.2 million.

As of September 30, 2021 and December 31, 2020 the

subordinated debt net of unamortized issuance costs was $98.4 million and $98.1 million, respectively.

As of March 31, 2022 and December 31, 2021 the subordinated debt net of unamortized issuance costs was $98.6 million and $98.5

million, respectively.

Capital Resources

Stockholders’ equity of $1.2 billion represented 10.35% of total assets at September 30, 2021 compared with $1.2 billion, or

10.86% of total assets, as of December 31, 2020.

Stockholders’ equity was consistent with December 31, 2020 as net income of $117.6 million for the nine months ending September 30, 2021 was offset by a decrease in accumulated other comprehensive

income of $14.9 million, dividends declared of $35.6 million during the period and repurchase of common stock of $14.1 million.

The Company repurchased 119,342 shares of common stock during the third quarter of 2021 at a weighted average price of $35.30

per share excluding commissions under a previous announced plan.

As of September 30, 2021, there were 1,600,000 shares available for repurchase under this plan authorized on October 28, 2019, amended on March 23, 2020 and January 27, 2021, and set

to expire on December 31, 2021.

The Board of Directors considers the Company’s capital levels, earnings position and earnings potential when making dividend

The Board of Directors approved a fourth-quarter 2021 cash dividend of $0.28 per share at a meeting held on October 25, 2021.

The dividend will be paid on December 15, 2021 to shareholders of record as of December 1, 2021.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at September 30, 2021 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.

Stockholders’ equity of $1.2 billion represented 9.90% of total assets at March 31, 2022 compared with $1.3 billion, or 10.41% of total assets, as of December 31, 2021.

Stockholders’ equity

decreased $48.2 million from December 31, 2021 as net income of $39.1 million for the three months ending March 31, 2022 was offset by a decrease in accumulated other comprehensive income of $68.0 million due to the change in the market value of

securities available for sale, dividends declared of $12.1 million during the period and repurchase of common stock of $8.2 million.

The deferred tax asset related to the unrealized losses in investment securities decreased $22.8 million from

December 31, 2021.

The Company purchased 217,100 shares of its common stock during the first quarter of 2022 at an average price of $37.55 per share under its previously announced share repurchase program.

March 31, 2022, there were 1,782,900 shares available for repurchase under this plan authorized on December 20, 2021 and set to expire on December 31, 2023.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at March 31, 2022 under applicable bank regulatory requirements.

Capital measurements are well in

excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented.

To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based

capital ratios must be 5%, 6.5%, 8% and 10%, respectively.

Capital Measurements

September 30, 2021

March 31, 2022

December 31, 2021

9 unchanged sentences

Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets.

In March 2020, the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System,

and the Federal Deposit Insurance Corporation (“FDIC”) announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL.

Under the modified CECL transition provision, the regulatory

capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses (after-tax) has been deferred and will phase into regulatory capital at 25% per year commencing January 1, 2022.

For the ongoing impact of CECL,

the Company is allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1,

2020 and December 31, 2021.

The cumulative adjustment to the allowance for credit losses between January 1, 2020 and December 31, 2021, will also phase into regulatory capital at 25% per year commencing January 1, 2022.

The Company adopted the

capital transition relief over the permissible five-year period.

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) has been deferred and will phase into regulatory capital at 25% per year commencing January 1, 2022.

For the ongoing impact of CECL, the Company is allowed to defer the regulatory capital impact of the allowance for

credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020 and December 31, 2021.

The cumulative adjustment to the allowance for credit losses

between January 1, 2020 and December 31, 2021, will also phase into regulatory capital at 25% per year commencing January 1, 2022.

The Company adopted the capital transition relief over the permissible five-year period.

Liquidity and Interest Rate Sensitivity Management

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.

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

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 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.

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 50 bps takes place over a 12-month period with a static balance

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.

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 50 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 rolling over at lower yields while interest-bearing liabilities remain at or near their floors.

In the rising rate

scenarios, net interest income is projected to experience a modest increase from the flat rate scenario;

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.

decrease in net interest income is a result of earning assets rolling over at lower yields while interest-bearing liabilities remain at or near their floors.

In the rising rate scenarios, net interest income is projected to experience a modest

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, MMDA and time accounts.

interest income for the next twelve months in the +200/+100/-50 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change in net interest income.

The following table summarizes the percentage change

in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the September 30, 2021 balance sheet position:

Net interest income for the next twelve months in the +200/+100/-50 bp

scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change 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, 2022 balance sheet position:

Interest Rate Sensitivity Analysis

Change in interest rates

(in bps points)

(in basis points)

Percent change in

net interest income

The Company anticipates that the trajectory of net interest income will depend significantly on the timing and path of the

recovery from the recent economic downturn.

In response to the economic impact of the pandemic, the federal funds rate was reduced by 150 bps in March 2020, and term interest rates fell sharply across the yield curve.

The Company has reduced

deposit rates, but future reductions are likely to be smaller and more selective.

With deposit rates near their lower bound, the Company will focus on managing asset yields in order to maintain the net interest margin.

Competitive pressure may

limit the Company’s ability to maintain asset yields in the current environment, however.

