NBT BANCORP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS NBT Bancorp Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) June 30, December 31, (In thousands, except share and per share data) 2023 2022 Assets Cash and due from banks $ 170,010 $ 166,488 Short-term interest-bearing accounts 31,878 30,862 Equity securities, at fair value 33,893 30,784 Securities available for sale, at fair value 1,453,926 1,527,225 Securities held to maturity (fair value $ 808,641 and $ 812,647 , respectively) 912,876 919,517 Federal Reserve and Federal Home Loan Bank stock 53,076 44,713 Loans held for sale 1,866 562 Loans 8,358,124 8,150,147 Less allowance for loan losses 100,400 100,800 Net loans $ 8,257,724 $ 8,049,347 Premises and equipment, net 66,799 69,047 Goodwill 281,204 281,204 Intangible assets, net 6,497 7,341 Bank owned life insurance 233,400 232,409 Other assets 387,348 379,797 Total assets $ 11,890,497 $ 11,739,296 Liabilities Demand (noninterest bearing) $ 3,326,685 $ 3,617,324 Savings, NOW and money market 5,224,560 5,444,837 Time 978,674 433,772 Total deposits $ 9,529,919 $ 9,495,933 Short-term borrowings 652,413 585,012 Long-term debt 29,764 4,815 Subordinated debt, net 97,145 96,927 Junior subordinated debt 101,196 101,196 Other liabilities 269,567 281,859 Total liabilities $ 10,680,004 $ 10,565,742 Stockholders’ equity Preferred stock, $ 0.01 par value. Authorized 2,500,000 shares at June 30 , 2023 and December 31, 2022 $ - $ - Common stock, $ 0.01 par value. Authorized 100,000,000 shares at June 30 , 2023 and December 31, 2022 ; issued 49,651,493 at June 30 , 2023 and December 31, 2022 497 497 Additional paid-in-capital 578,322 577,853 Retained earnings 996,920 958,433 Accumulated other comprehensive loss ( 190,100 ) ( 190,034 ) Common stock in treasury, at cost, 6,824,729 and 6,793,670 shares at June 30 , 2023 and December 31, 2022 , respectively ( 175,146 ) ( 173,195 ) Total stockholders’ equity $ 1,210,493 $ 1,173,554 Total liabilities and stockholders’ equity $ 11,890,497 $ 11,739,296 See accompanying notes to unaudited interim consolidated financial statements. 3 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Income (unaudited) Three Months Ended June 30, Six Months Ended June 30 , (In thousands, except per share data) 2023 2022 2023 2022 Interest, fee and dividend income Interest and fees on loans $ 106,935 $ 78,539 $ 207,834 $ 151,882 Securities available for sale 7,493 7,317 15,109 14,157 Securities held to maturity 4,991 4,185 10,026 7,678 Other 1,170 1,442 1,812 1,967 Total interest, fee and dividend income $ 120,589 $ 91,483 $ 234,781 $ 175,684 Interest expense Deposits $ 19,986 $ 1,756 $ 31,130 $ 3,598 Short-term borrowings 8,126 13 13,045 29 Long-term debt 290 33 337 120 Subordinated debt 1,335 1,359 2,669 2,718 Junior subordinated debt 1,767 737 3,449 1,286 Total interest expense $ 31,504 $ 3,898 $ 50,630 $ 7,751 Net interest income $ 89,085 $ 87,585 $ 184,151 $ 167,933 Provision for loan losses 3,606 4,390 7,515 4,986 Net interest income after provision for loan losses $ 85,479 $ 83,195 $ 176,636 $ 162,947 Noninterest income Service charges on deposit accounts $ 3,733 $ 3,763 $ 7,281 $ 7,451 Card services income 5,121 9,751 9,966 18,446 Retirement plan administration fees 11,735 12,676 23,197 25,955 Wealth management 8,227 8,252 16,314 16,892 Insurance services 3,716 3,578 7,647 7,366 Bank owned life insurance income 1,528 1,411 3,406 3,065 Net securities (losses) ( 4,641 ) ( 587 ) ( 9,639 ) ( 766 ) Other 2,626 2,812 5,282 5,906 Total noninterest income $ 32,045 $ 41,656 $ 63,454 $ 84,315 Noninterest expense Salaries and employee benefits $ 46,834 $ 46,716 $ 94,989 $ 92,224 Technology and data services 9,305 8,945 18,312 17,492 Occupancy 6,923 6,487 14,143 13,280 Professional fees and outside services 4,159 3,906 8,337 8,182 Office supplies and postage 1,676 1,548 3,304 2,972 FDIC assessment 1,344 810 2,740 1,612 Advertising 525 730 1,174 1,384 Amortization of intangible assets 458 545 994 1,181 Loan collection and other real estate owned, net 691 757 1,546 1,141 Acquisition expenses 1,189 - 1,807 - Other 5,690 5,675 10,770 8,794 Total noninterest expense $ 78,794 $ 76,119 $ 158,116 $ 148,262 Income before income tax expense $ 38,730 $ 48,732 $ 81,974 $ 99,000 Income tax expense 8,658 10,957 18,244 22,099 Net income $ 30,072 $ 37,775 $ 63,730 $ 76,901 Earnings per share Basic $ 0.70 $ 0.88 $ 1.49 $ 1.79 Diluted $ 0.70 $ 0.88 $ 1.48 $ 1.78 See accompanying notes to unaudited interim consolidated financial statements. 4 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended June 30, Six Months Ended June 30 , (In thousands) 2023 2022 2023 2022 Net income $ 30,072 $ 37,775 $ 63,730 $ 76,901 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized net holding (losses) arising during the period, gross $ ( 26,783 ) $ ( 44,860 ) $ ( 11,058 ) $ ( 135,890 ) Tax effect 6,696 11,215 2,765 33,973 Unrealized net holding (losses) arising during the period, net $ ( 20,087 ) $ ( 33,645 ) $ ( 8,293 ) $ ( 101,917 ) Reclassification adjustment for net losses in net income, gross $ 4,450 $ - $ 9,450 $ - Tax effect ( 1,113 ) - ( 2,363 ) - Reclassification adjustment for net losses in net income, net $ 3,337 $ - $ 7,087 $ - Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross $ 109 $ 131 $ 223 $ 268 Tax effect ( 28 ) ( 32 ) ( 56 ) ( 67 ) Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net $ 81 $ 99 $ 167 $ 201 Total securities available for sale, net $ ( 16,669 ) $ ( 33,546 ) $ ( 1,039 ) $ ( 101,716 ) Pension and other benefits: Amortization of prior service cost and actuarial losses, gross $ 649 $ 186 $ 1,298 $ 372 Tax effect ( 162 ) ( 46 ) ( 325 ) ( 93 ) Amortization of prior service cost and actuarial losses, net $ 487 $ 140 $ 973 $ 279 Total pension and other benefits, net $ 487 $ 140 $ 973 $ 279 Total other comprehensive (loss) $ ( 16,182 ) $ ( 33,406 ) $ ( 66 ) $ ( 101,437 ) Comprehensive income (loss) $ 13,890 $ 4,369 $ 63,664 $ ( 24,536 ) See accompanying notes to unaudited interim consolidated financial statements. 5 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (unaudited) (In thousands, except share and per share data) Common Stock Additional Paid-in- Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Common Stock in Treasury Total Balance at March 31, 2023 $ 497 $ 577,952 $ 979,722 $ ( 173,918 ) $ ( 172,594 ) $ 1,211,659 Net income - - 30,072 - - 30,072 Cash dividends - $ 0.30 per share - - ( 12,874 ) - - ( 12,874 ) Purchase of 87,000 treasury shares - - - - ( 2,778 ) ( 2,778 ) Net issuance of 9,432 shares to employee and other stock plans - ( 477 ) - - 226 ( 251 ) Stock-based compensation - 847 - - - 847 Other comprehensive (loss) - - - ( 16,182 ) - ( 16,182 ) Balance at June 30 , 2023 $ 497 $ 578,322 $ 996,920 $ ( 190,100 ) $ ( 175,146 ) $ 1,210,493 Balance at March 31, 2022 $ 497 $ 577,374 $ 883,246 $ ( 91,375 ) $ ( 167,492 ) $ 1,202,250 Net income - - 37,775 - - 37,775 Cash dividends - $ 0.28 per share - - ( 11,992 ) - - ( 11,992 ) Purchase of 182,900 treasury shares - - - - ( 6,561 ) ( 6,561 ) Net issuance of 26,983 shares to employee and other stock plans - ( 836 ) - - 519 ( 317 ) Stock-based compensation - 807 - - - 807 Other comprehensive (loss) - - - ( 33,406 ) - ( 33,406 ) Balance at June 30 , 2022 $ 497 $ 577,345 $ 909,029 $ ( 124,781 ) $ ( 173,534 ) $ 1,188,556 (In thousands, except share and per share data) Common Stock Additional Paid-in- Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Common Stock in Treasury Total Balance at December 31 , 2022 $ 497 $ 577,853 $ 958,433 $ ( 190,034 ) $ ( 173,195 ) $ 1,173,554 Cumulative effect adjustment for ASU 2022-02 implementation as of January 1, 2023 - - 502 - - 502 Net income - - 63,730 - - 63,730 Cash dividends - $ 0.60 per share - - ( 25,745 ) - - ( 25,745 ) Purchase of 87,000 treasury shares - - - - ( 2,778 ) ( 2,778 ) Net issuance of 55,941 shares to employee and other stock plans - ( 2,843 ) - - 827 ( 2,016 ) Stock-based compensation - 3,312 - - - 3,312 Other comprehensive (loss) - - - ( 66 ) - ( 66 ) Balance at June 30 , 2023 $ 497 $ 578,322 $ 996,920 $ ( 190,100 ) $ ( 175,146 ) $ 1,210,493 Balance at December 31, 2021 $ 497 $ 576,976 $ 856,203 $ ( 23,344 ) $ ( 159,879 ) $ 1,250,453 Net income - - 76,901 - - 76,901 Cash dividends - $ 0.56 per share - - ( 24,075 ) - - ( 24,075 ) Purchase of 400,000 treasury shares - - - - ( 14,713 ) ( 14,713 ) Net issuance of 68,394 shares to employee and other stock plans - ( 2,910 ) - - 1,058 ( 1,852 ) Stock-based compensation - 3,279 - - - 3,279 Other comprehensive (loss) - - - ( 101,437 ) - ( 101,437 ) Balance at June 30 , 2022 $ 497 $ 577,345 $ 909,029 $ ( 124,781 ) $ ( 173,534 ) $ 1,188,556 See accompanying notes to unaudited interim consolidated financial statements. 6 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, (In thousands) 2023 2022 Operating activities Net income $ 63,730 $ 76,901 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 7,515 4,986 Depreciation and amortization of premises and equipment 5,145 5,003 Net amortization on securities 1,392 1,927 Amortization of intangible assets 994 1,181 Amortization of operating lease right-of-use assets 3,278 3,341 Excess tax benefit on stock-based compensation ( 241 ) ( 176 ) Stock-based compensation expense 3,312 3,279 Bank owned life insurance income ( 3,406 ) ( 3,065 ) Amortization of subordinated debt issuance costs 218 218 Proceeds from sale of loans held for sale 12,550 2,728 Originations of loans held for sale ( 13,476 ) ( 2,139 ) Net gain on sale of loans held for sale ( 62 ) ( 78 ) Net securities losses 9,639 766 Net gains on sale of other real estate owned - ( 259 ) Net change in other assets and other liabilities ( 23,417 ) 9,483 Net cash provided by operating activities $ 67,171 $ 104,096 Investing activities Net cash used in acquisitions $ ( 2,213 ) $ ( 1,833 ) Securities available for sale: Proceeds from maturities, calls and principal paydowns 59,168 133,012 Proceeds from sales 2,550 - Purchases - ( 201,985 ) Securities held to maturity: Proceeds from maturities, calls and principal paydowns 52,554 109,956 Purchases ( 46,559 ) ( 313,825 ) Other: Net increase in loans ( 215,634 ) ( 282,417 ) Proceeds from Federal Home Loan Bank stock redemption 65,923 572 Purchases of Federal Home Loan Bank stock ( 74,286 ) ( 367 ) Proceeds from settlement of bank owned life insurance 2,415 913 Purchases of premises and equipment, net ( 2,876 ) ( 2,267 ) Proceeds from sales of other real estate owned - 426 Net cash used in investing activities $ ( 158,958 ) $ ( 557,815 ) Financing activities Net increase (decrease) in deposits $ 33,986 $ ( 205,761 ) Net increase (decrease) in short-term borrowings 67,401 ( 35,250 ) Proceeds from long-term debt 25,000 - Repayments of long-term debt ( 51 ) ( 10,648 ) Cash paid by employer for tax-withholding on stock issuance ( 1,488 ) ( 1,289 ) Purchase of treasury stock ( 2,778 ) ( 14,713 ) Cash dividends ( 25,745 ) ( 24,075 ) Net cash provided by (used in) financing activities $ 96,325 $ ( 291,736 ) Net increase (decrease) in cash and cash equivalents $ 4,538 $ ( 745,455 ) Cash and cash equivalents at beginning of period 197,350 1,269,071 Cash and cash equivalents at end of period $ 201,888 $ 523,616 7 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (continued) Six Months Ended June 30, 2023 2022 Supplemental disclosure of cash flow information Cash paid during the period for: Interest expense $ 40,751 $ 8,452 Income taxes paid, net of refund 21,318 24,203 Noncash investing activities: Loans transferred to other real estate owned $ 74 $ - Acquisitions: Fair value of assets acquired $ 150 $ 429 See accompanying notes to unaudited interim consolidated financial statements. 8 Table of Contents NBT Bancorp Inc. and Subsidiaries Notes to Unaudited Interim Consolidated Financial Statements June 30, 2023 1. Description of Business NBT Bancorp Inc. (the “Company”) is a registered financial holding company incorporated in the state of Delaware in 1986, with its principal headquarters located in Norwich, New York. The principal assets of the Company consist of all of the outstanding shares of common stock of its subsidiaries, including: NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT Holdings, Inc. (“NBT Holdings”), CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II. The Company’s principal sources of revenue are the management fees and dividends it receives from the Bank, NBT Financial and NBT Holdings. The Company’s business, primarily conducted through the Bank, consists of providing commercial banking, retail banking and wealth management services primarily to customers in its market area, which includes central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central Connecticut. The Company has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services. The Company’s business philosophy is to operate as a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited interim consolidated financial statements include the accounts of NBT Bancorp Inc. and its wholly-owned subsidiaries: the Bank, NBT Financial and NBT Holdings. Collectively, NBT Bancorp Inc. and its subsidiaries are referred to herein as (the “Company”). In the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and in accordance with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, the consolidated financial statements do not include all of the information and notes necessary for complete financial statements in conformity with GAAP. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2022 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation. The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements. 3. Recent Accounting Pronouncements R ecently Adopted Accounting Standards I n March 2022, the Financial Accounting Standards Board issued Accounting Standards Updates (“ASU”) 2022-02, Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). The ASU eliminates the guidance on Troubled Debt Restructurings (“TDRs”) and requires an evaluation on all loan modifications to determine if they result in a new loan or a continuation of the existing loan. The ASU also requires that entities disclose current-period gross charge-offs by year of origination. The elimination of the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously modified, resulting in a cumulative effect adjustment to retained earnings in the period of adoption for changes in the allowance for credit losses. The amendments in this ASU were effective for the Company on January 1, 2023, with early adoption permitted. The Company adopted the ASU on January 1, 2023 (“Day 1”) using the modified retrospective method and recorded a net increase to retained earnings of $ 0.5 million. The transition adjustment includes a $ 0.6 million impact to the allowance for credit losses on loans and a $ 0.1 million impact to the deferred tax asset . 9 Table of Contents 4. Securities The amortized cost, estimated fair value and unrealized gains (losses) of availa ble for sale (“AFS”) securit ies are as follows: (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value As of June 30 , 2023 U.S. treasury $ 133,019 $ - $ ( 11,022 ) $ 121,997 Federal agency 248,401 - ( 39,748 ) 208,653 State & municipal 96,645 2 ( 12,472 ) 84,175 Mortgage-backed: Government-sponsored enterprises 426,190 4 ( 53,872 ) 372,322 U.S. government agency securities 77,869 11 ( 8,813 ) 69,067 Collateralized mortgage obligations: Government-sponsored enterprises 474,708 8 ( 58,849 ) 415,867 U.S. government agency securities 166,936 - ( 25,434 ) 141,502 Corporate 48,423 - ( 8,080 ) 40,343 Total AFS securities $ 1,672,191 $ 25 $ ( 218,290 ) $ 1,453,926 As of December 31 , 2022 U.S. treasury $ 132,891 $ - $ ( 11,233 ) $ 121,658 Federal agency 248,419 - ( 42,000 ) 206,419 State & municipal 97,036 5 ( 14,190 ) 82,851 Mortgage-backed: Government-sponsored enterprises 454,177 9 ( 54,675 ) 399,511 U.S. government agency securities 81,844 15 ( 7,676 ) 74,183 Collateralized mortgage obligations: Government-sponsored enterprises 498,021 9 ( 59,473 ) 438,557 U.S. government agency securities 171,090 - ( 21,284 ) 149,806 Corporate 60,404 - ( 6,164 ) 54,240 Total AFS securities $ 1,743,882 $ 38 $ ( 216,695 ) $ 1,527,225 There was no allowance for credit losses on AFS securities as of June 30, 2023 and December 31, 2022. During the three months ended June 30, 2023, there were $ 4.5 million of gross realized losses reclassified out of accumulated other comprehensive income (loss) (“AOCI”) and into earnings. During the six months ended June 30, 2023, there were $ 4.5 million of gross realized losses reclassified out of AOCI and into earnings and the Company incurred a $ 5.0 million loss on the write-off of an AFS corporate debt security from a subordinated debt investment of a bank that failed. These losses were reclassified out of AOCI and into earnings in net securities losses in the consolidated statement of income. During the three and six months ended June 30, 2022 there were no gains or losses reclassified out of AOCI and into earnings. The amortized cost, estimated fair value and unrealized gains (losses) of held to maturity (“HTM”) securities are as follows: (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value As of June 30 , 2023 Federal agency $ 100,000 $ - $ ( 19,620 ) $ 80,380 Mortgage-backed: Government-sponsored enterprises 239,102 - ( 35,641 ) 203,461 U.S. government agency securities 17,391 1 ( 827 ) 16,565 Collateralized mortgage obligations: Government-sponsored enterprises 197,597 84 ( 15,575 ) 182,106 U.S. government agency securities 65,298 - ( 11,007 ) 54,291 State & municipal 293,488 50 ( 21,700 ) 271,838 Total HTM securities $ 912,876 $ 135 $ ( 104,370 ) $ 808,641 As of December 31 , 2022 Federal agency $ 100,000 $ - $ ( 20,678 ) $ 79,322 Mortgage-backed: Government-sponsored enterprises 249,511 - ( 36,819 ) 212,692 U.S. government agency securities 18,396 4 ( 619 ) 17,781 Collateralized mortgage obligations: Government-sponsored enterprises 207,738 200 ( 14,876 ) 193,062 U.S. government agency securities 66,628 - ( 9,842 ) 56,786 State & municipal 277,244 5 ( 24,245 ) 253,004 Total HTM securities $ 919,517 $ 209 $ ( 107,079 ) $ 812,647 10 Table of Contents At June 30, 2023 and December 31, 2022, all of the mortgaged-backed HTM securities were comprised of U.S. government agency and government-sponsored enterprises securities. There was no allowance for credit losses on HTM securities as of June 30, 2023 and December 31, 2022 because the expectation of nonrepayment of the amortized cost was zero, except for state & municipal securities, which such expected losses from nonrepayment were immaterial . The Company recorded no gains from calls on HTM securities for the three months ended June 30, 2023 and 2022. The Company recorded no gains from calls on HTM securities for the six months ended June 30, 2023. Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $ 4 thousand for the six months ended June 30, 2022. AFS and HTM securities with amortized costs totaling $ 1.68 billion at June 30, 2023 and $ 1.73 billion at December 31, 2022 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at June 30, 2023 and December 31, 2022, AFS and HTM securities with an amortized cost of $ 142.7 million and $ 149.5 million, respectively, were pledged as collateral for securities sold under repurchase agreements. The following tables set forth information with regard to gains and (losses) on equity securities: Three Months Ended June 30, (In thousands) 2023 2022 Net (losses) recognized on equity securities $ ( 191 ) $ ( 587 ) Less: Net (losses) recognized on equity securities sold during the period - - Unrealized (losses) recognized on equity securities still held $ ( 191 ) $ ( 587 ) Six Months Ended June 30, (In thousands) 2023 2022 Net (losses) recognized on equity securities $ ( 189 ) $ ( 770 ) Less: Net (losses) recognized on equity securities sold during the period - - Unrealized (losses) recognized on equity securities still held $ ( 189 ) $ ( 770 ) As of June 30, 2023 and December 31, 2022, the carrying value of equity securities without readily determinable fair values was $ 1.0 million. The Company performed a qualitative assessment to determine whether the investments were impaired and identified no areas of concern as of June 30, 2023 and 2022. There were no impairments, or downward or upward adjustments recognized for equity securities without readily determinable fair values during the three and six months ended June 30, 2023 and 2022. The following table sets forth information with regard to contractual maturities of debt securities at June 30, 2023: (In thousands) Amortized Cost Estimated Fair Value AFS debt securities: Within one year $ 10,194 $ 10,009 From one to five years 440,801 393,528 From five to ten years 508,775 438,195 After ten years 712,421 612,194 Total AFS debt securities $ 1,672,191 $ 1,453,926 HTM debt securities: Within one year $ 72,506 $ 72,463 From one to five years 100,046 96,551 From five to ten years 282,757 245,029 After ten years 457,567 394,598 Total HTM debt securities $ 912,876 $ 808,641 Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Except for U.S. government securities and government-sponsored enterprises securities , there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at June 30, 2023 and December 31, 2022. 11 Table of Contents The following table sets forth information with regard to investment securities with unrealized losses, for which an allowance for credit losses has not been recorded, segregated according to the length of time the securities had been in a continuous unrealized loss position: Less Than 12 Months 12 Months or Longer Total (In thousands) Fair Value Unrealized Losses Number of Positions Fair Value Unrealized Losses Number of Positions Fair Value Unrealized Losses Number of Positions As of June 30 , 2023 AFS securities: U.S. treasury $ 9,763 $ ( 182 ) 1 $ 112,234 $ ( 10,840 ) 7 $ 121,997 $ ( 11,022 ) 8 Federal agency - - - 208,653 ( 39,748 ) 16 208,653 ( 39,748 ) 16 State & municipal - - - 83,404 ( 12,472 ) 66 83,404 ( 12,472 ) 66 Mortgage-backed 20,856 ( 1,033 ) 48 419,602 ( 61,652 ) 136 440,458 ( 62,685 ) 184 Collateralized mortgage obligations 46,530 ( 1,999 ) 15 508,725 ( 82,284 ) 107 555,255 ( 84,283 ) 122 Corporate 12,844 ( 1,579 ) 4 27,499 ( 6,501 ) 11 40,343 ( 8,080 ) 15 Total securities with unrealized losses $ 89,993 $ ( 4,793 ) 68 $ 1,360,117 $ ( 213,497 ) 343 $ 1,450,110 $ ( 218,290 ) 411 HTM securities: Federal agency $ - $ - - $ 80,380 $ ( 19,620 ) 4 $ 80,380 $ ( 19,620 ) 4 Mortgage-backed 27,586 ( 1,519 ) 7 192,339 ( 34,949 ) 27 219,925 ( 36,468 ) 34 Collateralized mortgage obligation 70,172 ( 3,894 ) 13 156,957 ( 22,688 ) 41 227,129 ( 26,582 ) 54 State & municipal 61,670 ( 1,285 ) 86 129,553 ( 20,415 ) 134 191,223 ( 21,700 ) 220 Total securities with unrealized losses $ 159,428 $ ( 6,698 ) 106 $ 559,229 $ ( 97,672 ) 206 $ 718,657 $ ( 104,370 ) 312 As of December 31 , 2022 AFS securities: U.S. treasury $ 55,616 $ ( 3,864 ) 5 $ 66,042 $ ( 7,369 ) 3 $ 121,658 $ ( 11,233 ) 8 Federal agency - - - 206,419 ( 42,000 ) 16 206,419 ( 42,000 ) 16 State & municipal 3,679 ( 341 ) 2 78,395 ( 13,849 ) 64 82,074 ( 14,190 ) 66 Mortgage-backed 204,447 ( 15,048 ) 149 267,926 ( 47,303 ) 32 472,373 ( 62,351 ) 181 Collateralized mortgage obligations 211,612 ( 14,458 ) 77 374,376 ( 66,299 ) 49 585,988 ( 80,757 ) 126 Corporate 34,434 ( 2,970 ) 12 19,806 ( 3,194 ) 6 54,240 ( 6,164 ) 18 Total securities with unrealized losses $ 509,788 $ ( 36,681 ) 245 $ 1,012,964 $ ( 180,014 ) 170 $ 1,522,752 $ ( 216,695 ) 415 HTM securities: Federal agency $ - $ - - $ 79,322 $ ( 20,678 ) 4 $ 79,322 $ ( 20,678 ) 4 Mortgage-backed 91,417 ( 9,096 ) 21 138,936 ( 28,342 ) 13 230,353 ( 37,438 ) 34 Collateralized mortgage obligations 191,644 ( 13,863 ) 47 48,289 ( 10,855 ) 8 239,933 ( 24,718 ) 55 State & municipal 110,727 ( 4,930 ) 149 82,949 ( 19,315 ) 76 193,676 ( 24,245 ) 225 Total securities with unrealized losses $ 393,788 $ ( 27,889 ) 217 $ 349,496 $ ( 79,190 ) 101 $ 743,284 $ ( 107,079 ) 318 The Company does not believe the AFS securities that were in an unrealized loss position as of June 30, 2023 and December 31, 2022, which consisted of 411 and 415 individual securities, respectively, represented a credit loss impairment. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. As of June 30, 2023 and December 31, 2022, the majority of the AFS securities in an unrealized loss position consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises that carry the explicit and/or implicit guarantee of the U.S. government, which are widely recognized as “risk- free” and have a long history of zero credit losses. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities. AIR on AFS debt securities totaled $ 4.0 million at June 30, 2023 and $ 4.2 million at December 31, 2022 and is excluded from the estimate of credit losses and reported in the other assets financial statement line. 12 Table of Contents None of the Bank’s HTM debt securities were past due or on nonaccrual status as of June 30, 2023 and December 31, 2022. There was no accrued interest reversed against interest income for the three and six months ended June 30, 2023 or the year ended December 31, 2022 as all securities remained on accrual status. In addition, there were no collateral-dependent HTM debt securities as of June 30, 2023 and December 31, 2022. As of June 30, 2023 and December 31, 2022, 68 % and 70 %, respectively, of the Company’s HTM debt securities were issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, which are widely recognized as “risk-free,” and have a long history of zero credit losses. Therefore, the Company did not record an allowance for credit losses for these securities as of June 30, 2023 and December 31, 2022. The remaining HTM debt securities at June 30, 2023 and December 31, 2022 were comprised of state and municipal obligations with bond ratings of A to AAA. Utilizing the Current Expected Credit Losses (“CECL”) approach, the Company determined that the expected credit loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit loss was recorded as of June 30, 2023 and December 31, 2022. AIR on HTM debt securities totaled $ 3.8 million at June 30, 2023 and December 31, 2022 and is excluded from the estimate of credit losses and reported in the other assets financial statement line. 5. Allowance for Credit Losses and Credit Quality of Loans As described in Note 3 Recent Accounting Pronouncements, the Company’s adoption of ASU 2022-02 resulted in an insignificant change to our methodology for estimating the allowance for credit losses on TDRs. The Day 1 decrease in allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $ 0.6 million. The allowance for credit losses totaled $ 100.4 million at June 30, 2023, compared to $ 100.8 million at December 31, 2022. The allowance for credit losses as a percentage of loans was 1.20 % at June 30, 2023, compared to 1.24 % at December 31, 2022. During the first quarter of 2023, the Company made adjustments to the class segments within the portfolios to better align risk characteristics and reflect the monitoring and assessment of risks as the portfolios continue to evolve. Paycheck Protection Program was consolidated with Commercial & Industrial, as the portfolio had decreased to less than $ 1 million and no longer warranted a material class segment. The Other Consumer class segment was further separated into Residential Solar and Other Consumer. The growth in our Residential Solar portfolio warranted evaluation of this class separately from the Other Consumer class segments. The change to the class segments was applied retrospectively and did not have a significant impact on the allowance for loan losses. The following table illustrates the portfolio and class segments for the Company’s loan portfolio: Portfolio Segment Class Commercial Loans Commercial & Industrial Commercial Real Estate Consumer Loans Auto Residential Solar Other Consumer Residential Loans The allowance for credit losses calculation incorporated a 6-quarter forecast period to account for forecast economic conditions under each scenario utilized in the measurement. For periods beyond the 6-quarter forecast, the model reverts to long-term economic conditions over a 4-quarter reversion period on a straight-line basis. The Company considers a baseline, upside and downside economic forecast in measuring the allowance. The quantitative model as of 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-coronavirus (“COVID-19”) pandemic levels of 3.8% and increasing gradually to 4.2% by the end of the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the third quarter of 2023 at about 3.6% and reach 4.1% by the end of the forecast period. Other utilized economic variables worsened overall, with outlooks for annualized growth in retail sales and business output declining from the prior quarter and housing starts staying relatively unchanged. Key assumptions in the baseline economic outlook include the economy being at full employment in the coming quarters, recent bank failures not being symptomatic of broader issues in the financial system, and the reduction in the Federal Reserve’s balance sheet remaining on autopilot. 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. At June 30, 2023, the weightings were 60%, 40% and 0% for the baseline, upside and downside economic forecasts, respectively. Qualitative adjustments were made for isolated model limitations related to modeled inputs given abnormally high retail sales and business output growth rates in prior quarters along with low unemployment. Additionally, a qualitative adjustment for inflation is applied to adjust for potential model limitations arising from the use of a macroeconomic variable denominated in nominal dollar terms as well as a qualitative adjustment for potential weakness in auto collateral values. These factors were considered through separate quantitative processes and incorporated into the estimate of current expected credit losses at June 30, 2023. 13 Table of Contents The quantitative model as of March 31, 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. At March 31, 2023, the weightings were 50%, 0% and 50% for the baseline, upside and downside economic forecasts, respectively. The baseline outlook reflected an unemployment rate environment below pre-COVID-19 levels throughout much of the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the second quarter of 2023 at approximately 3.9% and rise to 4.4% before falling slightly to 4.1% by the end of the forecast period. Other utilized economic variables have generally remained stable in their respective forecasts, with the exception of northeast housing starts which deteriorated since December 31, 2022 and served as a counter-balance to the improved unemployment outlook. Key assumptions in the baseline economic outlook included the Federal Reserve raising rates with two more 25 basis point hikes at the May and June meetings bringing the terminal range to 5%-5.25%, recent bank failures not being symptomatic of a serious broader problem in the financial system, the economy remaining at full employment, continued tapering of the Federal Reserve balance sheet, a slowly increasing yield on ten-year treasury securities, and a continued decline in oil prices. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 3.7% in the first quarter of 2023 to a peak of 7.1% in the second quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2023. Additional adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation, and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth, and policy exceptions was also conducted. All these factors were considered through separate quantitative processes and incorporated when applicable into the estimate of current expected credit losses at March 31, 2023. The quantitative model as of December 31, 2022 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. At December 31, 2022, the weightings were 50%, 0% and 50% for the baseline, upside and downside economic forecasts, respectively. The baseline outlook reflected an unemployment rate environment initially around pre-COVID-19 levels at 3.9% that increases slightly during the forecast period to 4.0%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2023 at approximately 3.9% and hovering around 4.6% by the end of the forecast period. Other utilized economic variables have generally deteriorated in their respective forecasts, with retail sales and housing starts forecasts declining from the prior year. Key assumptions in the baseline economic outlook included a full employment economy being realized in the near future, continued tapering of the Federal Reserve balance sheet, an increasing yield on ten-year treasury securities, and a gradual decline in global oil prices. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 3.9% in the fourth quarter of 2022 to a peak of 6.9% in the first quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2022. Additional adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation, and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth, and policy exceptions was also conducted. All these factors were considered through separate quantitative processes and incorporated when applicable into the estimate of current expected credit losses at December 31, 2022. There were no loans purchased with credit deterioration during the six months ended June 30, 2023 or the year ended December 31, 2022. During 2023, the Company purchased $ 2.4 million of residential loans at a 7.01 % premium with a $ 17 thousand allowance for credit losses recorded for these loans. During 2022, the Company purchased $ 11.5 million of residential loans at a 1.53 % premium and $ 50.1 million in consumer loans at par with an allowance for credit losses recorded on the purchase date of $ 3.2 million. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $ 28.0 million at June 30, 2023 and $ 25.0 million at December 31, 2022 and there was no estimated allowance for credit losses related to AIR as of June 30, 2023 and December 31, 2022. The following tables present the activity in the allowance for credit losses by our portfolio segments: (In thousands) Commercial Loans Consumer Loans Residential Total Balance as of March 31, 2023 $ 36,040 $ 48,820 $ 15,390 $ 100,250 Charge-offs ( 207 ) ( 4,837 ) ( 105 ) ( 5,149 ) Recoveries 97 1,441 155 1,693 Provision 1,033 2,459 114 3,606 Ending balance as of June 30, 2023 $ 36,963 $ 47,883 $ 15,554 $ 100,400 Balance as of March 31, 2022 $ 28,557 $ 43,591 $ 17,852 $ 90,000 Charge-offs ( 447 ) ( 3,509 ) ( 90 ) ( 4,046 ) Recoveries 837 2,117 302 3,256 Provision 3,411 2,741 ( 1,762 ) 4,390 Ending balance as of June 30 , 2022 $ 32,358 $ 44,940 $ 16,302 $ 93,600 14 Table of Contents (In thousands) Commercial Loans Consumer Loans Residential Total Balance as of January 1, 2023 (after adoption of ASU 2022-02) $ 34,662 $ 50,951 $ 14,539 $ 100,152 Charge-offs ( 376 ) ( 10,179 ) ( 444 ) ( 10,999 ) Recoveries 638 2,818 276 3,732 Provision 2,039 4,293 1,183 7,515 Ending balance as of June 30, 2023 $ 36,963 $ 47,883 $ 15,554 $ 100,400 Balance as of December 31, 2021 $ 28,941 $ 44,253 $ 18,806 $ 92,000 Charge-offs ( 1,035 ) ( 7,100 ) ( 402 ) ( 8,537 ) Recoveries 930 3,769 452 5,151 Provision 3,522 4,018 ( 2,554 ) 4,986 Ending balance as of June 30, 2022 $ 32,358 $ 44,940 $ 16,302 $ 93,600 The allowance for credit losses as of June 30, 2023 was fairly consistent with the allowance estimates as of December 31, 2022 and March 31, 2023. The increase in the allowance for credit losses from December 31, 2021 and March 31, 2022 to June 30, 2022 was due to an increase in loan balances, an additional specific reserve established during the second quarter of 2022 and a modest deterioration in the economic forecast. Individually Evaluated Loans As of June 30, 2023, there was one relationship identified to be evaluated for loss on an individual basis which had an amortized cost basis of $ 2.0 million, with no allowance for credit loss. As of December 31, 2022, two different relationships were identified to be evaluated for loss on an individual basis, which in aggregate, had an amortized cost basis of $ 2.4 millio n, with no allowance for credit loss . The following table sets forth information with regard to past due and nonperforming loans by loan segment: (In thousands) 31-60 Days Past Due Accruing 61-90 Days Past Due Accruing Greater Than 90 Days Past Due Accruing Total Past Due Accruing Nonaccrual Current Recorded Total Loans As of June 30 , 2023 Commercial loans: C&I $ 377 $ 132 $ 44 $ 553 $ 3,228 $ 1,307,131 $ 1,310,912 CRE 2,123 14,012 - 16,135 4,917 2,737,038 2,758,090 Total commercial loans $ 2,500 $ 14,144 $ 44 $ 16,688 $ 8,145 $ 4,044,169 $ 4,069,002 Consumer loans: Auto $ 6,683 $ 1,430 $ 653 $ 8,766 $ 986 $ 1,009,364 $ 1,019,116 Residential solar 2,384 778 306 3,468 194 922,703 926,365 Other consumer 2,966 1,703 1,486 6,155 252 207,476 213,883 Total consumer loans $ 12,033 $ 3,911 $ 2,445 $ 18,389 $ 1,432 $ 2,139,543 $ 2,159,364 Residential $ 1,449 $ 498 $ 266 $ 2,213 $ 7,354 $ 2,120,191 $ 2,129,758 Total loans $ 15,982 $ 18,553 $ 2,755 $ 37,290 $ 16,931 $ 8,303,903 $ 8,358,124 (In thousands) 31-60 Days Past Due Accruing 61-90 Days Past Due Accruing Greater Than 90 Days Past Due Accruing Total Past Due Accruing Nonaccrual Current Recorded Total Loans As of December 31, 2022 Commercial loans: C&I $ 342 $ 99 $ 4 $ 445 $ 2,244 $ 1,238,468 $ 1,241,157 CRE 336 96 - 432 5,780 2,689,196 2,695,408 Total commercial loans $ 678 $ 195 $ 4 $ 877 $ 8,024 $ 3,927,664 $ 3,936,565 Consumer loans: Auto $ 8,640 $ 1,393 $ 785 $ 10,818 $ 1,494 $ 950,389 $ 962,701 Residential solar 2,858 731 474 4,063 79 852,656 856,798 Other consumer 3,483 1,838 1,789 7,110 94 272,384 279,588 Total consumer loans $ 14,981 $ 3,962 $ 3,048 $ 21,991 $ 1,667 $ 2,075,429 $ 2,099,087 Residential $ 2,496 $ 555 $ 771 $ 3,822 $ 7,542 $ 2,103,131 $ 2,114,495 Total loans $ 18,155 $ 4,712 $ 3,823 $ 26,690 $ 17,233 $ 8,106,224 $ 8,150,147 15 Table of Contents As of June 30, 2023 and December 31, 2022, there were $ 2.0 million and $ 1.1 million, respectively, of loans in nonaccrual that were specifically evaluated for individual expected credit loss without an allowance for credit losses. Credit Quality Indicators The Company has developed an internal loan grading system to evaluate and quantify the Company’s loan portfolio with respect to quality and risk. The system focuses on, among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries. The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and provide management with an early warning system, enabling recognition and response to problem loans and potential problem loans. Commercial Grading System For Commercial and Industrial (“C&I”) and Commercial Real Estate (“CRE”) loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass. Doubtful A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss. Substandard Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual. Although Substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard. Special Mention Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage, and/or tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent. Pass Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality. Pass loans also include any portion of a government guaranteed loan, including Paycheck Protection Program loans. 16 Table of Contents Consumer and Residential Grading System Consumer and Residential loans are graded as either Nonperforming or Performing. Nonperforming Nonperforming loans are loans that are (1) over 90 days past due and interest is still accruing or (2) on nonaccrual status. Performing All loans not meeting any of the above criteria are considered Performing. The following tables illustrate the Company’s credit quality by loan class by vintage and, beginning in 2023 with the Company’s January 1, 2023 adoption of ASU 2022-02, also includes gross charge-offs by loan class by vintage for the six months ended June 30, 2023. Included in other consumer gross charge-offs, the Company recorded $ 0.2 million in overdrawn deposit accounts reported as 2022 originations and $ 0.2 million in overdrawn deposit accounts reported as 2023 originations, for the six months ended June 30, 2023. (In thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of June 30 , 2023 C&I By internally assigned grade: Pass $ 129,726 $ 284,195 $ 226,716 $ 143,819 $ 77,298 $ 56,009 $ 338,877 $ 9,668 $ 1,266,308 Special mention - 2,440 421 3,610 40 380 4,654 - 11,545 Substandard 869 1,772 733 587 2,452 1,819 22,502 2,188 32,922 Doubtful - 1 67 50 4 15 - - 