NBT BANCORP INC

Previous wording

The purpose of this discussion and analysis is to provide a concise description of the consolidated financial condition and results of operations of NBT Bancorp Inc. (“NBT”) and its wholly-owned subsidiaries, including NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”) and NBT Holdings, Inc. (“NBT Holdings”) (collectively referred to herein as the “Company”). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company’s Annual Report on Form 10‑K for the year ended December 31, 2023 for an understanding of the following discussion and analysis. Operating results for the three and six months ended periods ending June 30, 2024 are not necessarily indicative of the results of the full year ending December 31, 2024 or any future period.

Current wording

The purpose of this discussion and analysis is to provide a concise description of the consolidated financial condition and results of operations of NBT Bancorp Inc. (“NBT”) and its wholly-owned subsidiaries, including NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”) and NBT Holdings, Inc. (“NBT Holdings”) (collectively referred to herein as the “Company”). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company’s Annual Report on Form 10‑K for the year ended December 31, 2023 for an understanding of the following discussion and analysis. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results of the full year ending December 31, 2024 or any future period.

Previous wording

Certain statements in this filing and future filings by the Company with the SEC, in the Company’s press releases or other public or stockholder communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control, that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local, regional, national and international economic conditions, including actual or potential stress in the banking industry, and the impact they may have on the Company and its customers, and the Company’s assessment of that impact; (2) changes in the level of nonperforming assets and charge-offs; (3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (4) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the FRB; (5) inflation, interest rates, securities market and monetary fluctuations; (6) political instability; (7) acts of war, including international military conflicts, or terrorism; (8) the timely development and acceptance of new products and services and the perceived overall value of these products and services by users; (9) changes in consumer spending, borrowing and saving habits; (10) changes in the financial performance and/or condition of the Company’s borrowers; (11) technological changes; (12) acquisition and integration of acquired businesses; (13) the ability to increase market share and control expenses; (14) changes in the competitive environment among financial holding companies; (15) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including those under the Dodd-Frank Act, and the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018; (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 FASB and other accounting standard setters; (17) changes in the Company’s organization, compensation and benefit plans; (18) the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examination…

Excerpt shortened here; the source contains the full paragraph.

Current wording

Certain statements in this filing and future filings by the Company with the SEC, in the Company’s press releases or other public or stockholder communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control, that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local, regional, national and international economic conditions, including actual or potential stress in the banking industry, and the impact they may have on the Company and its customers, and the Company’s assessment of that impact; (2) changes in the level of nonperforming assets and charge-offs; (3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (4) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the FRB; (5) inflation, interest rates, securities market and monetary fluctuations; (6) political instability; (7) acts of war, including international military conflicts, or terrorism; (8) the timely development and acceptance of new products and services and the perceived overall value of these products and services by users; (9) changes in consumer spending, borrowing and saving habits; (10) changes in the financial performance and/or condition of the Company’s borrowers; (11) technological changes; (12) acquisition and integration of acquired businesses; (13) governmental approvals of the Evans merger may not be obtained, or adverse regulatory conditions may be imposed in connection with governmental approvals of the merger; (14) the shareholders of Evans may fail to approve the merger; (15) the ability to increase market share and control expenses; (16) changes in the competitive environment among financial holding companies; (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 FASB and other accounting standard setters; (19) changes in the Company’s organiza…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

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 June 30, 2024, the quantitative model 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 June 30, 2024, the weightings were 80% and 20% for the baseline and downside economic forecasts, respectively. The baseline outlook reflects an economic environment where the Northeast unemployment rate increases slightly from 4.0% to 4.1% during the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the third quarter of 2024 at approximately 3.7% and increase slightly to 3.8% before the end of the forecast period. Key assumptions in the baseline economic outlook included the Federal Reserve cutting rates with two 25 basis point cuts at the September and December meetings, the economy remaining at full employment, and continued tapering of the Federal Reserve balance sheet. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, Northeast unemployment rises from 4.0% in the second quarter of 2024 to a peak of 7.2% in the fourth quarter of 2025. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of June 30, 2024. 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, 2024, the Company attributed the change in scenario weightings to the change in the allowance for credit losses, with a 10% decrease to the downside scenario and a 10% increase to the baseline scenario causing a 4% decrease 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, 2024, the Company increased the downside scenario to 100% which resulted in a 29% increase in the overall estimated allowance for credit losses.

Current wording

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 September 30, 2024, the quantitative model 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 September 30, 2024, the weightings were 80% and 20% for the baseline and downside economic forecasts, respectively. The baseline outlook reflects an economic environment where the Northeast unemployment rate increases slightly but remains around 4.1% during the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the fourth quarter of 2024 at approximately 3.9% and remains relatively stable during the forecast period. Key assumptions in the baseline economic outlook included the Federal Reserve cutting rates at the September and December meetings, the economy remaining at full employment, and continued tapering of the Federal Reserve balance sheet. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, Northeast unemployment rises from 4.0% in the third quarter of 2024 to a peak of 7.5% in the fourth quarter of 2025. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of September 30, 2024. 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. To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of September 30, 2024, the Company attributed the change in scenario weightings to the change in the allowance for credit losses, with a 10% decrease to the downside scenario and a 10% increase to the baseline scenario causing a 4% decrease 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 September 30, 2024, the Company increased the downside scenario to 100% which resulted in a 33% increase in the overall estimated allowance for credit losses.

Previous wording

The Company completed the acquisition of Salisbury in August of 2023, a commercial bank with $1.46 billion in assets with 13 banking offices in northwestern Connecticut, the Hudson Valley region of New York and southwestern Massachusetts. The Company incurred acquisition expenses related to the merger with Salisbury of $1.2 million in the second quarter of 2023 and $1.8 million in the six months ended June 30, 2023.