The Company anticipates that the trajectory of net interest income will depend significantly on the timing and path of the recovery from the recent economic downturn, related inflationary pressures

and FOMC monetary policy.

In response to the economic impact of the pandemic, the federal funds rate was reduced by 150 bps in March 2020, term interest rates fell sharply across the yield curve and the Company reduced deposit rates.

pressures have resulted in a higher overall yield curve and expectations for material increases to short term interest rates.

With deposit rates near their historic lows, the Company will focus on managing deposit expense in a rising rate environment

while allowing assets to reprice upward.

It is important to note that the current competitive lending environment may limit the Company’s ability to increase asset yields commensurate with relative interest rates.

Liquidity Risk

Liquidity involves the ability to 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, 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

The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access

to reliable sources of cash relative to the stability of its funding mix of average liabilities.

This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of

dependable borrowing sources, which can be accessed when necessary.

At September 30, 2021, the Company’s Basic Surplus measurement was 29.4% of total assets or approximately $3.5 billion as compared to the December 31, 2020 Basic Surplus of 25.7%

or $2.8 billion and was above the Company’s minimum of 5% (calculated at $599.7 million and $546.6 million, of period end total assets as September 30, 2021 and December 31, 2020, respectively) set forth in its liquidity policies.

At September 30, 2021 and December 31, 2020, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $14.0 million and

$64.1 million, respectively.

At September 30, 2021 and December 31, 2020, the Bank had $130.0 million and $74.0 million, respectively, of collateral encumbered by municipal letters of credit.

The Bank is a member of the FHLB system and had

additional borrowing capacity from the FHLB of approximately $1.7 billion at September 30, 2021 and $1.6 billion at December 31, 2020.

In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an

additional $901.2 million and $839.4 million at September 30, 2021 and December 31, 2020, 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 $2.0 billion at September 30, 2021 and $1.8 billion at December 31, 2020.

In addition, the Bank has a

“Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral.

At September 30, 2021 and December 31, 2020, the Bank had the capacity to borrow $588.3 million and $ 658.1 million, respectively, from this program.

The Company’s internal policies authorize borrowing up to 25% of assets.

Under this policy, remaining available borrowing capacity totaled $2.8 billion at September 30,

2021 and $2.6 billion at December 31, 2020.

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.

Liquidity risk arises from the possibility that we 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, 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.

2022, the Company’s Basic Surplus measurement was 25.3% of total assets or approximately $3.1 billion as compared to the December 31, 2021 Basic Surplus of 28.5% or $3.4 billion, and was above the Company’s minimum of 5% (calculated at $607.4 million

and $600.6 million, of period end total assets at March 31, 2022 and December 31, 2021, respectively) set forth in its liquidity policies.

At March 31, 2022 and December 31, 2021, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $14.0 million.

At March 31, 2022 and December 31, 2021, the Bank had $8.0 million and $81.0

million, respectively, of collateral encumbered by municipal letters of credit.

The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.8 billion at March 31, 2022 and $1.7 billion at December

In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $827.0 million and $999.1 million at March 31, 2022 and December 31, 2021, respectively, or used to collateralize other

borrowings, such as repurchase agreements.

The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $2.1

billion at March 31, 2022 and $2.0 billion at December 31, 2021.

In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral.

At March 31, 2022 and December 31,

2021, the Bank had the capacity to borrow $574.2 million and $580.8 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

$3.0 billion at March 31, 2022 and $2.9 billion at December 31, 2021.

This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives.

By tempering the need for cash flow liquidity with reliable

borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio.

The makeup and term structure of the securities portfolio is, in part, impacted by the overall

interest rate sensitivity of the balance sheet.

Investment decisions and deposit pricing strategies are impacted by the liquidity position.

The Company considered its Basic

Surplus position to be strong.

However, certain events may adversely impact the Company’s liquidity position in 2021.

The large inflow of deposits experienced in the second quarter of 2020 could reverse itself and flow out.

In the current economic

environment, draws against lines of credit could drive asset growth higher.

The Company considered its Basic Surplus position to be strong.

However, certain events may adversely impact

the Company’s liquidity position in 2022.

The large inflow of deposits experienced since the second quarter of 2020 could reverse itself and flow out.

In the current economic environment, draws against lines of credit could drive asset growth higher.

Disruptions in wholesale funding markets could spark increased competition for deposits.

These scenarios could lead to a decrease in the Company’s Basic Surplus measure

below the minimum policy level of 5%.

Significant monetary and fiscal policy actions taken by the federal government have helped to mitigate these risks.

Enhanced liquidity monitoring was put in place to quickly respond to the changing environment

during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.

At September 30, 2021, a portion of the Company’s loans and securities were pledged as collateral on borrowings.

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.

These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%.

Significant monetary and fiscal policy

actions taken by the federal government have helped to mitigate these risks.

Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring

and adding additional sources of liquidity.

At March 31, 2022, a portion of the Company’s loans and securities were pledged as collateral on borrowings.

Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets

will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.

The Company’s primary source of funds is the Bank.

Certain restrictions exist regarding the ability of the subsidiary bank to

transfer funds to the Company in the form of cash dividends.

The approval of the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s

earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations.

At September 30, 2021, approximately $193.0 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.

Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends.

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, 2022, approximately $109.5 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC.

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.

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis