What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-10 · 426 added, 321 removed, 322 unchanged (70% of the section changed)

7 unchanged sentences

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

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

on Form 10‑K for the year ended December 31, 2022 for an understanding of the following discussion and analysis.

Operating results for the three month period ending March 31, 2023 are not necessarily indicative of the results of the full year ending

December 31, 2023 or any future period.

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

Report on Form 10‑K for the year ended December 31, 2022 for an understanding of the following discussion and analysis.

Operating results for the three and six month periods ending June 30, 2023 are not necessarily indicative of the results of the

full year ending December 31, 2023 or any future period.

Forward-Looking Statements

Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission (“SEC”), in the Company’s press releases or other public or stockholder

communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.

These statements may be identified by the use of

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

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

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

Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission (“SEC”), in the Company’s press releases or other public or stockholder communications

or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.

These statements may be identified by the use of phrases such

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

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

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

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

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

(9) changes in consumer spending, borrowing

and saving habits;

(9) changes in consumer spending,

borrowing and saving habits;

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

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(12) acquisition and integration of acquired businesses;

(13) the ability to increase market share and control

(13) the businesses of NBT and Salisbury

(“Salisbury”) may not be combined successfully;

(14) the possibility that NBT and Salisbury may be unable to achieve expected synergies and operating efficiencies in the merger within the expected timeframes or at all or to

successfully integrate Salisbury’s operations and those of NBT;

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

(16) changes in the competitive environment among financial holding companies;

(15) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company

and its subsidiaries must comply, including those under the Dodd-Frank Act, Economic Growth, Regulatory Relief, Consumer Protection Act of 2018, Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and other legislative and regulatory

responses to the coronavirus (“COVID-19”) pandemic;

(16) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting

Standards Board and other accounting standard setters;

(17) 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, and the Economic Growth, Regulatory Relief, and

Consumer Protection Act of 2018;

(18) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and

other accounting standard setters;

(19) 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;

(20) 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;

(21) greater than expected costs or difficulties related to the integration of new products and lines of business;

(20) the adverse impact on the U.S.

economy, including the markets in which we operate, of the COVID-19 global pandemic or other public health crises;

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

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including, but not

limited to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the SEC, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances

for future periods to differ materially from those anticipated or projected.

Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect

the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

and (22) the Company’s success at managing the risks

involved in the foregoing items.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including, but not limited

to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the SEC, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for

future periods to differ materially from those anticipated or projected.

Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect the

occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Non-GAAP Measures

This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America

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

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

Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation.

Critical Accounting Estimates

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with GAAP that involve a significant level

of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

The Company follows financial accounting and reporting policies that are in accordance

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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.

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.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the

forecast period.

As of March 31, 2023, the model incorporated a baseline economic outlook along with an alternative downside scenario, which were equally weighted.

The baseline outlook reflected an unemployment rate environment below pre-COVID-19

levels throughout much of the forecast period.

Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the second quarter of 2023 at approximately 3.9% and rise to 4.4% before falling slightly to 4.1% by the end of the forecast

The alternative downside scenario assumed northeast unemployment rises from 3.7% in the first quarter of 2023 to a peak of 7.1% in the second quarter of 2024.

These scenarios and their respective weightings are evaluated at each measurement

date and reflect management’s expectations as of March 31, 2023.

All else held equal, the changes in the weightings of our forecasted scenarios would impact the amount of estimated allowance for credit losses through changes in the quantitative

reserve and scenario-specific qualitative adjustments.

To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of March 31, 2023, the Company increased the downside scenario

weighting by 10% to 60% and decreased the baseline scenario to 40% weighting which resulted in a 3% increase in the overall estimated allowance for credit losses.

To further demonstrate the sensitivity of the allowance for credit losses estimate to

macroeconomic forecast weightings assumptions as of March 31, 2023, the Company increased the downside scenario to 100% which resulted in a 17% increase in the overall estimated allowance for credit losses.

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.

changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast

The quantitative model as of June 30, 2023, incorporated a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model,

particularly significant unknowns relating to downside risks as of the measurement date.

The baseline outlook reflected an unemployment rate environment at pre-COVID-19 levels of 3.8% and increasing gradually to 4.2% by the end of the forecast

Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the third quarter of 2023 at about 3.6% and reach 4.1% by the end of the forecast period.

The alternative downside scenario assumes deteriorated economic

conditions from the baseline outlook.

Under this scenario, northeast unemployment jumps to 5.2% in the third quarter of 2023 and rises to a peak of 7.0% in the third quarter of 2024.

These scenarios and their respective weightings are evaluated at

each measurement date and reflect management’s expectations as of June 30, 2023.

All else held equal, the changes in the weightings of our forecasted scenarios would impact the amount of estimated allowance for credit losses through changes in the

quantitative reserve and scenario-specific qualitative adjustments.

To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of June 30, 2023, the Company increased the downside

scenario weighting by 10% to 50% and decreased the baseline scenario to 50% weighting which resulted in a 3.5% increase in the overall estimated allowance for credit losses.

To further demonstrate the sensitivity of the allowance for credit losses

estimate to macroeconomic forecast weightings assumptions as of June 30, 2023, the Company increased the downside scenario to 100% which resulted in a 21% increase in the overall estimated allowance for credit losses.

The Company’s policies on the CECL method for allowance for credit losses are disclosed in Note 1 to the consolidated financial statements presented in our 2022 Annual Report on Form 10-K.

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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

net income and earnings per share, return on average assets

and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology

advancements, market share and peer comparisons.