Current wording

The Company incurred acquisition expenses related to the merger with Evans of $0.5 million for the three and nine months ended September 30, 2024.

Previous wording

Net income for the three months ended June 30, 2024 was $32.7 million, up $2.6 million from the second quarter of 2023 and down $1.1 million from the first quarter of 2024. Diluted earnings per share were $0.69 for the three months ended June 30, 2024, down $0.01 from the second quarter of 2023 and down $0.02 from the first quarter of 2024. Net income for the six months ended June 30, 2024 was $66.5 million, or $1.40 per diluted common share, up $2.8 million from $63.7 million, or $1.48 per diluted common share for the six months ended June 30, 2023.

Current wording

Net income for the three months ended September 30, 2024 was $38.1 million, up $13.5 million from the third quarter of 2023 and up $5.4 million from the second quarter of 2024. Diluted earnings per share were $0.80 for the three months ended September 30, 2024, up $0.26 from the third quarter of 2023 and up $0.11 from the second quarter of 2024. Net income for the nine months ended September 30, 2024 was $104.6 million, or $2.21 per diluted common share, up $16.3 million from $88.3 million, or $2.01 per diluted common share for the nine months ended September 30, 2023.

Previous wording

Operating net income(1), a non-GAAP measure, which excludes acquisition expenses and securities gains (losses), net of tax, was $32.8 million, or $0.69 per diluted common share, for the three months ended June 30, 2024, compared to $0.80 per diluted common share for the second quarter of 2023 and $0.68 per diluted common share for the first quarter of 2024. Operating net income(1), for the six months ended June 30, 2024, was $64.9 million, or $1.37 per diluted common share, down $7.7 million from $72.6 million, or $1.68 per diluted common share for the six months ended June 30, 2023.

Current wording

Operating net income(1), a non-GAAP measure, which excludes acquisition expenses, acquisition-related provision for credit losses and securities gains (losses), net of tax, was $38.1 million, or $0.80 per diluted common share, for the three months ended September 30, 2024, compared to $0.84 per diluted common share for the third quarter of 2023 and $0.69 per diluted common share for the second quarter of 2024. Operating net income(1), for the nine months ended September 30, 2024, was $103.1 million, or $2.17 per diluted common share, down $7.9 million from $110.9 million, or $2.53 per diluted common share for the nine months ended September 30, 2023.

Previous wording

The following information should be considered in connection with the Company’s results for the three and six months ended June 30, 2024:

Current wording

The following information should be considered in connection with the Company’s results for the three and nine months ended September 30, 2024:

Previous wording

Net interest income was $97.2 million for the second quarter of 2024, up $2.0 million, or 2.1%, from the previous quarter. The FTE net interest margin was 3.18% for the three months ended June 30, 2024, an increase of 4 bps from the previous quarter. Interest income increased $3.8 million, or 2.6%, as the yield on average interest-earning assets increased 8 bps from the prior quarter to 4.92%, while average interest-earning assets of $12.37 billion increased $94.3 million from the prior quarter, primarily due to organic loan growth. Interest expense was up $1.8 million, or 3.5%, as the cost of interest-bearing liabilities increased 6 bps to 2.58% for the quarter ended June 30, 2024, driven by interest-bearing deposit costs increasing 8 bps, which were partially offset by lower average balances of short-term borrowings. Included in net interest income was $2.6 million of acquisition-related net accretion for the three months ended June 30, 2024 and $2.5 million of acquisition related net accretion for the three months ended March 31, 2024.

Current wording

Net interest income was $101.7 million for the third quarter of 2024, up $4.5 million, or 4.6%, from the previous quarter. The FTE net interest margin was 3.27% for the three months ended September 30, 2024, an increase of 9 bps from the previous quarter. Interest income increased $5.5 million, or 3.6%, as the yield on average interest-earning assets increased 9 bps from the prior quarter to 5.01%, while average interest-earning assets of $12.45 billion increased $79.2 million from the prior quarter, primarily due to organic loan growth slightly offset by a decrease in the average balance of securities. Interest expense was up $1.0 million, or 1.8%, as the cost of interest-bearing liabilities increased 2 bps to 2.60% for the quarter ended September 30, 2024, driven by interest-bearing deposit costs increasing 6 bps, which were partially offset by lower average balances of short-term borrowings. Included in net interest income was $2.7 million of acquisition-related net accretion for the three months ended September 30, 2024 and $2.6 million of acquisition-related net accretion for the three months ended June 30, 2024.

Previous wording

Net interest income was $97.2 million for the second quarter of 2024, up $8.1 million, or 9.1%, from the second quarter of 2023. The FTE net interest margin was 3.18% for the three months ended June 30, 2024, a decrease of 9 bps from the second quarter of 2023. Interest income increased $30.2 million, or 25.0%, as the yield on average interest-earning assets increased 50 bps from the same period in 2023 to 4.92%, while average interest-earning assets increased $1.38 billion, or 12.6%, from the second quarter of 2023 primarily due to the Salisbury acquisition and organic loan growth. Interest expense increased $22.1 million, or 70.1%, as the cost of interest-bearing liabilities increased 78 bps to 2.58% for the quarter ended June 30, 2024, primarily due to both a 110 bps increase in interest-bearing deposit costs and a $1.69 billion increase in interest-bearing deposits as a results of the Salisbury acquisition, partly offset by a decrease of $402.7 million in the average balances of short-term borrowings and the 558 bps rate paid on those borrowings. Included in net interest income was $2.6 million of acquisition-related net accretion for the three months ended June 30, 2024.

Current wording

Net interest income was $101.7 million for the third quarter of 2024, up $6.8 million, or 7.1%, from the third quarter of 2023. The FTE net interest margin was 3.27% for the three months ended September 30, 2024, an increase of 6 bps from the third quarter of 2023. Interest income increased $19.1 million, or 14.0%, as the yield on average interest-earning assets increased 38 bps from the same period in 2023 to 5.01%, while average interest-earning assets increased $644.2 million, or 5.5%, from the third quarter of 2023 primarily due to the Salisbury acquisition and organic loan growth. Interest expense increased $12.4 million, or 29.3%, as the cost of interest-bearing liabilities increased 42 bps to 2.60% for the quarter ended September 30, 2024, primarily due to both a 67 bps increase in interest-bearing deposit costs and a $1.13 billion increase in interest-bearing deposits as a result of the Salisbury acquisition, which were partially offset by a decrease of $491.5 million in the average balance of short-term borrowings and the 574 bps rate paid on those borrowings. Included in net interest income was $2.7 million of acquisition-related net accretion for the three months ended September 30, 2024 and $1.4 million of acquisition-related net accretion for the three months ended September 30, 2023.

Previous wording

Net interest income for the six months ended June 30, 2024 was $192.3 million, up $8.2 million, or 4.5%, from the same period in 2023. FTE net interest margin was 3.16% for the six months ended June 30, 2024, a decrease of 25 bps from the same period in 2023. Interest income increased $62.9 million, or 26.8%, as the yield on average interest-earning assets increased 54 bps from the same period in 2023 to 4.88%, while average interest-earning assets of $12.32 billion increased $1.37 billion primarily due to the Salisbury acquisition and organic loan growth partially offset by the decrease in securities. Interest expense was up $54.7 million, or 108.1%, for the six months ended June 30, 2024 as compared to the same period in 2023 driven by interest-bearing deposit costs increasing 133 bps, partly offset by a decrease of $273.8 million in the average balances of short-term borrowings and the 544 bps rate paid on those borrowings. Included in net interest income was $5.1 million of acquisition-related net accretion.

Current wording

Net interest income for the nine months ended September 30, 2024 was $294.0 million, up $15.0 million, or 5.4%, from the same period in 2023. FTE net interest margin was 3.20% for the nine months ended September 30, 2024, a decrease of 14 bps from the same period in 2023. Interest income increased $82.1 million, or 22.1%, as the yield on average interest-earning assets increased 49 bps from the same period in 2023 to 4.93%, while average interest-earning assets of $12.36 billion increased $1.13 billion primarily due to the Salisbury acquisition and organic loan growth, partially offset by the decrease in securities. Interest expense was up $67.1 million, or 72.3%, for the nine months ended September 30, 2024 as compared to the same period in 2023 driven by interest-bearing deposit costs increasing 109 bps and a $1.47 billion increase in interest-bearing deposits as a result of the Salisbury acquisition, partially offset by a decrease of $347.0 million in the average balances of short-term borrowings and the 548 bps rate paid on those borrowings. Included in net interest income was $7.8 million of acquisition-related net accretion for the nine months ended September 30, 2024 and $1.4 million of acquisition-related net accretion for the nine months ended September 30, 2023.

Previous wording

Noninterest income for the three months ended June 30, 2024 was $43.2 million, down $2.2 million, or 4.8%, from the prior quarter and up $11.2 million, or 34.9%, from the second quarter of 2023. Excluding net securities (losses) gains, noninterest income for the three months ended June 30, 2024 was $43.3 million, up $0.1 million, or 0.3%, from the prior quarter and up $6.6 million, or 18.1%, from the second quarter of 2023. The increase from the prior quarter was primarily driven by an increase in retirement plan administration fees and wealth management fees which were partially offset by a decrease in insurance services. The increase in retirement plan administration fees from the prior quarter was due primarily to organic growth, positive market performance and higher activity based fees. Wealth management fees increased from the prior quarter due primarily to organic growth and favorable market performance. Insurance services decreased from the prior quarter due to the seasonally higher income in the first quarter. The increase from the second quarter of 2023 was driven by an increase in retirement plan administration fees and wealth management fees. The increase in retirement plan administration fees from the second quarter of 2023 includes the impact from the acquisition of Retirement Direct, LLC on July 1, 2023, organic growth and higher market levels. Wealth management fees increased in the second quarter of 2023 driven by the addition of Salisbury revenues, organic growth and market performance.

Current wording

Noninterest income for the three months ended September 30, 2024 was $45.8 million, up $2.5 million, or 5.9%, from the prior quarter and up $5.5 million, or 13.8%, from the third quarter of 2023. Excluding net securities gains (losses), noninterest income for the three months ended September 30, 2024 was $45.3 million, up $2.0 million, or 4.6%, from the prior quarter and up $4.9 million, or 12.1%, from the third quarter of 2023. The increase from the prior quarter was primarily driven by an increase in wealth management fees and insurance services. Wealth management fees increased from the prior quarter due to organic growth and seasonal activity-based fees. Insurance services increased from the prior quarter due to seasonal renewals. The increase from the third quarter of 2023 was driven by an increase in retirement plan administration fees, wealth management fees and insurance services. Retirement plan administration fees increased from the third quarter of 2023 driven by organic growth and higher market levels. Wealth management fees increased in the third quarter of 2023 driven by the addition of Salisbury revenues, organic growth and market performance. Insurance services increased from the third quarter of 2023 due to organic growth.

Previous wording

Noninterest income for the six months ended June 30, 2024 was $88.6 million, up $25.2 million, or 39.7%, from the same period in 2023. Excluding net securities (losses) gains, noninterest income for the six months ended June 30, 2024 was $86.5 million, up $13.4 million, or 18.4%, from the same period in 2023. The increase from the prior year was primarily due to an increase in retirement plan administration fees, wealth management fees and service charges on deposit accounts. The increase in retirement plan administration fees was driven by positive market performance, the acquisition of Retirement Direct, LLC, organic growth and higher activity based fees. The increase in wealth management fees was driven by the addition of Salisbury revenues and market performance. In addition, the increases in service charges on deposit accounts and card services income were impacted by the Salisbury acquisition revenues.

