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 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.

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”). When references to “NBT,” “we,” “our,” “us,” and “the Company” are made in this report, we mean NBT Bancorp Inc. and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, NBT Bancorp Inc. When we refer to the “Bank” in this report, we mean our only bank subsidiary, NBT Bank, National Association, and its subsidiaries. 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, 2024 for an understanding of the following discussion and analysis. Operating results for the three month period ending March 31, 2025 are not necessarily indicative of the results of the full year ending December 31, 2025 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) 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.

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 and international trade disputes (including threatened or implemented tariffs imposed by the U.S. and threatened or implemented tariffs imposed by foreign countries in retaliation); (5) inflation, interest rate, 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 possibility that NBT may be unable to achieve expected synergies and operating efficiencies in the merger within the expected timeframes or at all or to successfully integrate Evans operations and those of NBT; (14) the ability to increase market share and control expenses; (15) changes in the competitive environment among financial holding companies; (16) 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; (17) the effect of changes in accounting policies and practices, as may be adopted by the re…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. The Company follows financial accounting and reporting policies that are in accordance with GAAP. The more significant of these policies are summarized in Note 1 to the consolidated financial statements presented in our 2023 Annual Report on Form 10-K. Refer to Note 3 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards. Not all significant accounting policies require management to make difficult, subjective or complex judgments. The allowance for credit losses and the allowance for unfunded commitments policies are deemed to meet the SEC’s definition of a critical accounting estimate.

Current wording

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. The Company follows financial accounting and reporting policies that are in accordance with GAAP. The more significant of these policies are summarized in Note 1 to the consolidated financial statements presented in our 2024 Annual Report on Form 10-K. Refer to Note 3 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards. The allowance for credit losses and unfunded commitments policies are deemed to meet the SEC’s definition of a critical accounting estimate.

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 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.

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 March 31, 2025, 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 March 31, 2025, the weightings were 75% and 25% for the baseline and downside economic forecasts, respectively. The baseline outlook reflected an economic environment where the unemployment rate increases from 4.1% to 4.4% during the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the second quarter of 2025 at approximately 5% and decrease to 3.9% before increasing to 4.1% by 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, national unemployment rises from 4.1% in the first quarter of 2025 to a peak of 7.6% in the second quarter of 2026. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2025. Additional qualitative adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth and policy exceptions was also conducted.

Previous 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.

Current wording

The Company incurred acquisition expenses related to the Merger of $1.2 million for the three months ended March 31, 2025.

Previous 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.

Current wording

Net income for the three months ended March 31, 2025 was $36.7 million, up $0.7 million from the fourth quarter of 2024 and up $2.9 million from the first quarter of 2024. Diluted earnings per share were $0.77 for the three months ended March 31, 2025, up $0.01 from the fourth quarter of 2024 and up $0.06 from the first quarter of 2024.

Previous 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.

Current wording

Operating net income(1), a non-GAAP measure, was $37.8 million, or $0.80 per diluted common share, for the three months ended March 31, 2025, compared to $0.77 per diluted common share for the fourth quarter of 2024 and $0.68 per diluted common share for the first quarter of 2024.

Previous wording

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

Current wording

The following information should be considered in connection with the Company’s results for the three months ended March 31, 2025:

Previous wording

Net interest income is the difference between interest income on earning assets, primarily loans and securities and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on interest-earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings.

Current wording

Net interest income is the difference between the interest and dividend income earned on interest-earning assets, primarily loans and securities and the interest expense paid on interest-bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on interest-earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings.

Previous wording

The following tables include the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing liabilities on a taxable equivalent basis.

Current wording

The following table includes the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing liabilities on a taxable equivalent basis.

Previous 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.

Current wording

Noninterest income for the three months ended March 31, 2025 was $47.5 million, up $5.0 million, or 11.8%, from the prior quarter and up $2.1 million, or 4.5%, from the first quarter of 2024. Excluding net securities gains (losses), noninterest income for the three months ended March 31, 2025 was $47.6 million, up $5.4 million, or 12.7%, from the prior quarter and up $4.3 million, or 10.1%, from the first quarter of 2024. The increase from the prior quarter was primarily driven by an increase in retirement plan administration fees, insurance services and bank owned life insurance income. The increase in retirement plan administration fees from the prior quarter was primarily due to higher seasonal activity-based fees in the first quarter, organic growth and the additional revenue from the acquisition of a small third party administrator (“TPA”) in the fourth quarter of 2024. Insurance services increased from the prior quarter due to organic growth, higher levels of policy renewals and first quarter seasonality. Bank owned life insurance income increased from the prior quarter due to a $1.3 million gain recognized from a claim. The increase from the first quarter of 2024 was driven by an increase in retirement plan administration fees, wealth management fees and bank owned life insurance income. The increase in retirement plan administration fees from the first quarter of 2024 was driven by the additional revenues from new customer plans, the TPA acquisition and higher market values of assets under administration. Wealth management fees increased from the first quarter of 2024 driven by performance and growth in new customer accounts. Bank owned life insurance income increased from the first quarter of 2024 due to a $1.3 million gain recognized from a claim.