The following information should be considered in connection with the Company’s results for the three months ended March 31, 2023:

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

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

represents 28% of total revenues;

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

The following information should be considered in connection with the Company’s results for the three and six months ended June 30, 2023:

net income for the three months ended June 30, 2023 was $30.1 million, down $7.7 million from the second quarter of 2022 and down $3.6 million from the first quarter of 2023;

diluted earnings per share of $0.70 for the three months ended June 30, 2023, down $0.18 from the second quarter of 2022 and down $0.08 from the first quarter of 2023;

excluding securities losses, noninterest income represents 29% of total revenues and was $36.7 million for the three months ended June 30, 2023, down $5.6 million, or 13.2%, from the second quarter of 2022 and up

$0.3 million, or 0.8%, from the first quarter of 2023;

noninterest expense, excluding $1.2 million of acquisition expenses in the second quarter of 2023 and $0.6 million in the first quarter of 2023, respectively, was up $1.5 million, or 2.0%, from the second quarter

of 2022 and down $1.1 million, or 1.4%, from the first quarter of 2023;

period end loans were $8.36 billion, up 5.1%, annualized, from December 31, 2022;

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

period end deposits were $9.53 billion, up 0.4% from December 31, 2022;

book value per share of $28.24 at March 31, 2023;

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

March 31, 2022;

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

book value per share of $28.26 at June 30, 2023;

tangible book value per share (1) was $21.55 at June 30, 2023, $21.52 at March 31, 2023 and $20.99 at June 30, 2022.

Non-GAAP measure - Refer to non-GAAP reconciliation below.

Salisbury Bancorp, Inc.

On July 10, 2023, NBT announced it has received the regulatory approvals and waivers from the Office of the Comptroller of the Currency, the Connecticut State Banking Department and the Federal

Reserve Bank of New York necessary to complete its acquisition of Salisbury.

NBT and Salisbury anticipate closing the transaction on August 11, 2023, subject to the satisfaction of customary closing conditions.

A systems conversion will follow with

locations of Salisbury Bank and Trust Company (“Salisbury Bank”) opening as NBT Bank offices on August 14, 2023.

Salisbury Bank is a Connecticut-chartered commercial bank with 13 banking offices in northwestern Connecticut, the Hudson Valley region

of New York, and southwestern Massachusetts.

Salisbury had assets of $1.56 billion, deposits of $1.36 billion and net loans of $1.24 billion as of June 30, 2023.

Results of Operations

Net income for the three months ended March 31, 2023 was $33.7 million, or $0.78 per diluted common share, down $2.5 million from $36.1 million, or $0.84 per diluted common share for the three

months ended December 31, 2022 and down $5.5 million from $39.1 million, or $0.90 per diluted common share for the first quarter of 2022.

Net interest income for the three months ended March 31, 2023 was $95.1 million, down $4.7 million, or 4.7% from the fourth quarter of 2022 and up $14.7 million, or 18.3%, from the first quarter of 2022, primarily due to higher yields on

earning assets due to increases in the Federal Reserve’s targeted Federal Funds rate as well as the new loan volume pricing, which was partially offset by the higher cost of interest-bearing liabilities.

The first quarter of 2022 also

included $2.0 million ($0.04 per diluted share) of income from the Paycheck Protection Program (“PPP”).

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

per diluted share) in the fourth quarter of 2022.

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

Durbin Amendment to the Dodd-Frank Act (“Durbin Amendment”).

The Company incurred acquisition expenses of $0.6 million ($0.01 per diluted share) and $1.0 million ($0.02 per diluted share) related to the pending merger with Salisbury Bancorp, Inc.

(“Salisbury”) in the first quarter of 2023 and the

fourth quarter of 2022, respectively.

Net income for the three months ended June 30, 2023 was $30.1 million, or $0.70 per diluted common share, down $3.6 million from $33.7 million, or $0.78 per diluted common share for the three months

ended March 31, 2023 and down $7.7 million from $37.8 million, or $0.88 per diluted common share for the second quarter of 2022.

Excluding the impact of securities losses and acquisition expenses, the Company generated $0.80 per diluted share of earnings in the second quarter of 2023, compared to $0.89 per diluted share in the second

quarter of 2022 and $0.88 per diluted share in the first quarter of 2023.

Net interest income was negatively impacted on a linked quarter basis from the continuation of higher funding costs.

In the second quarter of 2023, the Company incurred a $4.5 million ($0.08 per diluted share) securities loss on the sale of two subordinated debt securities held in the AFS portfolio.

In the first quarter of 2023,

the Company incurred a $5.0 million ($0.09 per diluted share) securities loss on the write-off of a subordinated debt security of a failed bank.

The Company incurred acquisition expenses of $1.2 million ($0.02 per diluted share) and $0.6 million ($0.01 per diluted share) related to the pending merger with Salisbury in the second quarter of 2023 and the

first quarter of 2023, respectively.

Net income for the six months ended June 30, 2023 was $63.7 million, or $1.48 per diluted common share, down $13.2 million from $76.9 million, or $1.78 per diluted common share for the six months

ended June 30, 2022.

Excluding the impact of securities losses and acquisition expenses, the Company generated $1.68 per diluted share of earnings for the six months ended June 30, 2023, compared to $1.80 per diluted share for the

six months ended June 30, 2022.

Net interest income was negatively impacted from the continuation of higher funding costs.

In the six months ended June 30, 2023, the Company incurred a $4.5 million ($0.08 per diluted share) securities loss on the sale of two subordinated debt securities held in the AFS portfolio and a $5.0 million

($0.09 per diluted share) securities loss on the write-off of a subordinated debt security of a failed bank.

The Company incurred acquisition expenses of $1.8 million ($0.03 per diluted share) related to the pending merger with Salisbury in the six months ended June 30, 2023.

The following table sets forth certain financial highlights:

Three Months Ended

Six Months Ended

Performance :

Diluted earnings per share

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Total risk-based capital ratio

The following tables provide non-GAAP reconciliations:

The following table provide non-GAAP reconciliations:

Three Months Ended

Six Months Ended

(In thousands, except per share data)

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Net interest income is affected by the interest rate spread, the difference between the yield on interest-earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities.

Net interest income

is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings.

Net interest income was $95.1 million for the first quarter of 2023, down $4.7 million, or 4.7%, from the previous quarter, and included two less days in the first quarter of 2023 compared to the

fourth quarter of 2022.

The FTE net interest margin was 3.55% for the three months ended March 31, 2023, a decrease of 13 basis points (“bps”) from the previous quarter.

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 $89.1 million for the second quarter of 2023, down $6.0 million, or 6.3%, from the previous quarter.

The FTE net interest margin was 3.27% for the three months ended June 30, 2023, a decrease of 28 basis points (“bps”) from

the previous quarter.