Current wording

Noninterest income for the nine months ended September 30, 2024 was $134.4 million, up $30.7 million, or 29.6%, from the same period in 2023. Excluding net securities gains (losses), noninterest income for the nine months ended September 30, 2024 was $131.8 million, up $18.3 million, or 16.1%, from the same period in 2023. The increase from the prior year was primarily due to an increase in retirement plan administration fees and wealth management fees. The increase in retirement plan administration fees was driven by higher market level, the acquisition of Retirement Direct, LLC, organic growth and higher activity based fees. The increase in wealth management fees was driven by the addition of Salisbury revenues, organic growth and market performance.

Previous wording

Noninterest expense for the three months ended June 30, 2024 was $89.6 million, down $2.2 million, or 2.4%, from the prior quarter and up $10.8 million, or 13.7%, from the second quarter of 2023. The decrease from the prior quarter was driven by lower technology and data services due to cost savings from various efficiency initiatives. In addition, the decrease in salaries and employee benefits from the prior quarter was driven by seasonally higher payroll taxes and stock-based compensation expenses in the first quarter of 2024, which were partially offset by a full quarter of merit pay increases which were effective in March and higher medical costs. Occupancy costs and other expenses decreased from the prior quarter due to lower seasonal costs including utilities and timing of initiatives. The increase from the second quarter of 2023 was driven by higher salaries and employee benefits due to the Salisbury acquisition, merit pay increases, and higher medical and other benefit costs. In addition, the increase in occupancy expense, professional fees and outside services and amortization of intangible assets were impacted by additional expenses from the Salisbury acquisition.

Current wording

Noninterest expense for the three months ended September 30, 2024 was $95.7 million, up $6.2 million, or 6.9%, from the prior quarter and up $4.9 million, or 5.4%, from the third quarter of 2023. Excluding acquisition expenses, noninterest expense for the three months ended September 30, 2024 was $95.2 million, up $5.6 million, or 6.3%, from the prior quarter and up $12.3 million, or 14.9%, from the third quarter of 2023. The increase from the prior quarter was primarily driven by higher salaries and employee benefits due to one additional payroll day and an increase in other benefits including higher levels of incentive compensation. In addition, the increase from the prior quarter was driven by higher technology and data services due to timing of planned initiatives and continued investment in digital platform solutions. The increase from the third quarter of 2023 was driven by higher salaries and employee benefits due to the Salisbury acquisition, merit pay increases, higher levels of incentive compensation, along with higher medical and other benefit costs. In addition, the increase in occupancy expense, professional fees and outside services and amortization of intangible assets were impacted by additional expenses from the Salisbury acquisition.

Previous wording

Noninterest expense for the six months ended June 30, 2024 was $181.4 million, up $23.2 million, or 14.7%, from the same period in 2023. Excluding acquisition expenses, noninterest expense for the six months ended June 30, 2024 was $181.4 million, up $25.1 million, or 16.0%, from the same period in 2023. The increase from the prior year was driven by higher salaries and employee benefits due to the Salisbury acquisition, merit pay increases, higher levels of incentive compensation and higher medical and other benefit costs. In addition, the increase in occupancy expense, professional fees and outside services and amortization of intangible assets were impacted by additional expenses from the Salisbury acquisition.

Current wording

Noninterest expense for the nine months ended September 30, 2024 was $277.1 million, up $28.2 million, or 11.3%, from the same period in 2023. Excluding acquisition expenses, noninterest expense for the nine months ended September 30, 2024 was $276.6 million, up $37.4 million, or 15.6%, from the same period in 2023. The increase from the prior year was driven by higher salaries and employee benefits due to the Salisbury acquisition, merit pay increases, higher levels of incentive compensation and higher medical and other benefit costs. In addition, the increase in occupancy expense, professional fees and outside services and amortization of intangible assets were impacted by additional expenses from the Salisbury acquisition.

Previous wording

Income tax expense for the three months ended June 30, 2024 was $9.2 million, down $0.2 million from the prior quarter and up $0.5 million from the second quarter of 2023. The effective tax rate was 22.0% for the second quarter of 2024 compared to 21.7% for the prior quarter and 22.4% for the second quarter of 2023.

Current wording

Income tax expense for the three months ended September 30, 2024 was $10.7 million, up $1.5 million from the prior quarter and up $3.6 million from the third quarter of 2023. The effective tax rate was 21.9% for the third quarter of 2024 compared to 22.0% for the prior quarter and 22.4% for the third quarter of 2023.

Previous wording

Income tax expense for the six months ended June 30, 2024 was $18.6 million, up $0.4 million from the same period in 2023 due to an increase in pre-tax net income. The effective tax rate was 21.8% for the six months ended June 30, 2024, compared to 22.3% for the six months ended June 30, 2023. The decrease in the effective tax rate from 2023 was due to a higher level of tax-exempt income as a percentage of total taxable income.

Current wording

Income tax expense for the nine months ended September 30, 2024 was $29.3 million, up $3.9 million from the same period in 2023 due to an increase in pre-tax net income. The effective tax rate was 21.9% for the nine months ended September 30, 2024, compared to 22.3% for the nine months ended September 30, 2023. The decrease in the effective tax rate from 2023 was due to a higher level of tax-exempt income as a percentage of total taxable income.

Previous wording

Total securities decreased $15.3 million, or 0.6%, from December 31, 2023 to June 30, 2024. The securities portfolio represented 17.5% of total assets as of June 30, 2024 as compared to 17.8% of total assets as of December 31, 2023.

Current wording

Total securities increased $32.5 million, or 1.4%, from December 31, 2023 to September 30, 2024. The securities portfolio represented 17.4% of total assets as of September 30, 2024 as compared to 17.8% of total assets as of December 31, 2023.

Previous wording

Total loans increased by $203.6 million, or 4.2% annualized, from December 31, 2023 to June 30, 2024. Excluding the other consumer and residential solar portfolios that are in a planned run-off status, period end loans increased $294.9 million, or 6.9% annualized. Commercial and industrial loans increased $43.7 million to $1.40 billion; commercial real estate loans increased $157.3 million to $3.78 billion; and total consumer loans increased $2.6 million to $4.67 billion. Total loans represent approximately 73.0% of assets as of June 30, 2024, as compared to 72.5% as of December 31, 2023.

Current wording

Total loans increased by $256.3 million, or 3.5% annualized, from December 31, 2023 to September 30, 2024. Excluding the other consumer and residential solar portfolios that are in a planned run-off status, period end loans increased $384.4 million, or 6.0% annualized. Commercial and industrial loans increased $104.7 million to $1.46 billion; commercial real estate loans increased $165.6 million to $3.79 billion; and total consumer loans decreased $13.9 million to $4.66 billion. Total loans represent approximately 71.6% of assets as of September 30, 2024, as compared to 72.5% as of December 31, 2023.

Previous wording

Within the CRE portfolio, approximately 80% comprises Non-Owner Occupied CRE, with the remaining 20% being Owner-Occupied CRE. Non-Owner Occupied CRE includes diverse sectors across the Company’s markets such as residential rental properties (41%), and office spaces (19%), along with retail, manufacturing, mixed use, hotels and others. Notably, office CRE loans account for 6% of the total outstanding loans, predominantly serving suburban medical and professional tenants across suburban and small urban markets. These loans carry an average size of $1.9 million, with 9% maturing over the next two years. As of June 30, 2024 and December 31, 2023, the total CRE construction and development loans amounted to $246.6 million and $347.2 million, respectively.

Current wording

Within the CRE portfolio, approximately 81% comprises Non-Owner Occupied CRE, with the remaining 19% being Owner-Occupied CRE. Non-Owner Occupied CRE includes diverse sectors across the Company’s markets such as residential rental properties (43%), and office spaces (18%), along with retail, manufacturing, mixed use, hotels and others. Notably, office CRE loans account for 6% of the total outstanding loans, predominantly serving suburban medical and professional tenants across suburban and small urban markets. These loans carry an average size of $1.9 million, with 10% maturing over the next two years. As of September 30, 2024 and December 31, 2023, the total CRE construction and development loans amounted to $286.9 million and $347.2 million, respectively.

Previous wording

Beginning January 1, 2023, the Company adopted 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 TDRs since December 31, 2022. The January 1, 2023 decrease in the 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.

Current wording

Beginning January 1, 2023, the Company adopted 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 TDRs since December 31, 2022. The January 1, 2023 decrease in the allowance for credit loss on TDR loans relating to the 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.

Previous wording

The allowance for credit losses totaled $120.5 million at June 30, 2024, as compared to $115.3 million at March 31, 2024 and $100.4 million at June 30, 2023. The allowance for credit losses as a percentage of loans was 1.22% at June 30, 2024, compared to 1.19% at March 31, 2024 and 1.20% at June 30, 2023. The increase in the allowance for credit losses from March 31, 2024 to June 30, 2024 was due to providing for loan growth, changes in model assumptions, including a change in prepayment speed assumptions and a $1.7 million additional specific reserve established relating to the commercial relationship previously placed on nonaccrual status in the fourth quarter of 2023, partly offset by a change in forecast scenario weightings from 70% baseline and 30% downside to 80% baseline and 20% downside. The increase in the allowance for credit losses from June 30, 2023 to June 30, 2024 was primarily due to the $14.5 million of allowance for acquired Salisbury loans which included both the $5.8 million allowance for PCD loans reclassified from loans and the $8.8 million allowance for non-PCD loans recognized through the provision for loan losses as well as the slowing of prepayment speed assumptions and providing for organic loan growth.

Current wording

The allowance for credit losses totaled $119.5 million at September 30, 2024, as compared to $120.5 million at June 30, 2024 and $114.6 million at September 30, 2023. The allowance for credit losses as a percentage of loans was 1.21% at September 30, 2024, compared to 1.22% at June 30, 2024 and 1.19% at September 30, 2023. The allowance for credit losses as of September 30, 2024 was consistent with the allowance estimates as of June 30, 2024. The increase in the allowance for credit losses from September 30, 2023 to September 30, 2024 was primarily due to providing for organic loan growth, the slowing of prepayment speed assumptions, including the change in prepayment model assumptions and an additional specific reserve established in the second quarter of 2024 relating to a commercial relationship individually evaluated for credit loss. These increases to the allowance for credit losses were partially offset by a change in forecast scenario weightings from 70% baseline and 30% downside to 80% baseline and 20% downside, and the shift in loan composition driven by other consumer and residential solar portfolios that are in a planned run-off status.

Previous wording

The allowance for credit losses was 316.37% of nonperforming loans at June 30, 2024, compared to 305.12% at March 31, 2024 and 510.01% at June 30, 2023. The allowance for credit losses was 346.71% of nonaccrual loans at June 30, 2024, compared to 327.66% of nonaccrual loans at March 31, 2024 and 593.00% of nonaccrual loans at June 30, 2023. The decline in the coverage of the allowance to nonperforming and nonaccrual loans from June 30, 2023 to June 30, 2024 largely relates to one nonperforming relationship that is individually evaluated for purposes of the allowance for credit losses which had a $1.8 million specific reserve established during the three months ended June 30, 2024.