Previous 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.

Current wording

Noninterest expense for the three months ended March 31, 2025 was $99.9 million, down $0.9 million, or 0.9%, from the prior quarter and up $8.1 million, or 8.9%, from the first quarter of 2024. Excluding acquisition expenses, noninterest expense for the three months ended March 31, 2025 was $98.7 million, down $1.1 million, or 1.1%, from the prior quarter and up $6.9 million, or 7.5%, from the first quarter of 2024. The decrease from the prior quarter was driven by lower salaries and employee benefits due to lower medical and other benefit costs, lower levels of incentive compensation and lower salaries due to two fewer payroll days in the quarter, partially offset by seasonally higher payroll taxes and stock-based compensation expenses. In addition, other expenses decreased $1.6 million due primarily to timing of expenses and Company initiatives in the fourth quarter of 2024. These costs were partially offset by the increase in occupancy costs which was driven by seasonal maintenance and utilities costs. The increase from the first quarter of 2024 was driven by higher salaries and employee benefits driven by merit pay increases which were effective annually in March, an increase in employees supporting growth in our markets and higher medical and other benefit costs. In addition, occupancy costs increased $0.9 million primarily due to higher seasonal maintenance and utilities given the harsher winter and higher facilities costs related to new banking locations.

Previous 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.

Current wording

Income tax expense for the three months ended March 31, 2025 was $10.5 million, up $0.9 million from the prior quarter and up $1.1 million from the first quarter of 2024. The effective tax rate was 22.2% for the first quarter of 2025 compared to 20.9% for the prior quarter and 21.7% for the first quarter of 2024. The increase in the effective tax rate from the prior quarter and the first quarter of 2024 was due to a lower level of tax-exempt income as a percentage of total taxable income.

Previous 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.

Current wording

Total securities increased $123.1 million, or 5.0%, from December 31, 2024 to March 31, 2025. The securities portfolio represented 18.6% of total assets as of March 31, 2025 as compared to 17.8% of total assets as of December 31, 2024.

Previous 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.

Current wording

Total loans were $9.98 billion and $9.97 billion at March 31, 2025 and December 31, 2024, respectively. Excluding the other consumer and residential solar portfolios that are in a planned run-off status, period end loans increased $40.5 million, or 1.8% annualized. C&I loans increased $10.5 million to $1.44 billion; CRE loans increased $13.4 million to $3.89 billion; and total consumer loans decreased $13.6 million to $4.65 billion. Total loans represent approximately 72.0% of assets as of March 31, 2025, as compared to 72.3% as of December 31, 2024.

Previous wording

Loans in the C&I and CRE portfolios consist primarily of loans made to small and medium-sized entities. The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion, equipment purchases, livestock purchases and seasonal crop expenses. These loans are usually collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. The Company extends CRE loans to facilitate various real estate transactions, encompassing acquisitions, refinancing, expansions and enhancements to both commercial and agricultural properties. These loans are secured by liens on real estate assets, covering a spectrum of properties including apartments, commercial structures, healthcare facilities and others, whether occupied by owners or non-owners. Risks associated with the CRE portfolio pertain to the borrowers’ capacity to meet interest and principal payments throughout the loan’s duration, as well as their ability to secure financing upon the loan’s maturity. The Company has a risk management framework that includes rigorous underwriting standards, targeted portfolio stress testing, interest rate sensitivities on commercial borrowers and comprehensive credit risk monitoring mechanisms. The Company remains vigilant in monitoring market trends, economic indicators and regulatory developments to promptly adapt our risk management strategies as needed.

Current wording

Loans in the C&I and CRE portfolios consist primarily of loans extended to small and medium-sized entities. The Company offers a variety of loan products tailored to meet the needs of commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion, equipment purchases, livestock purchases and seasonal crop expenses. These loans are typically collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are inherently subject to industry price volatility. The Company extends CRE loans to support real estate transactions, including acquisitions, refinancings, expansions and property improvements to both commercial and agricultural properties. These loans are secured by liens on real estate assets, covering a spectrum of properties including apartments, commercial structures, healthcare facilities and others, whether occupied by owners or non-owners. Risks associated with the CRE portfolio pertain to the borrowers’ ability to meet interest and principal payments over the life of the loan, as well as their ability to secure financing upon the loan’s maturity. The Company has a risk management framework that includes rigorous underwriting standards, targeted portfolio stress testing, interest rate sensitivities on commercial borrowers and comprehensive credit risk monitoring mechanisms. The Company remains vigilant in monitoring market trends, economic indicators and regulatory developments to promptly adapt our risk management strategies as needed.

Previous 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.

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 (17%), along with retail, manufacturing, mixed use, hotels and others. Notably, office CRE loans account for 5% 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 March 31, 2025 and December 31, 2024, the total CRE construction and development loans amounted to $316.4 million and $314.8 million, respectively.

Previous wording

Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio, adjusted for expected prepayments. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

Current wording

Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio, adjusted for expected prepayments and curtailments. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

Previous wording

Management estimates the allowance balance for credit losses using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required at each point in the measurement process.

Current wording

Management estimates the allowance for credit losses using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required at each point in the measurement process.

Previous wording

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted probability of default and loss given default modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.

Current wording

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD and LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio as of the balance sheet date.

Previous wording

Additional information about our allowance for credit losses is included in Note 7 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q as well as in the “Critical Accounting Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

Current wording

Additional information about our Allowance for Credit Losses is included in Note 7 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q as well as in the “Critical Accounting Estimates” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

Previous 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.

Current wording

The allowance for credit losses totaled $117.0 million at March 31, 2025, compared to $116.0 million at December 31, 2024. The allowance for credit losses as a percentage of loans was 1.17% at March 31, 2025, compared to 1.16% at December 31, 2024. The allowance for credit losses as of March 31, 2025 increased compared to the allowance estimates as of December 31, 2024 primarily due to deterioration in the economic forecast including the change in the forecast scenario and the change in forecast scenario weightings from 80% baseline and 20% downside to 75% baseline and 25% downside. The increase to the allowance for credit losses were partially offset by model refreshment 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 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.

Current wording

The allowance for credit losses was 245.33% of nonperforming loans at March 31, 2025, compared to 224.73% at December 31, 2024. The allowance for credit losses was 260.99% of nonaccrual loans at March 31, 2025, compared to 253.17% of nonaccrual loans at December 31, 2024. The increase in the coverage of the allowance to nonperforming and nonaccrual loans from December 31, 2024 to March 31, 2025 largely relates to the increase in allowance primarily due to deterioration in economic conditions during the quarter and the $2.1 million charge-off on a nonperforming relationship that is individually evaluated for purposes of the allowance for credit losses.

Previous 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.

Current wording

As of March 31, 2025, the unfunded commitment reserve totaled $4.5 million, compared to $4.4 million as of December 31, 2024.

Previous wording

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, troubled loans modifications, OREO and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. The threshold for evaluating classified commercial and commercial real estate loans risk graded substandard or doubtful, and nonperforming loans individually evaluated for credit loss is $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.

Current wording

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, troubled loans modifications, OREO and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. The threshold for evaluating classified, commercial and CRE loans risk graded substandard or doubtful, and nonperforming loans individually evaluated for credit loss is $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.

Previous 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.

Current wording

Total nonperforming assets were $48.0 million at March 31, 2025, compared to $51.8 million at December 31, 2024. Nonperforming loans at March 31, 2025 were $47.7 million or 0.48% of total loans, compared with $51.6 million or 0.52% of total loans at December 31, 2024. The decrease in nonperforming assets from December 31, 2024 to March 31, 2025 was attributable to the previously mentioned $2.1 million charge-off in the first quarter of 2025 on an individually evaluated CRE relationship in which NBT is a participant. This relationship is being actively managed and its current carrying value is supported by recent appraised values. Total nonaccrual loans were $44.8 million or 0.45% of total loans at March 31, 2025, compared to $45.8 million or 0.46% of total loans at December 31, 2024. Past due loans as a percentage of total loans was 0.32% at March 31, 2025, down from 0.34% at December 31, 2024.

Previous 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.

Current wording

In addition to nonperforming loans discussed above, the Company has also identified approximately $125.2 million in potential problem loans at March 31, 2025 as compared to $116.1 million at December 31, 2024. 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 CRE relationships reflecting changing conditions in certain CRE markets including construction delays, rising costs and delays in leasing up spaces. The increase in potential problem loans from December 31, 2024, is primarily due to the net migration of $8.8 million in commercial loan balances to substandard. Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 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 $11.59 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.

Current wording

Total deposits were $11.71 billion at March 31, 2025, up $161.8 million, or 1.4%, from December 31, 2024. As of March 31, 2025 there were $294.7 million of brokered time deposits, down from $295.8 million as of December 31, 2024. 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 increase in deposits was primarily due to the inflow of seasonal municipal deposits during the first quarter of 2025. The Company’s composition of total deposits is diverse and granular with over 561,000 accounts with an average per account balance of $20,834 as of March 31, 2025. As of March 31, 2025 and December 31, 2024 the estimated amounts of uninsured deposits based on the same methodologies and assumptions used for the bank regulatory reporting were $4.85 billion and $4.73 billion, respectively. Total average deposits increased $540.1 million, or 4.9%, from the same period last year.

