UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2019.~~2020.

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

COMMISSION FILE NUMBER 0-14703

NBT BANCORP INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		16-1268674
(State of Incorporation)		(I.R.S. Employer Identification No.)

52 South Broad Street, Norwich, New York 13815

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (607) 337-2265

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of class		Trading Symbol(s)		Name of exchange on which registered
Common Stock, par value $0.01 per share		NBTB		The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October ~~31, 2019,~~30, 2020, there were ~~43,791,695~~43,625,286 shares outstanding of the Registrant’s ~~common stock,~~Common Stock, $0.01 par value per share.

Table of Contents

NBT BANCORP INC.

FORM 10-Q-Quarter Ended September 30, ~~2019~~2020

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Balance Sheets at September 30, ~~2019~~2020 and December 31, ~~2018~~2019	3

	Consolidated Statements of Income for the three and nine month periods ended September 30, ~~2019~~2020 and ~~2018~~2019	4

	Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, ~~2019~~2020 and ~~2018~~2019	5

	Consolidated Statements of Stockholders’ Equity for the three and nine month periods ended September 30, ~~2019~~2020 and ~~2018~~2019	6

	Consolidated Statements of Cash Flows for the nine month periods ended September 30, ~~2019~~2020 and ~~2018~~2019	7

	Notes to Unaudited Interim Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3740

Item 3	Quantitative and Qualitative Disclosures about Market Risk	5056

Item 4	Controls and Procedures	5056

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	5157
Item 1A	Risk Factors	5157
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	5158
Item 3	Defaults Upon Senior Securities	5158
Item 4	Mine Safety Disclosures	5158
Item 5	Other Information	5158
Item 6	Exhibits	5259

SIGNATURES		5360

2

Table of Contents

Item 1 – FINANCIAL STATEMENTS

NBT Bancorp Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)

		September 30,				December 31,				September 30,				December 31,
		2019				2018				2020				2019
(In thousands, except share and per share data)
Assets
Cash and due from banks		$	217,639			$	175,550			$	167,169			$	170,595
Short-term interest bearing accounts			56,457				5,405
Short-term interest-bearing accounts											450,291				46,248
Equity securities, at fair value			26,818				23,053				30,758				27,771
Securities available for sale, at fair value			932,173				998,496				1,197,925				975,340
Securities held to maturity (fair value $691,189 and $778,675, respectively)			678,435				783,599
Securities held to maturity (fair value $684,862 and $641,262, respectively)											663,088				630,074
Federal Reserve and Federal Home Loan Bank stock			37,490				53,229				28,484				44,620
Loans held for sale			17,986				6,943				1,823				11,731
Loans			7,013,809				6,887,709				7,560,643				7,136,098
Less allowance for loan losses(1)			72,365				72,505				114,500				72,965
Net loans		$	6,941,444			$	6,815,204			$	7,446,143			$	7,063,133
Premises and equipment, net			75,708				78,970				73,055				75,631
Goodwill			274,769				274,769				280,541				274,769
Intangible assets, net			12,864				15,599				12,557				12,020
Bank owned life insurance			180,513				177,479				185,227				181,748
Other assets			209,090				148,067				313,151				202,245
Total assets		$	9,661,386			$	9,556,363			$	10,850,212			$	9,715,925
Liabilities
Demand (noninterest bearing)		$	2,477,657			$	2,361,099			$	3,163,717			$	2,414,383
Savings, NOW and money market			4,405,218				4,076,434				5,134,495				4,312,244
Time			860,291				930,678				659,971				861,193
Total deposits		$	7,743,166			$	7,368,211			$	8,958,183			$	7,587,820
Short-term borrowings			443,266				871,696				183,472				655,275
Long-term debt			84,239				73,724				64,126				64,211
Subordinated debt, net											97,943				0
Junior subordinated debt			101,196				101,196				101,196				101,196
Other liabilities			190,918				123,627				279,181				187,026
Total liabilities		$	8,562,785			$	8,538,454			$	9,684,101			$	8,595,528
Stockholders’ equity
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at September 30, 2019 and December 31, 2018		$	-			$	-
Common stock, $0.01 par value. Authorized 100,000,000 shares at September 30, 2019 and December 31, 2018; issued 49,651,493 at September 30, 2019 and December 31, 2018			497				497
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at September 30, 2020 and December 31, 2019										$	0			$	0
Common stock, $0.01 par value. Authorized 100,000,000 shares at September 30, 2020 and December 31, 2019; issued 49,651,493 at September 30, 2020 and December 31, 2019											497				497
Additional paid-in-capital			576,146				575,466				577,737				576,708
Retained earnings			679,090				621,203				726,650				696,214
Accumulated other comprehensive loss			(22,924	)			(43,174	)
Common stock in treasury, at cost, 5,864,848 and 5,978,527 shares at September 30, 2019 and December 31, 2018, respectively			(134,208	)			(136,083	)
Accumulated other comprehensive income (loss)											2,021				(19,026	)
Common stock in treasury, at cost, 6,040,113 and 5,854,882 shares at September 30, 2020 and December 31, 2019, respectively											(140,794	)			(133,996	)
Total stockholders’ equity		$	1,098,601			$	1,017,909			$	1,166,111			$	1,120,397
Total liabilities and stockholders’ equity		$	9,661,386			$	9,556,363			$	10,850,212			$	9,715,925