Current wording

The allowance for credit losses was 320.21% of nonperforming loans at September 30, 2024, compared to 316.37% at June 30, 2024 and 472.31% at September 30, 2023. The allowance for credit losses was 358.45% of nonaccrual loans at September 30, 2024, compared to 346.71% of nonaccrual loans at June 30, 2024 and 552.67% of nonaccrual loans at September 30, 2023. The decline in the coverage of the allowance to nonperforming and nonaccrual loans from September 30, 2023 to September 30, 2024 largely relates to one nonperforming relationship that is individually evaluated for purposes of the allowance for credit losses which had a $1.7 million specific reserve established during the three months ended June 30, 2024.

Previous wording

The provision for loan losses was $8.9 million for three months ended June 30, 2024, compared to $5.6 million in the prior quarter and $3.6 million for the same period in the prior year. Provision expense increased from the prior quarter and the second quarter of 2023 primarily due to providing for the second quarter’s loan growth, changes in model assumptions, including the extension of the expected duration of the portfolio and a specific reserve related to a commercial relationship previously placed in nonaccrual in the fourth quarter of 2023. Net charge-offs totaled $3.7 million during the three months ended June 30, 2024, compared to net charge-offs of $4.7 million during the first quarter of 2024 and $3.5 million in the second quarter of 2023. Net charge-offs to average loans was 15 bps for the three months ended June 30, 2024, compared to 19 bps for the first quarter of 2024 and 17 bps for the three months ended June 30, 2023.

Current wording

The provision for loan losses was $2.9 million for three months ended September 30, 2024, compared to $8.9 million in the prior quarter and $12.6 million for the same period in the prior year. Included in the provision expense for the three months ended September 30, 2023, was $8.8 million of acquisition-related provision for loan losses due to the Salisbury acquisition. Provision expense decreased compared to the prior quarter due lower levels of loan growth the third quarter of 2024 including the run-off of the other consumer and residential solar portfolios, the stabilization of expected prepayment assumptions impacting the expected life of the loan portfolio and a specific reserve established in the prior quarter relating to a commercial relationship previously placed in nonaccrual in the fourth quarter of 2023. Net charge-offs totaled $3.9 million during the three months ended September 30, 2024, compared to net charge-offs of $3.7 million during the second quarter of 2024 and $4.2 million in the third quarter of 2023. Net charge-offs to average loans was 16 bps for the three months ended September 30, 2024, compared to 15 bps for the second quarter of 2024 and 18 bps for the three months ended September 30, 2023.

Previous wording

The provision for loan losses was $14.5 million for the six months ended June 30, 2024, compared to $7.5 million for the six months ended June 30, 2023. Provision expense increased from the same period in the prior year due primarily to providing for loan growth, the slowing of prepayment speed assumptions, changes in model assumptions, including the extension of the expected duration of the portfolio and a specific reserve related to a commercial relationship previously placed in nonaccrual in the fourth quarter of 2023. Net charge-offs totaled $8.4 million during the six months ended June 30, 2024, compared to net charge-offs of $7.3 million during the six months ended June 30, 2023. Net charge-offs to average loans was 17 bps for the six months ended June 30, 2024, compared to 18 bps for the six months ended June 30, 2023.

Current wording

The provision for loan losses was $17.4 million for the nine months ended September 30, 2024, compared to $20.1 million for the nine months ended September 30, 2023. Provision expense decreased from the same period in the prior year due to the $8.8 million of acquisition-related provision for loan losses due to the Salisbury acquisition recorded during the nine months ended September 30, 2023, partially offset by providing for current year loan growth, the slowing of prepayment speed assumptions in the current year, changes in model assumptions including the extension of the expected duration of the portfolio and a specific reserve related to a commercial relationship previously placed in nonaccrual in the fourth quarter of 2023. Net charge-offs totaled $12.3 million during the nine months ended September 30, 2024, compared to net charge-offs of $11.5 million during the nine months ended September 30, 2023. Net charge-offs to average loans was 17 bps for the nine months ended September 30, 2024, compared to 18 bps for the nine months ended September 30, 2023.

Previous wording

As of June 30, 2024, the unfunded commitment reserve totaled $4.3 million, compared to $4.7 million as of March 31, 2024 and $4.4 million as of June 30, 2023.

Current wording

As of September 30, 2024, the unfunded commitment reserve totaled $4.6 million, compared to $4.3 million as of June 30, 2024 and $4.8 million as of September 30, 2023.

Previous wording

Total nonperforming assets were $38.2 million at June 30, 2024, compared to $37.9 million at December 31, 2023 and $19.9 million at June 30, 2023. Nonperforming loans at June 30, 2024 were $38.1 million or 0.39% of total loans, compared with $37.9 million or 0.39% of total loans at December 31, 2023 and $19.7 million or 0.24% of total loans at June 30, 2023. The increase in nonperforming assets was attributable to a diversified, multi-tenant commercial real estate development relationship that was placed into a nonaccrual status in the fourth quarter of 2023, in which NBT is a participant. The relationship is being actively managed, as noted above, a $1.7 specific reserve was established during the three months ended June 30, 2024 for this relationship. Total nonaccrual loans were $34.8 million or 0.35% of total loans at June 30, 2024, compared to $34.2 million or 0.35% of total loans at December 31, 2023 and $16.9 million or 0.20% of total loans at June 30, 2023. Past due loans as a percentage of total loans was 0.30% at June 30, 2024, down from 0.32% at December 31, 2023 and down from 0.45% at June 30, 2023.