Interest income increased $6.4 million, or 5.6%, as the yield on average interest-earning assets increased 16 bps from the prior quarter to 4.42%, while average interest-earning assets of $10.98 billion increased $73.4 million

from the prior quarter, primarily due to an increase in average loans partially offset by a decrease in average investment securities.

Interest expense was up $12.4 million, or 64.7%, as the cost of interest-bearing liabilities increased 66 bps to

1.80% for the quarter ended June 30, 2023, driven by interest-bearing deposit costs increasing 56 bps, as well $200.6 million increase in the average balances of short-term borrowings and a 31 bps increase on the rates paid on those borrowings.

Net interest income was $89.1 million for the second quarter of 2023, up $1.5 million, or 1.7%, from the second quarter of 2022.

The second quarter of 2022 included $1.3 million of Paycheck Protection

Program (“PPP”) loan interest and fees recognized into interest income.

The FTE net interest margin was 3.27% for the three months ended June 30, 2023, an increase of 6 bps from the second quarter of 2022.

Interest income increased $29.1 million,

or 31.8%, as the yield on average interest-earning assets increased 107 bps from the same period in 2022 to 4.42%, while average interest-earning assets of $10.98 billion was comparable to the second quarter of 2022 as the increase in average loans

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

Interest expense increased $27.6 million, or 708.2%, as the cost of interest-bearing liabilities increased 157

bps to 1.80% for the quarter ended June 30, 2023, driven by interest-bearing deposit costs increasing 119 bps, as well as a $557.8 million increase in the average balances of short-term borrowings and a 527 bps rate paid on those borrowings.

Net interest income for the first six months of 2023 was $184.2 million, up $16.2 million, or 9.7%, from the same period in 2022.

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

months ended June 30, 2022 was $3.3 million.

FTE net interest margin was 3.41% for the six months ended June 30, 2023, an increase of 33 bps from the same period in 2022.

Interest income increased $59.1 million, or 33.6%, as the yield on average

interest-earning assets increased 24 bps from the prior quarter to 4.26%, while average interest-earning assets of $10.91 billion increased $108.8 million from the prior quarter, primarily due to an increase in average loans partially offset by a

decrease in investment securities.

Interest expense was up $9.7 million, or 103.6%, as the cost of interest-bearing liabilities increased 57 bps to 1.14% for the quarter ended March 31, 2023, driven by interest-bearing deposit costs increasing 47

bps, as well as higher balances in short-term borrowings and the rates paid on those borrowings.

Net interest income was $95.1 million for the first quarter of 2023, up $14.7 million, or 18.3%, from the first quarter of 2022.

The first quarter of 2022 included $2.0 million of PPP loan interest

and fees recognized into interest income.

The FTE net interest margin was 3.55% for the three months ended March 31, 2023, an increase of 60 bps from the first quarter of 2022.

Interest income increased $30.1 million, or 35.6%, as the yield on

average interest-earning assets increased 117 bps from the same period in 2022 to 4.26%, while average interest-earning assets decreased $179.2 million, or 1.6%, from the first quarter of 2022, primarily due to a decrease in excess liquidity was

partially offset by an increase in loans and investment securities.

Interest expense increased $15.3 million, or 396.4%, as the cost of interest-bearing liabilities increased 91 bps to 1.14% for the quarter ended March 31, 2023, driven by

interest-bearing deposit costs increasing 63 bps, as well as higher balances in short-term borrowings and the rates paid on those borrowings.

interest-earning assets increased 112 bps from the same period in 2022 to 4.34%, while average interest-earning assets of $10.95 billion decreased $88.9 million primarily due to the decrease in excess liquidity more than offsetting the increase in

average loans.

Interest expense was up $42.9 million, or 553.2%, for the six months ended June 30, 2023 as compared to the same period in 2022 driven by interest-bearing deposit costs increasing 92 bps, as well as a $458.1 million increase in the

average balances of short-term borrowings and a 515 bps rate paid on those borrowings.

Average Balances and Net Interest Income

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Three Months Ended

March 31, 2023

December 31, 2022

March 31, 2022

June 30, 2023

June 30, 2022

(Dollars in thousands)

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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 an FTE basis using the statutory Federal income tax rate of 21%.

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

Six Months Ended

June 30, 2023

June 30, 2022

(Dollars in thousands)

Short-term interest-bearing accounts

Securities taxable (1)

Securities tax-exempt (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

Federal funds purchased

Repurchase agreements

Short-term borrowings

Long-term debt

Subordinated debt, net

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%.

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

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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,

Three Months Ended June 30,

Increase (Decrease)

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Change in FTE net interest income

Six Months Ended June 30,

Increase (Decrease)

2023 over 2022

(In thousands)

Short-term interest-bearing accounts

Securities taxable

Securities tax-exempt

Federal Reserve Bank and FHLB stock

Total FTE interest income

Money market deposit accounts

NOW deposit accounts

Savings deposits

Time deposits

Federal funds purchased

Repurchase agreements

Short-term borrowings

Long-term debt

Subordinated debt, net

Junior subordinated debt

Total FTE interest expense

Change in net FTE interest income

Noninterest Income

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noninterest income for the periods indicated:

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(In thousands)

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Total noninterest income

Noninterest income for the three months ended March 31, 2023 was $31.4 million, down $2.7 million, or 7.9%, from the fourth quarter of 2022 and down $11.3 million, or 26.4%, from the first quarter

During the three months ended March 31, 2023, the Company incurred a $5.0 million securities loss on the write-off of a subordinated debt security of a failed bank.

Excluding net securities losses, noninterest income for the three months

ended March 31, 2023 was $36.4 million, up $2.1 million, or 6.1% from the prior quarter and down $6.4 million, or 15.0% from the first quarter of 2022.

The increase from the prior quarter was primarily driven by an increase in retirement plan

administration fees driven by seasonal revenues.

The decrease from the first quarter of 2022 was driven by lower card services income from the impact of the statutory price cap provisions of the Durbin Amendment of approximately $4.0 million.

addition, the decrease from the prior year was impacted by lower retirement plan administration fees driven by unfavorable market performance and a decrease in certain activity-based fees along with a decrease in wealth management fees driven

primarily by a decline in market performance.