(1) Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.

See accompanying notes to unaudited interim consolidated financial statements.

3

Table of Contents

NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018				2020				2019				2020				2019
(In thousands, except per share data)
Interest, fee and dividend income
Interest and fees on loans		$	81,082			$	77,249			$	241,674			$	221,864			$	74,998			$	81,082			$	230,996			$	241,674
Securities available for sale			5,711				6,659				17,664				20,588				5,603				5,711				16,956				17,664
Securities held to maturity			4,586				3,462				14,892				8,898				3,734				4,586				11,751				14,892
Other			1,002				834				2,728				2,381				659				1,002				2,138				2,728
Total interest, fee and dividend income		$	92,381			$	88,204			$	276,958			$	253,731			$	84,994			$	92,381			$	261,841			$	276,958
Interest expense
Deposits		$	10,745			$	6,157			$	29,805			$	15,167			$	4,267			$	10,745			$	18,183			$	29,805
Short-term borrowings			1,989				3,000				7,986				7,421				446				1,989				3,215				7,986
Long-term debt			498				431				1,391				1,359				398				498				1,184				1,391
Subordinated debt																			1,375				0				1,503				0
Junior subordinated debt			1,095				1,089				3,404				3,030				565				1,095				2,186				3,404
Total interest expense		$	14,327			$	10,677			$	42,586			$	26,977			$	7,051			$	14,327			$	26,271			$	42,586
Net interest income		$	78,054			$	77,527			$	234,372			$	226,754			$	77,943			$	78,054			$	235,570			$	234,372
Provision for loan losses			6,324				6,026				19,408				22,300
Provision for loan losses (1)																			3,261				6,324				51,741				19,408
Net interest income after provision for loan losses		$	71,730			$	71,501			$	214,964			$	204,454			$	74,682			$	71,730			$	183,829			$	214,964
Noninterest income
Insurance and other financial services revenue		$	6,421			$	6,172			$	19,115			$	18,502
Service charges on deposit accounts			4,330				4,503				12,790				12,721			$	3,087			$	4,330			$	9,613			$	12,790
ATM and debit card fees			6,277				5,906				17,958				16,995				7,194				6,277				19,184				17,958
Retirement plan administration fees			7,600				7,244				23,170				19,879				9,685				7,600				26,840				23,170
Trust			5,209				4,808				14,491				14,951
Bank owned life insurance			1,556				1,288				4,119				3,852
Net securities gains			4,036				412				4,024				575
Wealth management																			7,695				7,630				21,791				21,315
Insurance																			3,742				4,000				11,303				12,291
Bank owned life insurance income																			1,255				1,556				4,010				4,119
Net securities gains (losses)																			84				4,036				(548	)			4,024
Other			4,291				3,048				12,115				11,341				4,985				4,291				15,968				12,115
Total noninterest income		$	39,720			$	33,381			$	107,782			$	98,816			$	37,727			$	39,720			$	108,161			$	107,782
Noninterest expense
Salaries and employee benefits		$	39,352			$	38,394			$	117,275			$	112,687			$	40,451			$	39,352			$	120,918			$	117,275
Occupancy			5,335				5,380				17,053				17,034				5,294				5,335				16,354				17,053
Data processing and communications			4,492				4,434				13,599				13,221				4,058				4,492				12,370				13,599
Professional fees and outside services			3,535				3,580				10,562				10,408				3,394				3,535				10,694				10,562
Equipment			4,487				4,319				13,762				12,508				5,073				4,487				14,494				13,762
Office supplies and postage			1,667				1,563				4,835				4,640				1,530				1,667				4,621				4,835
FDIC (credit) expense			(20	)			1,223				1,946				3,516
FDIC expense (credit)																			645				(20	)			1,949				1,946
Advertising			677				739				1,821				1,776				530				677				1,461				1,821
Amortization of intangible assets			874				1,054				2,735				3,064				856				874				2,573				2,735
Loan collection and other real estate owned, net			976				1,234				2,722				3,479				620				976				2,365				2,722
Other			8,374				4,577				18,130				13,324				3,857				8,374				14,730				18,130
Total noninterest expense		$	69,749			$	66,497			$	204,440			$	195,657			$	66,308			$	69,749			$	202,529			$	204,440
Income before income tax expense		$	41,701			$	38,385			$	118,306			$	107,613			$	46,101			$	41,701			$	89,461			$	118,306
Income tax expense			9,322				8,578				26,245				23,699				10,988				9,322				19,267				26,245
Net income		$	32,379			$	29,807			$	92,061			$	83,914			$	35,113			$	32,379			$	70,194			$	92,061
Earnings per share
Basic		$	0.74			$	0.68			$	2.10			$	1.92			$	0.80			$	0.74			$	1.61			$	2.10
Diluted		$	0.73			$	0.68			$	2.09			$	1.91			$	0.80			$	0.73			$	1.60			$	2.09