Current wording

Total nonperforming assets were $37.4 million at September 30, 2024, compared to $37.9 million at December 31, 2023 and $24.3 million at September 30, 2023. Nonperforming loans at September 30, 2024 were $37.3 million or 0.38% of total loans, compared with $37.9 million or 0.39% of total loans at December 31, 2023 and $24.3 million or 0.25% of total loans at September 30, 2023. The increase in nonperforming assets from the same period in the prior year was attributable to a diversified, multi-tenant commercial real estate development relationship that was placed into a nonaccrual status in the fourth quarter of 2023, in which NBT is a participant. The relationship is being actively managed, as noted above, a $1.7 million specific reserve was established during the three months ended June 30, 2024 for this relationship. Total nonaccrual loans were $33.3 million or 0.34% of total loans at September 30, 2024, compared to $34.2 million or 0.35% of total loans at December 31, 2023 and $20.7 million or 0.21% of total loans at September 30, 2023. Past due loans as a percentage of total loans was 0.36% at September 30, 2024, up from 0.32% at December 31, 2023 and down from 0.49% at September 30, 2023.

Previous wording

In addition to nonperforming loans discussed above, the Company has also identified approximately $125.2 million in potential problem loans at June 30, 2024 as compared to $87.7 million at December 31, 2023 and $90.6 million at June 30, 2023. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” Potential problem loans have increased to more normalized levels and the increase primarily relates to a few commercial real estate relationships reflecting changing conditions in commercial real estate markets including construction delays, rising costs and delays in leasing up spaces. The increase in potential problem loans at June 30, 2024 compared to December 31, 2023 and June 30, 2023 is primarily due to the migration of commercial loan balances of $35.1 million and $38.0 million, respectively, to substandard, the majority of which is adequately secured by real estate collateral. 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.

Current wording

In addition to nonperforming loans discussed above, the Company has also identified approximately $119.9 million in potential problem loans at September 30, 2024 as compared to $87.7 million at December 31, 2023 and $92.4 million at September 30, 2023. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” Potential problem loans have increased to more normalized levels and the increase primarily relates to a few commercial real estate relationships reflecting changing conditions in commercial real estate markets including construction delays, rising costs and delays in leasing up spaces. The increase in potential problem loans at September 30, 2024 compared to December 31, 2023 and September 30, 2023 is primarily due to the net migration of commercial loan balances of $32.9 million and $27.2 million, respectively, to substandard, the majority of which is adequately secured by real estate collateral. 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.

Previous wording

Total deposits were $11.27 billion at June 30, 2024, up $302.5 million, or 2.8%, from December 31, 2023. As of June 30, 2024, there were $218.5 million of brokered time deposits, up from $155.2 million as of December 31, 2023. The increase in deposits was primarily due to higher consumer deposit balances and accounts and the inflow of seasonal municipal deposits. The Company continues to experience some incremental migration from noninterest bearing and low interest checking and savings accounts into higher cost money market and time deposit instruments. The Company’s composition of total deposits is diverse and granular with over 562,000 accounts with an average per account balance of $20,052 as of June 30, 2024. As of June 30, 2024 and December 31, 2023 the estimated amounts of uninsured deposits based on the methodologies and assumptions used for the bank regulatory reporting were $4.47 billion and $4.08 billion, respectively. Total average deposits increased $1.57 billion, or 16.5%, from the same period last year. The increase in average balances was primarily due to the $1.31 billion in deposits acquired from Salisbury in the third quarter of 2023.

Current wording

Total deposits were $11.59 billion at September 30, 2024, up $619.3 million, or 5.6%, from December 31, 2023. As of September 30, 2024, there were $250.0 million of brokered time deposits, up from $155.2 million as of December 31, 2023. The increase in deposits was primarily due to higher consumer deposit balances and accounts and the inflow of seasonal municipal deposits. The Company continues to experience some incremental migration from noninterest bearing and low interest checking and savings accounts into higher cost money market and time deposit instruments. The Company’s composition of total deposits is diverse and granular with over 563,000 accounts with an average per account balance of $20,560 as of September 30, 2024. As of September 30, 2024 and December 31, 2023 the estimated amounts of uninsured deposits based on the methodologies and assumptions used for the bank regulatory reporting were $4.81 billion and $4.08 billion, respectively. Total average deposits increased $1.39 billion, or 14.1%, from the same period last year. The increase in average balances was primarily due to the $1.31 billion in deposits acquired from Salisbury in the third quarter of 2023.

Previous wording

The Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $224.7 million at June 30, 2024 compared to $386.7 million at December 31, 2023. Long-term debt was $29.7 million at June 30, 2024 compared to $29.8 million at December 31, 2023.

Current wording

The Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $205.0 million at September 30, 2024 compared to $386.7 million at December 31, 2023. Long-term debt was $29.7 million at September 30, 2024 compared to $29.8 million at December 31, 2023.

Previous wording

As of June 30, 2024 and December 31, 2023 the subordinated debt net of unamortized issuance costs and fair value discount was $120.5 million and $119.7 million, respectively.

Current wording

As of September 30, 2024 and December 31, 2023 the subordinated debt net of unamortized issuance costs and fair value discount was $120.8 million and $119.7 million, respectively.

Previous wording

Stockholders’ equity of $1.46 billion represented 10.83% of total assets at June 30, 2024 compared with $1.43 billion, or 10.71% of total assets, as of December 31, 2023. Stockholders’ equity increased $36.3 million from December 31, 2023 driven by net income generation of $66.5 million for the six months ended June 30, 2024, partially offset by dividends declared of $30.2 million and a $2.0 million increase in accumulated other comprehensive loss due primarily to the change in the fair value of securities available for sale.

Current wording

Stockholders’ equity of $1.52 billion represented 11.00% of total assets at September 30, 2024 compared with $1.43 billion, or 10.71% of total assets, as of December 31, 2023. Stockholders’ equity increased $96.3 million from December 31, 2023 driven by net income generation of $104.6 million for the nine months ended September 30, 2024 and a decrease of $35.2 million in accumulated other comprehensive loss due primarily to the change in the fair value of securities available for sale, partially offset by dividends declared of $46.2 million.