Noninterest income for the three months ended June 30, 2023 was $32.0 million, up $0.6 million, or 2.0%, from the prior quarter and down $9.6 million, or 23.1%, from the second quarter of 2022.

the three months ended June 30, 2023, the Company incurred a $4.5 million securities loss on the sale of two subordinated debt securities held in the AFS portfolio and during the three months ended March 31, 2023, the Company incurred a $5.0

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

Excluding net securities losses, noninterest income for the three months ended June 30, 2023 was $36.7 million, up $0.3 million, or 0.8%, from the prior

quarter and down $5.6 million, or 13.2%, from the second quarter of 2022.

The increase from the prior quarter was primarily driven by an increase in card services income and retirement plan administration fees.

The decrease from the second quarter

of 2022 was driven by lower card services income from the impact of the statutory price cap provisions of the Durbin Amendment of approximately $4.0 million.

In addition, the decrease from the prior year was impacted by lower retirement plan

administration fees driven by a decrease in activity-based fees which were primarily related to statutory plan document restatements.

Noninterest income for the six months ended June 30, 2023 was $63.5 million, down $20.9 million, or 24.7%, from the same period in 2022.

Excluding net securities losses, noninterest income for the six

months ended June 30, 2023 was $73.1 million, down $12.0 million, or 14.1%, from the same period in 2022.

The decrease from the prior year was primarily due to lower card services income from the impact of the statutory price cap provisions of the

Durbin Amendment of approximately $8.0 million, lower retirement plan administration fees driven by a decrease in certain activity-based fees and a decrease in other noninterest income due to lower commercial loan swap fees.

Noninterest Expense

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

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(In thousands)

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Total noninterest expense

Noninterest expense for the three months ended March 31, 2023 was $79.3 million, down $0.2 million, or 0.2%, from the prior quarter and up $7.2 million, or 10.0%, from the first quarter of 2022.

The Company incurred acquisition expenses of $0.6 million and $1.0 million related to the pending merger with Salisbury in the first quarter of 2023 and the fourth quarter of 2022, respectively.

Excluding acquisition expenses, noninterest expense for

the three months ended March 31, 2023 was $78.7 million, up $0.2 million, or 0.2%, from the prior quarter and up $6.6 million, or 9.1%, from the first quarter of 2022.

The increase from the prior quarter was primarily driven by higher salaries and

employee benefits due to seasonally higher payroll taxes, seasonally higher stock-based compensation expenses and merit pay increases.

In addition, the increase in occupancy costs was due to seasonal costs including utility expenses and the increase

in FDIC assessment expense was due to the statutory increase in the FDIC assessment rate.

The increase from the prior quarter was partially offset by lower professional fees and outside services driven by seasonal expenses and timing of external

services for several tactical and strategic initiatives incurred in the prior quarter and other expenses declined from the seasonally higher linked fourth quarter of 2022.

The increase from the first quarter of 2022 was driven by increased salaries

and wages, including merit pay increases, higher benefit plan expenses and staff additions.

In addition, the increase in technology and data services was due to continued investment in digital platform solutions, the increase in FDIC assessment

expense was driven by the statutory increase in the FDIC assessment rate, and other expenses were higher due to the increase in actuarially determined expenses related to the Company’s retirement plans and higher travel and training expenses due to

increased activity compared to the pandemic-impacted first quarter of 2022.

Income tax expense for the three months ended March 31, 2023 was $9.6 million, down $1.0 million from the prior quarter and down $1.6 million from the first quarter of 2022.

The effective tax rate

was 22.2% for the first quarter of 2023 compared to 22.6% for the fourth quarter of 2022 and 22.2% for the first quarter of 2022.

Noninterest expense for the three months ended June 30, 2023 was $78.8 million, down $0.5 million, or 0.7%, from the prior quarter and up $2.7 million, or 3.5%, from the second quarter of 2022.

Company incurred acquisition expenses of $1.2 million, $0.6 million and $1.0 million related to the pending merger with Salisbury in the second quarter of 2023, first quarter of 2023 and the fourth quarter of 2022, respectively.

acquisition expenses, noninterest expense for the three months ended June 30, 2023 was $77.6 million, down $1.1 million, or 1.4%, from the prior quarter and up $1.5 million, or 2.0%, from the second quarter of 2022.

The decrease from the prior

quarter was primarily driven by lower salaries and employee benefits due to seasonally higher payroll taxes and higher stock-based compensation expenses in the first quarter along with a lower level of incentive compensation in the second quarter,

which were partially offset by a full quarter of merit pay increases and higher health and welfare benefits.

These decreases were partially offset by higher technology and data services due to continued investment in digital platform solutions and

an increase in other expenses driven by a $0.1 million reduction in the reserve for unfunded loan commitments in the second quarter of 2023 compared to a $0.6 million reduction in the first quarter 2023.

The increase from the second quarter of 2022

was driven by the increase in technology and data services due to continued investment in digital platform solutions, the increase in Federal Deposit Insurance Corporation (“FDIC”) assessment expense was driven by the statutory increase in the FDIC

assessment rate, and increased occupancy costs were driven by higher utilities, rent and seasonal maintenance costs.

Noninterest expense for the six months ended June 30, 2023 was $158.1 million, up $9.9 million, or 6.6%, from the same period in 2022.

The Company incurred acquisition expenses of $1.8 million for the

six months ended June 30, 2023.

Excluding acquisition expenses, noninterest expense for the six months ended June 30, 2023 was $156.3 million, up $8.0 million, or 5.4%, from the same period in 2022.

The increase from the prior year was driven by

higher salaries and employee benefits due to increased salaries and wages including merit pay increases and higher health and welfare benefits which were partially offset by lower levels of incentive compensation.

In addition, the increase in

technology and data services was due to continued investment in digital platform solutions, the increase in FDIC assessment expense was driven by the statutory increase in the FDIC assessment rate, increased occupancy costs were driven by higher

utilities, rent and maintenance costs and other expenses were higher due to the increase in actuarially determined expenses related to the Company’s retirement plans.

Income tax expense for the three months ended June 30, 2023 was $8.6 million, down $0.9 million from the prior quarter and down $2.3 million from the second quarter of 2022 due to a decrease in

pre-tax net income.