(1) Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.

See accompanying notes to unaudited interim consolidated financial statements.

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NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018				2020				2019				2020				2019
(In thousands)
Net income		$	32,379			$	29,807			$	92,061			$	83,914			$	35,113			$	32,379			$	70,194			$	92,061
Other comprehensive income (loss), net of tax:

Securities available for sale:
Unrealized net holding gains (losses) arising during the period, gross		$	2,360			$	(5,798	)		$	26,787			$	(26,605	)
Unrealized net holding (losses) gains arising during the period, gross																		$	(1,263	)		$	2,360			$	26,509			$	26,787
Tax effect			(590	)			1,449				(6,697	)			6,651				316				(590	)			(6,627	)			(6,697	)
Unrealized net holding gains (losses) arising during the period, net		$	1,770			$	(4,349	)		$	20,090			$	(19,954	)
Unrealized net holding (losses) gains arising during the period, net																		$	(947	)		$	1,770			$	19,882			$	20,090

Reclassification adjustment for net (gains) losses in net income, gross		$	(20	)		$	-			$	79			$	-			$	0			$	(20	)		$	(3	)		$	79
Tax effect			5				-				(20	)			-				0				5				1				(20	)
Reclassification adjustment for net (gains) losses in net income, net		$	(15	)		$	-			$	59			$	-			$	0			$	(15	)		$	(2	)		$	59

Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross		$	190			$	168			$	556			$	533			$	157			$	190			$	495			$	556
Tax effect			(47	)			(42	)			(139	)			(133	)			(39	)			(47	)			(124	)			(139	)
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net		$	143			$	126			$	417			$	400			$	118			$	143			$	371			$	417

Total securities available for sale, net		$	1,898			$	(4,223	)		$	20,566			$	(19,554	)		$	(829	)		$	1,898			$	20,251			$	20,566