Previous 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.

Current wording

The Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $85.6 million at March 31, 2025 compared to $162.9 million at December 31, 2024. Long-term debt was $4.6 million at March 31, 2025, compared to $29.6 million at December 31, 2024. The decrease in long-term debt was due to a maturity of a $25.0 million borrowing that matured in the first quarter of 2025.

Previous wording

Subordinated notes assumed in connection with the Salisbury acquisition included $25.0 million of 3.50% fixed-to-floating rate subordinated notes due 2031. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 3.50%, payable quarterly in arrears commencing on June 30, 2021, and a floating rate of interest equivalent to the three-month SOFR plus a spread of 2.80%, payable quarterly in arrears commencing on June 30, 2026. As of the acquisition date, the fair value discount was $3.0 million, which will be amortized into interest expense over the expected call or maturity date.

Current wording

Subordinated notes assumed in connection with the Salisbury acquisition included $25.0 million of 3.50% fixed-to-floating rate subordinated notes due 2031. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 3.50%, payable quarterly in arrears commencing on June 30, 2021, and a floating rate of interest equivalent to the three-month SOFR plus a spread of 2.80%, payable quarterly in arrears commencing on June 30, 2026. As of the acquisition date, the fair value discount was $3.0 million, which is being amortized into interest expense over the expected call or maturity date.

Previous 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.

Current wording

As of March 31, 2025 and December 31, 2024 the subordinated debt net of unamortized issuance costs and fair value discount was $121.6 million and $121.2 million, respectively.

Previous 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.

Current wording

Stockholders’ equity of $1.57 billion represented 11.29% of total assets at March 31, 2025 compared with $1.53 billion, or 11.07% of total assets, as of December 31, 2024. Stockholders’ equity increased $39.6 million from December 31, 2024 driven by net income of $36.7 million for the three months ended March 31, 2025 and a $20.3 million decrease in accumulated other comprehensive loss, partially offset by dividends declared of $16.1 million.

Previous 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.

Current wording

The Company did not purchase shares of its common stock during the three months ended March 31, 2025. Under its 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 March 31, 2025, there were 1,992,400 shares available for repurchase under this program authorized on December 18, 2023, which is set to expire on December 31, 2025.

Previous wording

In managing the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.

Current wording

In managing the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing NIM compression. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its NIM. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.

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. 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.

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 (e.g., no change in current interest rates) with a static balance sheet. Six additional models are run in which gradual increases of 300 bps, 200 bps and 100 bps, and gradual decreases of 100 bps, 200 bps and 300 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 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:

Current wording

The Company’s Interest Rate Sensitivity has remained in a near neutral position. In the declining rate scenarios, 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, MMDA and time accounts. Net interest income for the next twelve months in the +300/+200/+100/-100/-200/-300 bps scenarios, as described above, is within the internal policy risk limits of not more than a 5.0% reduction in net interest income in the +100/-100 bps scenarios, of not more than a 7.5% reduction in net interest income in the +200/-200 bps scenarios and of not more than a 12.0% reduction in net interest income in the +300/-300 bps scenarios. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the March 31, 2025 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. 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.

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. 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, when the FRB lowered the federal funds rate by 50 bps, followed by consecutive 25 bps reductions in November and December of 2024 for a total of 100 bps of federal funds rate reductions by the end of 2024. While deposit rates increased meaningfully in 2023 and continued to increase in early 2024 in conjunction with elevated short-term interest rates, the recent federal funds rate reductions have 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 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.

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 March 31, 2025, the Company’s Basic Surplus measurement was 16.9% of total assets, or $2.34 billion, as compared to the December 31, 2024 Basic Surplus of 17.0%, or $2.34 billion, and was above the Company’s minimum of 5% (calculated at $693.2 million and $689.3 million of period end total assets as of March 31, 2025 and December 31, 2024, respectively) set forth in its liquidity policies.

Previous 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.

Current wording

At March 31, 2025 and December 31, 2024, FHLB advances outstanding totaled $4.6 million and $45.6 million, respectively. At March 31, 2025 and December 31, 2024, the Bank had $204.0 million and $199.0 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 $1.70 billion at March 31, 2025 and $1.71 billion at December 31, 2024. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $1.01 billion and $957.3 million at March 31, 2025 and December 31, 2024, 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 $2.02 billion at March 31, 2025 and $2.01 billion at December 31, 2024. 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 March 31, 2025 and December 31, 2024, the Bank had the capacity to borrow $1.16 billion and $1.13 billion, respectively, from this program. The Company’s internal policies authorize borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $3.44 billion at March 31, 2025 and $3.38 billion at December 31, 2024.

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. 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.

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 2025. While short-term interest rates have declined, they remain elevated relative 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 bank failures of 2023 have led to a deposit decline in the banking system and increased volatility to liquidity risk.