137 Total C&I $ 130,595 $ 288,408 $ 227,937 $ 148,066 $ 79,794 $ 58,223 $ 366,033 $ 11,856 $ 1,310,912 Current-period gross charge-offs $ - $ ( 1 ) $ ( 5 ) $ ( 63 ) $ - $ ( 193 ) $ - $ - $ ( 262 ) CRE By internally assigned grade: Pass $ 144,348 $ 382,793 $ 449,149 $ 412,649 $ 313,179 $ 698,047 $ 229,150 $ 15,550 $ 2,644,865 Special mention - 2,251 6,722 3,354 10,119 14,216 13,768 - 50,430 Substandard 309 193 6,896 5,623 3,170 45,057 1,547 - 62,795 Total CRE $ 144,657 $ 385,237 $ 462,767 $ 421,626 $ 326,468 $ 757,320 $ 244,465 $ 15,550 $ 2,758,090 Current-period gross charge-offs $ - $ - $ - $ - $ ( 114 ) - $ - $ - $ ( 114 ) Auto By payment activity: Performing $ 249,677 $ 418,275 $ 193,855 $ 56,852 $ 69,477 $ 29,327 $ 14 $ - $ 1,017,477 Nonperforming - 367 765 196 150 161 - - 1,639 Total auto $ 249,677 $ 418,642 $ 194,620 $ 57,048 $ 69,627 $ 29,488 $ 14 $ - $ 1,019,116 Current-period gross charge-offs $ ( 30 ) $ ( 525 ) $ ( 516 ) $ ( 204 ) $ ( 165 ) $ ( 130 ) $ - $ - $ ( 1,570 ) Residential solar By Internally Assigned Grade: Performing $ 129,390 $ 447,725 $ 185,410 $ 69,994 $ 50,419 $ 42,927 $ - $ - $ 925,865 Nonperforming - 299 81 - 71 49 - - 500 Total residential solar $ 129,390 $ 448,024 $ 185,491 $ 69,994 $ 50,490 $ 42,976 $ - $ - $ 926,365 Current-period gross charge-offs $ - $ ( 578 ) $ ( 428 ) $ ( 45 ) $ ( 164 ) $ ( 139 ) $ - $ - $ ( 1,354 ) Other consumer By payment activity: Performing $ 7,876 $ 36,057 $ 81,241 $ 27,518 $ 20,021 $ 21,995 $ 17,423 $ 14 $ 212,145 Nonperforming - 414 909 93 84 204 5 29 1,738 Total other consumer $ 7,876 $ 36,471 $ 82,150 $ 27,611 $ 20,105 $ 22,199 $ 17,428 $ 43 $ 213,883 Current-period gross charge-offs $ ( 223 ) $ ( 1,818 ) $ ( 3,700 ) $ ( 834 ) $ ( 487 ) $ ( 193 ) $ - $ - $ ( 7,255 ) Residential By payment activity: Performing $ 87,959 $ 264,222 $ 344,895 $ 205,768 $ 151,242 $ 822,754 $ 226,997 $ 18,301 $ 2,122,138 Nonperforming 29 432 237 329 466 6,127 - - 7,620 Total residential $ 87,988 $ 264,654 $ 345,132 $ 206,097 $ 151,708 $ 828,881 $ 226,997 $ 18,301 $ 2,129,758 Current-period gross charge-offs $ - $ - $ ( 82 ) $ - $ - $ ( 362 ) $ - $ - $ ( 444 ) Total loans $ 750,183 $ 1,841,436 $ 1,498,097 $ 930,442 $ 698,192 $ 1,739,087 $ 854,937 $ 45,750 $ 8,358,124 Current-period gross charge-offs $ ( 253 ) $ ( 2,922 ) $ ( 4,731 ) $ ( 1,146 ) $ ( 930 ) $ ( 1,017 ) $ - $ - $ ( 10,999 ) 17 Table of Contents (In thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of December 31, 2022 C&I By internally assigned grade: Pass $ 296,562 $ 252,480 $ 164,976 $ 91,497 $ 39,394 $ 32,413 $ 327,166 $ 3,133 $ 1,207,621 Special mention 1,044 524 4,531 194 1,108 417 5,234 - 13,052 Substandard 76 459 231 3,098 91 3,969 12,348 163 20,435 Doubtful - 20 - 28 - 1 - - 49 Total C&I $ 297,682 $ 253,483 $ 169,738 $ 94,817 $ 40,593 $ 36,800 $ 344,748 $ 3,296 $ 1,241,157 CRE By internally assigned grade: Pass $ 374,313 $ 465,990 $ 439,012 $ 333,568 $ 217,141 $ 566,783 $ 201,563 $ 24,735 $ 2,623,105 Special mention 605 764 868 2,641 4,649 24,023 850 - 34,400 Substandard 309 - 2,316 3,937 1,822 23,819 713 4,987 37,903 Total CRE $ 375,227 $ 466,754 $ 442,196 $ 340,146 $ 223,612 $ 614,625 $ 203,126 $ 29,722 $ 2,695,408 Auto By payment activity: Performing $ 488,776 $ 239,090 $ 75,853 $ 99,615 $ 44,061 $ 13,027 $ - $ - $ 960,422 Nonperforming 590 655 404 385 216 29 - - 2,279 Total auto $ 489,366 $ 239,745 $ 76,257 $ 100,000 $ 44,277 $ 13,056 $ - $ - $ 962,701 Residential solar By Payment Activity: Performing $ 485,942 $ 193,971 $ 74,532 $ 54,662 $ 36,119 $ 11,019 $ - $ - $ 856,245 Nonperforming 320 98 50 25 16 44 - - 553 Total residential solar $ 486,262 $ 194,069 $ 74,582 $ 54,687 $ 36,135 $ 11,063 $ - $ - $ 856,798 Other consumer By payment activity: Performing $ 52,545 $ 110,624 $ 36,412 $ 27,383 $ 15,536 $ 15,735 $ 19,218 $ 250 $ 277,703 Nonperforming 238 838 395 247 57 87 8 15 1,885 Total other consumer $ 52,783 $ 111,462 $ 36,807 $ 27,630 $ 15,593 $ 15,822 $ 19,226 $ 265 $ 279,588 Residential By payment activity: Performing $ 251,012 $ 349,498 $ 212,161 $ 156,957 $ 157,755 $ 717,621 $ 233,056 $ 28,122 $ 2,106,182 Nonperforming 267 384 408 555 1,028 5,651 - 20 8,313 Total residential $ 251,279 $ 349,882 $ 212,569 $ 157,512 $ 158,783 $ 723,272 $ 233,056 $ 28,142 $ 2,114,495 Total loans $ 1,952,599 $ 1,615,395 $ 1,012,149 $ 774,792 $ 518,993 $ 1,414,638 $ 800,156 $ 61,425 $ 8,150,147 18 Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The allowance for losses on unfunded commitments totaled $ 4.4 million as of June 30, 2023, compared to $ 5.1 million as of December 31, 2022. Loan Modifications to Borrowers Experiencing Financial Difficulties As discussed in Note 3 Recent Accounting Pronouncements, the Company’s January 1, 2023 adoption of ASU 2022-02 eliminates the recognition and measurement of TDRs. Upon adoption of this guidance, the Company will no longer recognize an allowance for credit losses for the economic concession granted to a borrower for changes in the timing and amount of contractual cash flows when a loan is restructured. The adoption of ASU 2022-02 results in a change to reporting for loan modifications to borrowers experiencing financial difficulties. With the adoption of ASU 2022-02 these modifications require enhanced reporting on the type of modifications granted and the financial magnitude of the concessions granted. When the Company modifies a loan with financial difficulty, such modifications generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a change in scheduled payment amount; or principal forgiveness. The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted: Three Months Ended June 30, 2023 Term Extension Combination - Term Extension and Interest Rate Reduction (Dollars in thousands) Amortized Cost % of Total Class of Financing Receivables Amortized Cost % of Total Class of Financing Receivables Residential $ 199 0.009 % $ 171 0.008 % Total $ 199 $ 171 Six Months Ended June 30, 2023 Term Extension Combination - Term Extension and Interest Rate Reduction (Dollars in thousands) Amortized Cost % of Total Class of Financing Receivables Amortized Cost % of Total Class of Financing Receivables Residential $ 242 0.011 % $ 171 0.008 % Total $ 242 $ 171 The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulties: Three Months Ended June 30, 2023 Loan Type Term Extension Interest Rate Reduction Residential Added a weighted-average 10 years to the life of loans, which reduced monthly payment amounts for the borrowers. Interest rates were reduced by an average of three and a half percent Six Months Ended June 30, 2023 Loan Type Term Extension Interest Rate Reduction Residential Added a weighted-average 14 years to the life of loans, which reduced monthly payment amounts for the borrowers. Interest rates were reduced by an average of three and a half percent There were no financing receivables that had a payment default during the three months ended June 30, 2023 that were modified to borrowers experiencing financial difficulty since the adoption of ASU 2022-02 effective January 1, 2023. 