Cash flow hedges:
Unrealized gains (losses) on derivatives (cash flow hedges), gross		$	9			$	175			$	(475	)		$	1,647			$	0			$	9			$	(274	)		$	(475	)
Tax effect			(2	)			(44	)			119				(412	)			0				(2	)			69				119
Unrealized gains (losses) on derivatives (cash flow hedges), net		$	7			$	131			$	(356	)		$	1,235			$	0			$	7			$	(205	)		$	(356	)

Reclassification of net unrealized (gains) on cash flow hedges to interest (income), gross		$	(395	)		$	(638	)		$	(1,932	)		$	(1,537	)
Reclassification of net unrealized losses (gains) on cash flow hedges to interest (income), gross																		$	101			$	(395	)		$	192			$	(1,932	)
Tax effect			98				159				483				384				(25	)			98				(48	)			483
Reclassification of net unrealized (gains) on cash flow hedges to interest (income), net		$	(297	)		$	(479	)		$	(1,449	)		$	(1,153	)
Reclassification of net unrealized losses (gains) on cash flow hedges to interest (income), net																		$	76			$	(297	)		$	144			$	(1,449	)

Total cash flow hedges, net		$	(290	)		$	(348	)		$	(1,805	)		$	82			$	76			$	(290	)		$	(61	)		$	(1,805	)

Pension and other benefits:
Amortization of prior service cost and actuarial losses, gross		$	672			$	286			$	1,985			$	876			$	381			$	672			$	1,143			$	1,985
Tax effect			(168	)			(71	)			(496	)			(219	)			(95	)			(168	)			(286	)			(496	)
Amortization of prior service cost and actuarial losses, net		$	504			$	215			$	1,489			$	657			$	286			$	504			$	857			$	1,489

Total pension and other benefits, net		$	504			$	215			$	1,489			$	657			$	286			$	504			$	857			$	1,489

Total other comprehensive income (loss)		$	2,112			$	(4,356	)		$	20,250			$	(18,815	)
Total other comprehensive income																		$	(467	)		$	2,112			$	21,047			$	20,250
Comprehensive income		$	34,491			$	25,451			$	112,311			$	65,099			$	34,646			$	34,491			$	91,241			$	112,311

See accompanying notes to unaudited interim consolidated financial statements.

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NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (unaudited)

		Common Stock				Additional Paid-in- Capital				Retained Earnings				Accumulated Other Comprehensive (Loss) Income				Common Stock in Treasury				Total				Common Stock				Additional Paid-in- Capital				Retained Earnings				Accumulated Other Comprehensive (Loss) Income				Common Stock in Treasury				Total
(In thousands, except share and per share data)
Balance at June 30, 2020																										$	497			$	577,197			$	703,322			$	2,488			$	(140,852	)		$	1,142,652
Net income																											0				0				35,113				0				0				35,113
Cash dividends - $0.27 per share																											0				0				(11,785	)			0				0				(11,785	)
Net issuance of 3,030 shares to employee and other stock plans																											0				(108	)			0				0				58				(50	)
Stock-based compensation																											0				648				0				0				0				648
Other comprehensive (loss)																											0				0				0				(467	)			0				(467	)
Balance at September 30, 2020																										$	497			$	577,737			$	726,650			$	2,021			$	(140,794	)		$	1,166,111

Balance at June 30, 2019		$	497			$	575,794			$	658,107			$	(25,036	)		$	(134,539	)		$	1,074,823			$	497			$	575,794			$	658,107			$	(25,036	)		$	(134,539	)		$	1,074,823
Net income			-				-				32,379				-				-				32,379				0				0				32,379				0				0				32,379
Cash dividends - $0.26 per share			-				-				(11,396	)			-				-				(11,396	)			0				0				(11,396	)			0				0				(11,396	)
Net issuance of 17,234 shares to employee and other stock plans			-				(104	)			-				-				331				227				0				(104	)			0				0				331				227
Stock-based compensation			-				456				-				-				-				456				0				456				0				0				0				456
Other comprehensive income			-				-				-				2,112				-				2,112				0				0				0				2,112				0				2,112
Balance at September 30, 2019		$	497			$	576,146			$	679,090			$	(22,924	)		$	(134,208	)		$	1,098,601			$	497			$	576,146			$	679,090			$	(22,924	)		$	(134,208	)		$	1,098,601