Previous wording

The Company purchased 5,700 shares of its common stock during the three months ended June 30, 2024 at an average price of $33.02 per share under its previously announced share repurchase program. The Company 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, 2024, there were 1,992,400 shares available for repurchase under this plan authorized on December 18, 2023, which is set to expire on December 31, 2025.

Current wording

The Company did not purchase shares of its common stock during the three months ended September 30, 2024. The Company purchased 7,600 shares of its common stock in the first and second quarters of 2024 at an average price of $33.02 per share under its previously announced share repurchase program. The Company 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 September 30, 2024, there were 1,992,400 shares available for repurchase under this plan authorized on December 18, 2023, which is set to expire on December 31, 2025.

Previous wording

The primary tool utilized by the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk.

Current wording

The primary tool utilized by the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet. Four additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps, a gradual decrease of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk.

Previous wording

The Company’s Interest Rate Sensitivity has migrated to a near neutral position. In the declining rate scenario, net interest income is projected to modestly decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors. In the rising rate scenarios, net interest income is near neutral, impacted by slowing prepayments speeds and increased deposit reactivity; the magnitude of 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, 2024 balance sheet position:

Current wording

The Company’s Interest Rate Sensitivity has remained in a near neutral position. In the declining rate scenario, net interest income is projected to modestly decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors. In the rising rate scenarios, net interest income is near neutral, impacted by slowing prepayments speeds and increased deposit reactivity; the magnitude of 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/-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 September 30, 2024 balance sheet position:

Previous wording

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 Federal Funds increases of 425 bps in 2022 with an additional 100 bps of increases in 2023. While deposit rates increased meaningfully in 2023 and have continued to increase in 2024 in conjunction with elevated short term interest rates, there has been some moderation to the level of increase. The Company continues to focus on managing deposit expense in an environment of elevated interest rates while allowing assets to reprice upward.

Current wording

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 Federal Funds increases of 425 bps in 2022 with an additional 100 bps of increases in 2023. However, the tightening cycle ended in September of 2024 with the Federal Reserve lowering the federal funds rate by 50 bps. While deposit rates increased meaningfully in 2023 and have continued to increase in early 2024 in conjunction with elevated short-term interest rates, the recent federal funds rate reduction has provided the catalyst for the Company to begin reducing deposit rates. The Company continues to focus on managing deposit expense in an environment of still elevated but declining short-term interest rates while allowing assets to reprice upward in relation to existing portfolio asset yields.

Previous wording

The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At June 30, 2024, the Company’s Basic Surplus measurement was 15.6% of total assets, or $2.11 billion, as compared to the December 31, 2023 Basic Surplus of 11.6%, or $1.54 billion, and was above the Company’s minimum of 5% (calculated at $675.1 million and $665.5 million of period end total assets as June 30, 2024 and December 31, 2023, respectively) set forth in its liquidity policies.

Current wording

The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At September 30, 2024, the Company’s Basic Surplus measurement was 16.4% of total assets, or $2.26 billion, as compared to the December 31, 2023 Basic Surplus of 11.6%, or $1.54 billion, and was above the Company’s minimum of 5% (calculated at $692.0 million and $665.5 million of period end total assets as September 30, 2024 and December 31, 2023, respectively) set forth in its liquidity policies.

Previous wording

At June 30, 2024 and December 31, 2023, FHLB advances outstanding totaled $143.7 million and $322.7 million, respectively. At June 30, 2024 and December 31, 2023, the Bank had $154.0 million and $77.0 million, respectively, of collateral encumbered by municipal letters of credit. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.69 billion at June 30, 2024 and $1.11 billion at December 31, 2023. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $784.4 million and $823.3 million at June 30, 2024 and December 31, 2023, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $2.03 billion at June 30, 2024 and $2.01 billion at December 31, 2023. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile and residential solar loans as collateral. At June 30, 2024 and December 31, 2023, the Bank had the capacity to borrow $1.10 billion and $1.02 billion, respectively, from this program. The Company’s internal policy authorizes borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $3.20 billion at June 30, 2024 and $2.99 billion at December 31, 2023.

Current wording

At September 30, 2024 and December 31, 2023, FHLB advances outstanding totaled $129.6 million and $322.7 million, respectively. At September 30, 2024 and December 31, 2023, the Bank had $194.0 million and $77.0 million, respectively, of collateral encumbered by municipal letters of credit. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.63 billion at September 30, 2024 and $1.11 billion at December 31, 2023. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $807.7 million and $823.3 million at September 30, 2024 and December 31, 2023, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $2.06 billion at September 30, 2024 and $2.01 billion at December 31, 2023. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile and residential solar loans as collateral. At September 30, 2024 and December 31, 2023, the Bank had the capacity to borrow $1.12 billion and $1.02 billion, respectively, from this program. The Company’s internal policy authorizes borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $3.41 billion at September 30, 2024 and $2.99 billion at December 31, 2023.

Previous wording

This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considers its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2024. Continued increases to interest rates could result in deposit declines as depositors have alternative opportunities for yield on their excess funds. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Note, enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the 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.

Current wording

This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considers its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2024. While short-term interest rates have declined, they remain elevated related to recent history, which could result in deposit declines as depositors have alternative opportunities for yield on their excess funds. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Note, enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the 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 elevated interest rates and the recent bank failures have led to a deposit decline in the banking system and increased volatility to liquidity risk.

Previous wording

Certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends. The approval of the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations. At June 30, 2024, approximately $84.3 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.

Current wording

Certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends. The approval of the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations. At September 30, 2024, approximately $95.8 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.