The effective tax rate was 22.4% for the second quarter of 2023, compared to 22.2% in the prior quarter and 22.5% for the second quarter of 2022.

Income tax expense for the six months ended June 30, 2023 was $18.2 million, down $3.9 million from the same period of 2022 due to a decrease in pre-tax net income.

The effective tax rate was 22.3%

for the six months ended June 30, 2023 and 2022.

ANALYSIS OF FINANCIAL CONDITION

Total securities decreased $25.9 million, or 1.0%, from December 31, 2022 to March 31, 2023.

The securities portfolio represents 20.7% of total assets as of March 31, 2023 as compared to 21.1% of

total assets as of December 31, 2022.

Total securities decreased $76.8 million, or 3.1%, from December 31, 2022 to June 30, 2023.

The securities portfolio represented 20.2% of total assets as of June 30, 2023 as compared to 21.1% of total

assets as of December 31, 2022.

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

March 31, 2023

June 30, 2023

December 31, 2022

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

agency notes and collateralized mortgage obligations are all guaranteed by Fannie Mae, Freddie Mac, the Federal Home Loan Bank, Federal Farm Credit

Banks or Ginnie Mae (“GNMA”).

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

Currently, there are no subprime

mortgages in our investment portfolio .

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

(In thousands)

March 31, 2023

June 30, 2023

December 31, 2022

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Other consumer

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

Total loans increased by $114.4 million, or 5.7% annualized, from December 31, 2022 to March 31, 2023.

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

Total loans increased by $208.0 million, or 5.1% annualized, from December 31, 2022 to June 30, 2023.

Commercial and industrial loans increased $53.1 million to $1.32 billion;

commercial real

estate loans increased $37.7 million to $2.85 billion;

commercial real estate

loans increased $76.3 million to $2.88 billion;

and total consumer loans increased $78.6 million to $4.15 billion.

Total loans represent approximately 69.8% of assets as of March 31, 2023, as compared to 69.4% as of December 31, 2022.

Included in total consumer loans is $158.0 million of a portfolio of loans in a run-off status.

Total loans represent approximately

70.3% of total assets as of June 30, 2023, as compared to 69.4% as of December 31, 2022.

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

Beginning January 1, 2023, the Company adopted Accounting Standards Updates (“ASU”) 2022-02 Financial Instruments - CECL Losses (Topic 326):

Troubled Debt

Restructurings and Vintage Disclosures which resulted in an insignificant change to the Company’s methodology for estimating the allowance for credit losses on Troubled Debt Restructurings (“TDRs”) since December 31, 2022.

The January 1,

2023 decrease in allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $0.6 million, which increased retained earnings by $0.5 million and decreased the deferred tax asset by $0.1 million.

Troubled Debt Restructurings and Vintage

Disclosures which resulted in an insignificant change to the Company’s methodology for estimating the allowance for credit losses on Troubled Debt Restructurings (“TDRs”) since December 31, 2022.

The January 1, 2023 decrease in allowance

for credit loss on TDR loans relating to adoption of ASU 2022-02 was $0.6 million, which increased retained earnings by $0.5 million and decreased the deferred tax asset by $0.1 million .

Management considers the accounting policy relating to the allowance for credit losses to be a critical estimate given the degree of judgment exercised in evaluating the level of the allowance

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The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans).

The allowance for credit losses is a valuation account that is deducted from, or

added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans.

The allowance for credit losses is a valuation account that is deducted from, or added

to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans.

Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible.

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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.

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

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

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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.

Company historical loss experience was supplemented with peer information when there was insufficient loss data for the

Significant management judgment is required at each point in the measurement process.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics

The respective quantitative allowance for each segment is measured using an econometric, discounted probability of default and loss given default modeling methodology in which distinct, segment-specific multi-variate regression models are

applied to multiple, probabilistically weighted external economic forecasts.

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

value of modeled cash flows and amortized cost basis.

After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the

loan portfolio at the balance sheet date.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar

risk characteristics exist.

regression models are applied to multiple, probabilistically weighted external economic forecasts.

Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference

between the net present value of modeled cash flows and amortized cost basis.

After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime

losses that exist in the loan portfolio at the balance sheet date .

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.

Upon adoption of CECL, management revised

the manner in which loans were pooled for similar risk characteristics.

Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined

or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.

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.

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appropriate based on evaluation and analysis of the loan portfolio.

The allowance for credit losses totaled $100.3 million at March 31, 2023, compared to $100.8 million at December 31, 2022 and $90.0 million at March 31, 2022.

The allowance for credit losses as a

percentage of loans was 1.21% at March 31, 2023, compared to 1.24% at December 31, 2022 and 1.18% at March 31, 2022.

The allowance for credit losses was 538.63% of nonperforming loans at March 31, 2023, compared to 478.72% at December 31, 2022 and

324.25% at March 31, 2022.

The allowance for credit losses was 615.63% of nonaccrual loans at March 31, 2023, compared to 584.92% of nonaccrual loans at December 31, 2022 and 348.68% at March 31, 2022.

The decrease in allowance for credit losses from

December 31, 2022 compared to March 31, 2023 was primarily due to a reduction in expected net losses in the residential solar portfolios, an improvement in economic forecasts and a reduction in allowance on TDRs related to the adoption of ASU

These decreases were partially offset by an increase in providing for the increase in loan balances and declining prepayment speeds.

The increase in allowance for credit losses from March 31, 2022 to March 31, 2023 was primarily due to an

increase in providing for the increase in loan balances.

The provision for loan losses was $3.9 million for three months ended March 31, 2023, compared to $7.7 million in the prior quarter and $0.6 million for the same period in the prior year.

expense decreased from the prior quarter due to a lower level of loan growth in the first quarter, generally stable economic forecasts and portfolio mix composition and quality.

The increase in provision expense from March 31, 2022, was driven by

higher net charge-offs and stable economic conditions, in contrast to improved economic conditions in the CECL forecast in the same period in the prior year.

Net charge-offs totaled $3.8 million during the three months ended March 31, 2023, compared

to net charge-offs of $3.7 million during the fourth quarter of 2022 and $2.6 million in the first quarter of 2022.