19 Table of Contents The following table depicts the performance of loans that have been modified since the adoption of ASU 2022-02 effective January 1, 2023: Payment Status (Amortized Cost Basis) (In thousands) Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due Three Months Ended June 30, 2023 Loan Type Residential $ 370 $ - $ - $ - Total $ 370 $ - $ - $ - Payment Status (Amortized Cost Basis) (In thousands) Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due Six Months Ended June 30, 2023 Loan Type Residential $ 413 $ - $ - $ - Total $ 413 $ - $ - $ - Troubled Debt Restructuring Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company accounted for loan modifications to borrowers experiencing financial difficulty when concessions were granted as TDRs. The following tables are disclosures related to TDRs in prior periods. The following table illustrates the recorded investments and number of modifications designated as TDRs, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring: Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 (Dollars in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Residential 2 $ 98 $ 123 4 $ 216 $ 247 Total TDRs 2 $ 98 $ 123 4 $ 216 $ 247 The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period: Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 (Dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Consumer loans: Auto - $ - 1 $ 11 Total consumer loans - $ - 1 $ 11 Residential 18 $ 890 34 $ 1,714 Total TDRs 18 $ 890 35 $ 1,725 20 Table of Contents 6. Defined Benefit Post-Retirement Plans The Company has a qualified, noncontributory, defined benefit pension plan (the “Plan”) covering substantially all of its employees at June 30, 2023. Benefits paid from the Plan are based on age, years of service, compensation and social security benefits and are determined in accordance with defined formulas. The Company’s policy is to fund the Plan in accordance with Employee Retirement Income Security Act of 1974 standards. Assets of the Plan are invested in publicly traded stocks, bonds and mutual funds. In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives. The Company also assumed supplemental retirement plans for former executives of Alliance Financial Corporation (“Alliance”) when the Company acquired Alliance. These supplemental employee retirement plans and the Plan are collectively referred to herein as “Pension Benefits.” In addition, the Company provides certain health care benefits for retired employees. Benefits were accrued over the employees’ active service period. Only employees that were employed by the Company on or before January 1, 2000 are eligible to receive post-retirement health care benefits. In addition, the Company assumed post-retirement medical life insurance benefits for certain Alliance employees, retirees and their spouses, if applicable, in the Alliance acquisition. These post-retirement benefits are referred to herein as “Other Benefits.” Accounting standards require an employer to: (1) recognize the overfunded or underfunded status of defined benefit post-retirement plans, which is measured as the difference between plan assets at fair value and the benefit obligation, as an asset or liability in its balance sheet; (2) recognize changes in that funded status in the year in which the changes occur through comprehensive income; and (3) measure the defined benefit plan assets and obligations as of the date of its year-end balance sheet. The Company made no voluntary contributions to the pension and other benefits plans during the three and six months ended June 30, 2023 and 2022. The components of expense for Pension Benefits and Other Benefits are set forth below: Pension Benefits Other Benefits Three Months Ended June 30, Three Months Ended June 30, (In thousands) 2023 2022 2023 2022 Components of net periodic cost (benefit): Service cost $ 482 $ 534 $ 1 $ 2 Interest cost 1,010 694 56 41 Expected return on plan assets ( 1,853 ) ( 2,228 ) - - Net amortization 670 185 ( 21 ) 1 Total net periodic cost (benefit) $ 309 $ ( 815 ) $ 36 $ 44 Pension Benefits Other Benefits Six Months Ended June 30, Six Months Ended June 30, (In thousands) 2023 2022 2023 2022 Components of net periodic cost (benefit): Service cost $ 964 $ 1,068 $ 2 $ 4 Interest cost 2,020 1,388 112 82 Expected return on plan assets ( 3,706 ) ( 4,456 ) - - Net amortization 1,340 370 ( 42 ) 2 Total net periodic cost (benefit) $ 618 $ ( 1,630 ) $ 72 $ 88 The service cost component of the net periodic cost (benefit) is included in Salaries and Employee Benefits and the interest cost, expected return on plan assets and net amortization components are included in Other Noninterest Expense on the unaudited interim consolidated statements of income. 21 Table of Contents 7. Earnings Per Share Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company’s dilutive stock options and restricted stock units). The following is a reconciliation of basic and diluted EPS and the anti-dilutive stock options and restricted stock outstanding for the periods presented in the unaudited interim consolidated statements of income: Three Months Ended June 30, (In thousands, except per share data) 2023 2022 Basic EPS: Weighted average common shares outstanding 42,905 42,845 Net income available to common stockholders $ 30,072 $ 37,775 Basic EPS $ 0.70 $ 0.88 Diluted EPS: Weighted average common shares outstanding 42,905 42,845 Dilutive effect of common stock options and restricted stock 221 248 Weighted average common shares and common share equivalents 43,126 43,093 Net income available to common stockholders $ 30,072 $ 37,775 Diluted EPS $ 0.70 $ 0.88 Anti-dilutive stock options and restricted stock outstanding 61 2 Six Months Ended June 30, (In thousands, except per share data) 2023 2022 Basic EPS: Weighted average common shares outstanding 42,900 42,992 Net income available to common stockholders $ 63,730 $ 76,901 Basic EPS $ 1.49 $ 1.79 Diluted EPS: Weighted average common shares outstanding 42,900 42,992 Dilutive effect of common stock options and restricted stock 229 246 Weighted average common shares and common share equivalents 43,129 43,238 Net income available to common stockholders $ 63,730 $ 76,901 Diluted EPS $ 1.48 $ 1.78 Anti-dilutive stock options and restricted stock outstanding 24 2 22 Table of Contents 8. Reclassification Adjustments Out of Other Comprehensive Income (Loss) The following table summarizes the reclassification adjustments out of AOCI: Detail About AOCI Components Amount Reclassified from AOCI Affected Line Item in the Consolidated Statements of Comprehensive Income (Loss) Three Months Ended (In thousands) June 30, 2023 June 30, 2022 AFS securities: Losses on AFS securities $ 4,450 $ - Net securities (gains) losses Amortization of unrealized gains related to securities transfer 109 131 Interest income Tax effect $ ( 1,141 ) $ ( 32 ) Income tax (benefit) Net of tax $ 3,418 $ 99 Pension and other benefits: Amortization of net losses $ 640 $ 157 Other noninterest expense Amortization of prior service costs 9 29 Other noninterest expense Tax effect $ ( 162 ) $ ( 46 ) Income tax (benefit) Net of tax $ 487 $ 140 Total reclassifications, net of tax $ 3,905 $ 239 Detail About AOCI Components Amount Reclassified from AOCI Affected Line item in the Consolidated Statement of Comprehensive Income (Loss) Six Months Ended (In thousands) June 30, 2023 June 30, 2022 AFS securities: Losses on AFS securities $ 9,450 $ - Net securities (gains) losses Amortization of unrealized gains related to securities transfer 223 268 Interest income Tax effect $ ( 2,419 ) $ ( 67 ) Income tax (benefit) Net of tax $ 7,254 $ 201 Pension and other benefits: Amortization of net losses $ 1,280 $ 314 Other noninterest expense Amortization of prior service costs 18 58 Other noninterest expense Tax effect $ ( 325 ) $ ( 93 ) Income tax (benefit) Net of tax $ 973 $ 279 Total reclassifications, net of tax $ 8,227 $ 480 23 Table of Contents 9. Derivative Instruments and Hedging Activities The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Generally, the Company may use derivative financial instruments to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments. Currently, the Company has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. Derivatives Not Designated as Hedging Instruments The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the consolidated balance sheet at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of incom e. The Company is subject to over-the-counter derivative clearing requirements, which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company clears certain derivative transactions through the Chicago Mercantile Exchange Clearing House (“CME”). The CME requires the Company to post initial and variation margin payments to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company’s financial statements are not equal and offsetting. In 2017, the U.K. Financial Conduct Authority announced its intention to stop compelling banks to submit rates for the calculation of London Interbank Offered Rate (“LIBOR”) after 2021. In 2022, the Federal Reserve adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on the Secured Overnight Financing Rate (“SOFR”) that will replace