Balance at June 30, 2018		$	497			$	574,741			$	585,044			$	(44,756	)		$	(136,597	)		$	978,929
Net income			-				-				29,807				-				-				29,807
Cash dividends - $0.25 per share			-				-				(10,930	)			-				-				(10,930	)
Net issuance of 14,120 shares to employee and other stock plans			-				(89	)			-				-				291				202
Stock-based compensation			-				503				-				-				-				503
Other comprehensive (loss)			-				-				-				(4,356	)			-				(4,356	)
Balance at September 30, 2018		$	497			$	575,155			$	603,921			$	(49,112	)		$	(136,306	)		$	994,155

		Common Stock				Additional Paid-in- Capital				Retained Earnings				Accumulated Other Comprehensive (Loss) Income				Common Stock in Treasury				Total				Common Stock				Additional Paid-in- Capital				Retained Earnings				Accumulated Other Comprehensive (Loss) Income				Common Stock in Treasury				Total
(In thousands, except share and per share data)
Balance at December 31, 2019																										$	497			$	576,708			$	696,214			$	(19,026	)		$	(133,996	)		$	1,120,397
Net income																											0				0				70,194				0				0				70,194
Cumulative effect adjustment for ASU 2016-13 implementation																											0				0				(4,339	)			0				0				(4,339	)
Cash dividends - $0.81 per share																											0				0				(35,419	)			0				0				(35,419	)
Purchase of 263,507 treasury shares																											0				0				0				0				(7,980	)			(7,980	)
Net issuance of 78,276 shares to employee and other stock plans																											0				(2,928	)			0				0				1,182				(1,746	)
Stock-based compensation																											0				3,957				0				0				0				3,957
Other comprehensive income																											0				0				0				21,047				0				21,047
Balance at September 30, 2020																										$	497			$	577,737			$	726,650			$	2,021			$	(140,794	)		$	1,166,111

Balance at December 31, 2018		$	497			$	575,466			$	621,203			$	(43,174	)		$	(136,083	)		$	1,017,909			$	497			$	575,466			$	621,203			$	(43,174	)		$	(136,083	)		$	1,017,909
Net income			-				-				92,061				-				-				92,061				0				0				92,061				0				0				92,061
Cash dividends - $0.78 per share			-				-				(34,174	)			-				-				(34,174	)			0				0				(34,174	)			0				0				(34,174	)
Net issuance of 113,679 shares to employee and other stock plans			-				(2,916	)			-				-				1,875				(1,041	)			0				(2,916	)			0				0				1,875				(1,041	)
Stock-based compensation			-				3,596				-				-				-				3,596				0				3,596				0				0				0				3,596
Other comprehensive income			-				-				-				20,250				-				20,250				0				0				0				20,250				0				20,250
Balance at September 30, 2019		$	497			$	576,146			$	679,090			$	(22,924	)		$	(134,208	)		$	1,098,601			$	497			$	576,146			$	679,090			$	(22,924	)		$	(134,208	)		$	1,098,601

Balance at December 31, 2017		$	497			$	574,209			$	543,713			$	(22,077	)		$	(138,165	)		$	958,177
Net income			-				-				83,914				-				-				83,914
Cumulative effect adjustment for ASU 2016-01 implementation			-				-				2,618				(2,645	)			-				(27	)
Cumulative effect adjustment for ASU 2018-02 implementation			-				-				5,575				(5,575	)			-				-
Cash dividends - $0.73 per share			-				-				(31,899	)			-				-				(31,899	)
Net issuance of 118,510 shares to employee and other stock plans			-				(2,511	)			-				-				1,859				(652	)
Stock-based compensation			-				3,457				-				-				-				3,457
Other comprehensive (loss)			-				-				-				(18,815	)			-				(18,815	)
Balance at September 30, 2018		$	497			$	575,155			$	603,921			$	(49,112	)		$	(136,306	)		$	994,155

See accompanying notes to unaudited interim consolidated financial statements.