Net charge-offs to average loans was 19 bps for the three months ended March 31, 2023, compared to 18 bps for the fourth quarter of

2022 and 14 bps for the three months ended March 31, 2022.

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

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

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 allowance for credit losses totaled $100.4 million at June 30, 2023, compared to $100.3 million at March 31, 2023 and $93.6 million at June 30, 2022.

The allowance for credit losses

as a percentage of loans was 1.20% at June 30, 2023, compared to 1.21% at March 31, 2023 and 1.20% at June 30, 2022.

The allowance for credit losses was 510.01% of nonperforming loans at June 30, 2023, compared to 538.63% at March 31, 2023 and

363.23% at June 30, 2022.

The allowance for credit losses was 593.00% of nonaccrual loans at June 30, 2023, compared to 615.63% of nonaccrual loans at March 31, 2023 and compared to 395.39% at June 30, 2022.

The allowance for credit losses as of

June 30, 2023 is fairly consistent with the allowance estimates as of March 31, 2023.

The increase in the allowance for credit losses from June 30, 2022 to June 30, 2023 was primarily due to providing for loan growth experienced over the

The provision for loan losses was $3.6 million for three months ended June 30, 2023, compared to $3.9 million in the prior quarter and $4.4 million for the same period in the prior year.

Provision expense decreased

from the same period in the prior year due the second quarter of 2022 including an increase in the allowance due to the deterioration in the forecast of economic conditions, increase in loan balances and an additional specific reserve established,

which were partially offset by an increase in net charge-offs in the second quarter of 2023.

Net charge-offs totaled $3.5 million during the three months ended June 30, 2023, compared to net charge-offs of $3.8 million during the first quarter of

2023 and $0.8 million in the second quarter of 2022.

Net charge-offs to average loans was 17 bps for the three months ended June 30, 2023, compared to 19 bps for the first quarter of 2023 and 4 bps for the three months ended June 30, 2022.

The provision for loan losses was $7.5 million for the six months ended June 30, 2023, compared to $5.0 million for the six months ended June 30, 2022.

Provision expense increased from the same period in the prior

year due primarily to an increase in net charge-offs during the six months ended June 30, 2023.

Net charge-offs totaled $7.3 million during the six months ended June 30, 2023, compared to net charge-offs of $3.4 million during the six months ended

June 30, 2022.

Net charge-offs to average loans was 18 bps for the six months ended June 30, 2023, compared to 9 bps for the six months ended June 30, 2022.

As of June 30, 2023, the unfunded commitment reserve totaled $4.4 million, compared to $4.5 million as of March 31, 2023 and $5.1 million as of June 30, 2022.

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

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

Loans may also be placed on nonaccrual when circumstances indicate

that the borrower may be unable to meet the contractual principal or interest payments.

The threshold for evaluating classified and nonperforming loans specifically evaluated for individual credit loss is $1.0 million.

OREO represents property acquired through foreclosure

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

March 31, 2023

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

June 30, 2023

December 31, 2022

(Dollars in thousands)

N onaccrual loans:

Nonaccrual loans:

Troubled loan modifications (TDRs prior to 2023)

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Total allowance for loan losses to nonaccrual loans

Total nonperforming assets were $18.7 million at March 31, 2023, compared to $21.2 million at December 31, 2022 and $27.8 million at March 31, 2022.

Nonperforming loans at March 31, 2023 were $18.6

million, or 0.23% of total loans, compared with $21.1 million, or 0.26% of total loans at December 31, 2022 and $27.8 million, or 0.36% of total loans at March 31, 2022.

The decrease in nonperforming loans primarily resulted from a reduction in

consumer past due loans 90 days past due and still accruing and a reduction in commercial loans in nonaccrual.

Total nonaccrual loans were $16.3 million or 0.20% of total loans at March 31, 2023, compared to $17.2 million or 0.21% of total loans at

December 31, 2022 and $25.8 million or 0.34% of total loans at March 31, 2022.

Past due loans as a percentage of total loans was 0.30% at March 31, 2023, down from 0.33% at December 31, 2022 and up from 0.24% at March 31, 2022.

In addition to nonperforming loans discussed above, the Company has also identified approximately $55.9 million in potential problem loans at March 31, 2023 as compared to $52.0 million at December

31, 2022 and $66.7 million at March 31, 2022.

Total nonperforming assets were $19.9 million at June 30, 2023, compared to $21.2 million at December 31, 2022 and $25.8 million at June 30, 2022.

Nonperforming loans at June 30, 2023 were $19.7

million, or 0.24% of total loans, compared with $21.1 million, or 0.26% of total loans at December 31, 2022 and $25.8 million, or 0.33% of total loans at June 30, 2022.

The decrease in nonperforming loans from June 30, 2022 primarily resulted from

a reduction in commercial nonaccrual loans.

Total nonaccrual loans were $16.9 million or 0.20% of total loans at June 30, 2023, compared to $17.2 million or 0.21% of total loans at December 31, 2022 and compared to $23.7 million or 0.30% of total

loans at June 30, 2022.

Past due loans as a percentage of total loans was 0.45% at June 30, 2023, up from 0.33% at December 31, 2022 and up from 0.40% at June 30, 2022.

In addition to nonperforming loans discussed above, the Company has also identified approximately $90.6 million in potential problem loans at June 30, 2023 as compared to $52.0 million at December 31,

2022 and $56.0 million at June 30, 2022.

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

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

Potential problem loans are classified by the Company’s loan rating system as “substandard.” The decrease in potential problem loans from March 31, 2022 is primarily due to the improved economic conditions.

Higher risk industries include

entertainment, restaurants, retail, healthcare and accommodations.

As of March 31, 2023, 8.4% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic.

Management cannot predict the extent to which economic

conditions may worsen or other factors, which may impact borrowers and the potential problem loans.

Accordingly, there can be no assurance that other loans will not become over 90 days past due, be placed on nonaccrual, become troubled loans

modifications or require increased allowance coverage and provision for loan losses.

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

within its footprint.

Total deposits were $9.68 billion at March 31, 2023, up $185.3 million, or 2.0%, from December 31, 2022.

The increase in deposits was concentrated in time and money market accounts with seasonal

municipal deposit inflows during the first quarter of 2023.