LIBOR in certain financial contracts after June 30, 2023. As of June 30, 2023, the Company has transitioned substantially all of its financial instruments to an alternative benchmark rate. As of June 30, 2023 and December 31, 2022, the Company had twelve and fifteen risk participation agreements, respectively, with financial institution counterparties for interest rate swaps related to participated loans. Risk participation agreements provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions. 24 Table of Contents T he following table summarizes the derivatives outstanding: (In thousands) Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value As of June 30 , 2023 Derivatives not designated as hedging instruments Interest rate derivatives $ 1,293,103 Other assets $ 114,212 $ 1,293,103 Other liabilities $ 114,203 Risk participation agreements 62,813 Other assets 36 17,285 Other liabilities 8 Total derivatives not designated as hedging instruments $ 114,248 $ 114,211 Netting adjustments (1) 23,960 - Net derivatives in the balance sheet $ 90,288 $ 114,211 Derivatives not offset on the balance sheet $ 456 $ 456 Cash collateral (2) - - Net derivative amounts $ 89,832 $ 113,755 As of December 31, 2022 Derivatives not designated as hedging instruments Interest rate derivatives $ 1,275,708 Other assets $ 117,247 $ 1,275,708 Other liabilities $ 117,247 Risk participation agreements 88,963 Other assets 47 18,421 Other liabilities 10 Total derivatives not designated as hedging instruments $ 117,294 $ 117,257 Netting adjustments (1) 24,109 - Net derivatives in the balance sheet $ 93,185 $ 117,257 Derivatives not offset on the balance sheet $ 352 $ 352 Cash collateral (2) - - Net derivative amounts $ 92,833 $ 116,905 (1) Netting adjustments represents the amounts recorded to convert derivatives assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance on the settle to market rules for cleared derivatives. The CME legally characterizes the variation margin posted between counterparties as settlements of the outstanding derivative contracts instead of cash collateral. (2) Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship: Three Months Ended June 30, Six Months Ended June 30 , (In thousands) 2023 2022 2023 2022 Derivatives not designated as hedging instruments: (Decrease) in other income $ ( 7 ) $ ( 67 ) $ - $ ( 119 ) 10. Fair Value Measurements and Fair Value of Financial Instruments G AAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). 25 Table of Contents A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted prices for such instruments. The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or quote from alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the methodologies used by its third-party providers in pricing the securities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flow s. The following tables set forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted for at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement: (In thousands) Level 1 Level 2 Level 3 June 30, 2023 Assets: AFS securities U.S. treasury $ 121,997 $ - $ - $ 121,997 Federal agency - 208,653 - 208,653 State & municipal - 84,175 - 84,175 Mortgage-backed - 441,389 - 441,389 Collateralized mortgage obligations - 557,369 - 557,369 Corporate - 40,343 - 40,343 Total AFS securities $ 121,997 $ 1,331,929 $ - $ 1,453,926 Equity securities 32,893 1,000 - 33,893 Derivatives - 90,288 - 90,288 Total $ 154,890 $ 1,423,217 $ - $ 1,578,107 Liabilities: Derivatives $ - $ 114,211 $ - $ 114,211 Total $ - $ 114,211 $ - $ 114,211 (In thousands) Level 1 Level 2 Level 3 December 31, 2022 Assets: AFS securities U.S. treasury $ 121,658 $ - $ - $ 121,658 Federal agency - 206,419 - 206,419 State & municipal - 82,851 - 82,851 Mortgage-backed - 473,694 - 473,694 Collateralized mortgage obligations - 588,363 - 588,363 Corporate - 54,240 - 54,240 Total AFS securities $ 121,658 $ 1,405,567 $ - $ 1,527,225 Equity securities 29,784 1,000 - 30,784 Derivatives - 93,185 - 93,185 Total $ 151,442 $ 1,499,752 $ - $ 1,651,194 Liabilities: Derivatives $ - $ 117,257 $ - $ 117,257 Total $ - $ 117,257 $ - $ 117,257 26 Table of Contents GAAP requires disclosure of assets and liabilities measured and recorded at fair value on a non-recurring basis such as goodwill, loans held for sale, other real estate owned, collateral-dependent loans individually evaluated for expected credit losses and HTM securities. The non-recurring fair value measurements recorded during the six month period ended June 30, 2023 and the year ended December 31, 2022 were related to loans individually evaluated for expected credit losses with fair value of $ 2.0 million and $ 1.1 million as of June 30, 2023 and December 31, 2022, respectively. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the allowance for credit losses for individually evaluated collateral dependent loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10 % to 50 % . Based on the valuation techniques used, the fair value measurements for collateral dependent individually evaluated loans are classified as Level 3. The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, AFS securities, equity securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and derivatives. June 30, 2023 December 31, 2022 (In thousands) Fair Value Hierarchy Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: HTM securities 2 $ 912,876 $ 808,641 $ 919,517 $ 812,647 Net loans 3 8,259,590 7,777,173 8,049,909 7,840,350 Financial liabilities: Time deposits 2 $ 978,674 $ 936,503 $ 433,772 $ 413,868 Long-term debt 2 29,764 29,106 4,815 4,539 Subordinated debt 1 98,000 86,173 98,000 92,883 Junior subordinated debt 2 101,196 98,131 101,196 98,372 Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial wealth operation that contributes net fee income annually. The wealth management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value. HTM Securities The fair value of the Company’s HTM securities is primarily measured using information from a third-party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Net Loans Net loans include portfolio loans and loans held for sale. Loans were first segregated by type and then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments, and those expected future cash flows also includes credit risk, illiquidity risk and other market factors to calculate the exit price fair value in accordance with ASC 820. Time Deposits The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value. 27 Table of Contents Long-Term Debt The fair value of long-term debt was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. Subordinated Debt The fair value of subordinated debt has been measured using the observable market price as of the period reported. Junior Subordinated Debt The fair value of junior subordinated debt has been estimated using a discounted cash flow analysis. 11. Commitments and Contingencies The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, standby letters of credit and certain agricultural real estate loans sold to investors with recourse, with the sold portion having a government guarantee that is assignable back to the Company upon repurchase of the loan in the event of default. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, unused lines of credit, standby letters of credit and loans sold with recourse is represented by the contractual amount of those investments. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness. Commitments to extend credit and unused lines of credit totaled $ 2.31 billion at June 30, 2023 and $ 2.42 billion at December 31, 2022. Since many loan commitments, standby letters of credit and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third-parties. These standby letters of credit are generally issued in support of third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. Standby letters of credit totaled $ 39.6 million at June 30, 2023 and $ 53.3 million at December 31, 2022. A s of June 30, 2023 and December 31, 2022 , the fair value of the Company’s standby letters of credit was not significant. 28 Table of Contents NBT BANCORP INC. AND SUBSIDIARIES