Total average deposits decreased $0.70 billion, or 6.8%, from the same period last year.

The decrease was driven primarily by a decrease of $207.6 million, or 5.6%, in demand deposits,

combined with a decrease in interest-bearing deposits of $491.5 million, or 7.5%, due to decreases in money market accounts, partially offset by an increase in time accounts.

The decrease in average balances was due primarily to larger commercial

customers taking advantage of higher yielding investment opportunities in both the Company’s wealth management solutions as well as other attractive offerings in the market.

As of March 31, 2023 and December 31, 2022 the estimated amounts of

uninsured deposits based on the same methodologies and assumptions used for the bank regulatory reporting was $3.7 billion and $3.6 billion, respectively.

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

Potential problem loans are classified by the Company’s loan rating system as “substandard.” The increase in potential problem loans from December 31, 2022 and June 30, 2022 is primarily due to the migration to substandard of a $15.7 million

commercial real estate relationship that is adequately collateralized.

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

Accordingly, there can

be no assurance that other loans will not become over 90 days past due, be placed on nonaccrual, become troubled loans modifications or require increased allowance coverage and provision for loan losses.

To mitigate this risk the Company maintains

a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.

Total deposits were $9.53 billion at June 30, 2023, up $34.0 million, or 0.4%, from December 31, 2022.

As of June 30, 2023 there were $242.0 million of brokered time deposits, up from $19.4 million as

of December 31, 2022.

The Company continues to experience the migration from no interest and low interest checking and savings accounts into higher cost money market and time deposit instruments.

Total average deposits decreased $0.7 million, or

7.0%, from the same period last year.

The decrease was driven primarily by a decrease of $301.4 million, or 8.1%, in demand deposits, combined with a decrease in interest-bearing deposits of $414.3 million, or 6.3%, due to decreases in money market

accounts, partially offset by an increase in time accounts.

The decrease in average balances was due primarily to larger commercial customers taking advantage of higher yielding investment opportunities in both the Company’s wealth management

solutions as well as other offerings in the market.

As of June 30, 2023 and December 31, 2022 the estimated amounts of uninsured deposits based on the methodologies and assumptions used for the bank regulatory reporting was $3.5 billion and $3.6

billion, respectively.

Borrowed Funds

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

Short-term borrowings totaled $475.2 million at March 31, 2023 compared to $585.0 million at December 31, 2022.

Long-term debt was $29.8 million at March 31, 2023 compared to $4.8 million at December 31, 2022.

Short-term borrowings totaled $652.4 million at June 30, 2023 compared to $585.0 million at December 31, 2022.

Long-term debt was $29.8 million at June 30, 2023 compared to $4.8 million at December 31, 2022.

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

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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.

on October 1, 2025.

The subordinated debt issuance cost of $2.2 million are being amortized on a straight-line basis into interest expense over five years.

As of March 31, 2023 and December 31, 2022 the subordinated debt net of unamortized issuance

As of June 30, 2023 and December 31, 2022 the subordinated debt net of unamortized issuance

costs was $97.1 million and $96.9 million, respectively.

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Capital Resources

Stockholders’ equity of $1.21 billion represented 10.23% of total assets at March 31, 2023 compared with $1.17 billion, or 10.00% of total assets, as of December 31, 2022.

Stockholders’ equity

increased $38.1 million from December 31, 2022 driven by net income of $33.7 million for the three months ending March 31, 2023 and a $16.1 million increase in accumulated other comprehensive income due primarily to the change in market value of

securities available for sale, partially offset by dividends declared of $12.9 million.

The deferred tax asset related to the unrealized losses in investment securities decreased $5.1 million from December 31, 2022.

The Company did not purchase shares of its common stock during the three months ended March 31, 2023.

As of March 31, 2023, there were 1,600,000 shares available for repurchase under the Company's

share repurchase plan, which was authorized on December 20, 2021 and is set to expire on December 31, 2023.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at March 31, 2023 under applicable bank regulatory requirements.

Capital measurements are well in

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

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

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

Stockholders’ equity of $1.21 billion represented 10.18% of total assets at June 30, 2023 compared with $1.17 billion, or 10.00% of total assets, as of December 31, 2022.

Stockholders’ equity increased $36.9 million from

December 31, 2022 driven by net income of $63.7 million for the six months ended June 30, 2023, partially offset by dividends declared of $25.7 million and the repurchase of common stock of $2.8 million.

The Company purchased 87,000 shares of its common stock during the second quarter of 2023 at an average price of $31.94 per share under its previously announced share repurchase program.

may repurchase shares of its common stock from time to time to mitigate the potential dilutive effects of stock-based incentive plans and other potential uses of common stock for corporate purposes.

As of June 30, 2023, there were 1,513,000 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 June 30, 2023 under applicable bank regulatory requirements.

Capital measurements are well in excess

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

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

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

Capital Measurements

March 31, 2023

June 30, 2023

December 31, 2022

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

In March 2020, the Office of Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”) announced an interim

final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL.

Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance

for credit losses (after-tax) was deferred and was phased into regulatory capital at 25% per year commencing January 1, 2022.

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

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

The cumulative adjustment to the allowance for credit losses

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

In March 2020, the Office of Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System and the FDIC announced an interim final rule to delay the

estimated impact on regulatory capital stemming from the implementation of CECL.

Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses

(after-tax) was deferred and was phased into regulatory capital at 25% per year commencing January 1, 2022.

For the ongoing impact of CECL, the Company was allowed to defer the regulatory capital impact of the allowance for credit losses in an

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

The cumulative adjustment to the allowance for credit losses between January

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

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

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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.

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

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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.

In managing the Company’s asset/liability position, the Board and management aim to regulate the Company’s interest rate risk while minimizing net interest margin compression.

At times, depending on

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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.

Information, such as principal balance,

interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet.

In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and

mortgage related investment securities along with any optionality within the deposits and borrowings.

The model is first run under an assumption of a flat rate scenario (i.e.

no change in current interest rates) with a static balance sheet.

Three additional models are run in

which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet.

Under these scenarios, assets subject to prepayments are adjusted to account for

faster or slower prepayment assumptions.

additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet.

Under these scenarios, assets subject to prepayments

are adjusted to account for faster or slower prepayment assumptions.

Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario.

The resulting changes in net interest income are then measured

against the flat rate scenario.

The 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.

decrease in net interest income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors.

In the rising rate scenarios, net interest income is

projected to experience an increase from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, money market deposit accounts and time accounts.

Net interest income

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

The following table summarizes the percentage change in net

interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the March 31, 2023 balance sheet position:

The decrease in net interest

income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors.

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

increase from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, money market deposit accounts and time accounts.

Net interest income for the next twelve months

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

The following table summarizes the percentage change in net interest income in the rising

and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the June 30, 2023 balance sheet position:

Interest Rate Sensitivity Analysis

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net interest income

The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of short to mid-term interest rates which are heavily driven by

inflationary pressures and FOMC monetary policy.

In response to the economic impact of the pandemic, the federal funds rate was reduced to near zero in March 2020, term interest rates fell sharply across the yield curve and the Company reduced

deposit rates.

Post-pandemic, inflationary pressures have resulted in a higher overall yield curve with Fed Funds increases of 425 bps in 2022.

Expectations for continued increases to short-term interest rates in 2023 have been tempered by weakness

in the financial sector of the economy.

With deposit rates coming off their historic lows, the Company continues to focus on managing deposit expense in an environment with elevated interest rates and heightened demand for deposits.

The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of short to mid-term interest rates which are

heavily driven by inflationary pressures and Federal Open Market Committee monetary policy.

In response to the economic impact of the pandemic, the federal funds rate was reduced to near zero in March 2020, term interest rates fell sharply across

the yield curve and the Company reduced deposit rates.

Post-pandemic, inflationary pressures have resulted in a higher overall yield curve with Fed Funds increases of 425 bps in 2022 and an additional 75 bps in 2023.

Current expectations are for

short-term interest rates to normalize at current levels in the near-term as inflation levels have moderated.

While deposit rates have increased meaningfully in 2023 in conjunction with the increase to short term interest rates, the Company

continues to focus on managing deposit expense and overall deposit levels in an environment with elevated demand for liquidity.

Liquidity Risk

Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources.

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.

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

ALCO is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity.

Liquidity policies must also provide

the flexibility to implement appropriate strategies, along with regular monitoring of liquidity and testing of the contingent liquidity plan.

Liquidity policies must also provide the

flexibility to implement appropriate strategies, along with regular monitoring of liquidity and testing of the contingent liquidity plan.

Requirements change as loans grow, deposits and securities mature and payments on borrowings are made.

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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.

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.

2023, the Company’s Basic Surplus measurement was 13.9% of total assets, or $1.66 billion, as compared to the December 31, 2022 Basic Surplus of 13.2%, or $1.55 billion, and was above the Company’s minimum of 5% (calculated at $594.5 million and

$587.0 million of period end total assets at March 31, 2023 and December 31, 2022, respectively) set forth in its liquidity policies.

At March 31, 2023 and December 31, 2022, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $457.8 million and $443.8 million, respectively.

At March 31, 2023 and December 31, 2022, the

Bank had $8.0 million of collateral encumbered by municipal letters of credit.

The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.16 billion at March 31, 2023 and $1.17 billion at December

In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $835.7 million and $898.1 million at March 31, 2023 and December 31, 2022, respectively, or used to collateralize other

borrowings, such as repurchase agreements.

The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $1.87

billion at March 31, 2023 and $1.92 billion at December 31, 2022.

$587.0 million of period end total assets as June 30, 2023 and December 31, 2022, respectively) set forth in its liquidity policies.

At June 30, 2023 and December 31, 2022, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $622.8 million and $443.8 million, respectively.

At June 30, 2023 and December 31, 2022, the Bank

had $68.0 million and $8.0 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 $924.5 million at June 30, 2023

and $1.17 billion at December 31, 2022.

In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $1.02 billion and $898.1 million at June 30, 2023 and December 31, 2022, respectively, or

used to collateralize other borrowings, such as repurchase agreements.

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

additional liquidity of $1.78 billion at June 30, 2023 and $1.92 billion at December 31, 2022.

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

At March 31, 2023 and December 31,

2022, the Bank had the capacity to borrow $654.2 million and $622.7 million, respectively, from this program.

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

Under this policy, remaining available borrowing capacity totaled

$2.48 billion at March 31, 2023 and $2.41 billion at December 31, 2022.

30, 2023 and December 31, 2022, the Bank had the capacity to borrow $677.0 million and $622.7 million, respectively, from this program.

The Company’s internal policy authorizes borrowing up to 25% of assets.

Under this policy, remaining available

borrowing capacity totaled $2.27 billion at June 30, 2023 and $2.41 billion at December 31, 2022.

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

By tempering the need for cash flow liquidity with reliable

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

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

interest rate sensitivity of the balance sheet.

By tempering the need for cash flow

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

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

impacted by the overall interest rate sensitivity of the balance sheet.

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

The Company considers its Basic Surplus position to be strong.

However, certain events may adversely impact

the Company’s liquidity position in 2023.

However, certain

events may adversely impact the Company’s liquidity position in 2023.

Higher interest rates could result in deposit declines as depositors have alternative opportunities for yield on their excess funds.

In the current economic environment, draws against lines of credit could

drive asset growth higher.

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%.

monetary and fiscal policy actions taken by the federal government during the COVID-19 pandemic have helped to mitigate these risks.

Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19

pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.

At March 31, 2023, a portion of the Company’s loans and securities were pledged as collateral on borrowings.

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

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

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

policy level of 5%.

Significant monetary and fiscal policy actions taken by the federal government during the COVID-19 pandemic helped to mitigate these risks.

Additionally, 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.

While, the pandemic has come to an end, this enhanced monitoring continues as rising interest rates and

the recent bank failures have led to a deposit decline in the banking system and increased volatility to liquidity risk.

At June 30, 2023, a portion of the Company’s loans and securities were pledged as collateral on borrowings.

Therefore, once on-balance-sheet liquidity is reduced, 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.

approval of the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for

the preceding two years as specified in applicable OCC regulations.

At March 31, 2023, approximately $91.4 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC.

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 June 30, 2023, approximately $96.3 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.

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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