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NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

		Nine Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2020				2019
(In thousands)
Operating activities
Net income		$	92,061			$	83,914			$	70,194			$	92,061
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			19,408				22,300				51,741				19,408
Depreciation and amortization of premises and equipment			7,106				6,957				7,378				7,106
Net amortization on securities			2,495				3,108				2,812				2,495
Amortization of intangible assets			2,735				3,064				2,573				2,735
Amortization of operating lease right-of-use assets			5,396				-				5,549				5,396
Excess tax benefit on stock-based compensation			(371	)			(507	)			(188	)			(371	)
Stock-based compensation expense			3,596				3,457				3,957				3,596
Bank owned life insurance income			(4,119	)			(3,852	)			(4,010	)			(4,119	)
Amortization of subordinated debt issuance costs											121				0
Proceeds from sale of loans held for sale			109,661				73,239				153,732				109,661
Originations of loans held for sale			(119,753	)			(76,959	)			(144,105	)			(119,753	)
Net gains on sale of loans held for sale			(475	)			(181	)			(1,892	)			(475	)
Net security (gains)			(4,024	)			(575	)
Net (gains) losses on sale of other real estate owned			(178	)			130
Net security losses (gains)											548				(4,024	)
Net gains on sale of other real estate owned											(243	)			(178	)
Net change in other assets and other liabilities			(9,579	)			(14,313	)			(40,760	)			(9,579	)
Net cash provided by operating activities		$	103,959			$	99,782			$	107,407			$	103,959
Investing activities
Net cash used in acquisitions		$	-			$	(7,884	)		$	(3,899	)		$	0
Securities available for sale:
Proceeds from maturities, calls and principal paydowns			226,070				213,732				239,622				226,070
Proceeds from sales			26,203				-				0				26,203
Purchases			(160,781	)			(102,004	)			(437,827	)			(160,781	)
Securities held to maturity:
Proceeds from maturities, calls and principal paydowns			165,997				73,217				181,143				165,997
Proceeds from sales											996				0
Purchases			(61,150	)			(249,300	)			(215,327	)			(61,150	)
Equity securities:
Proceeds from sales			3,966				3,318				0				3,966
Purchases			(93	)			(2	)			0				(93	)
Other:
Net increase in loans			(146,778	)			(323,614	)			(436,630	)			(146,778	)
Proceeds from Federal Home Loan Bank stock redemption			147,200				186,869				58,799				147,200
Purchases of Federal Reserve and Federal Home Loan Bank stock			(131,461	)			(192,584	)
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock											(42,663	)			(131,461	)
Proceeds from settlement of bank owned life insurance			1,085				-				531				1,085
Purchases of premises and equipment, net			(4,018	)			(4,256	)			(4,512	)			(4,018	)
Proceeds from sales of other real estate owned			1,129				2,124				1,113				1,129
Net cash provided by (used in) investing activities		$	67,369			$	(400,384	)
Net cash (used in) provided by investing activities										$	(658,654	)		$	67,369
Financing activities
Net increase in deposits		$	374,955			$	270,654			$	1,370,363			$	374,955
Net (decrease) increase in short-term borrowings			(428,430	)			92,585
Net decrease in short-term borrowings											(471,803	)			(428,430	)
Proceeds from issuance of subordinated debt											100,000				0
Payment of subordinated debt issuance costs											(2,178	)			0
Proceeds from issuance of long-term debt			10,598				25,000				0				10,598
Repayments of long-term debt			(83	)			(40,117	)			(85	)			(83	)
Proceeds from the issuance of shares to employee and other stock plans			543				1,140				184				543
Cash paid by employer for tax-withholdings on stock issuance			(1,596	)			(1,792	)			(1,218	)			(1,596	)
Purchase of treasury stock											(7,980	)			0
Cash dividends			(34,174	)			(31,899	)			(35,419	)			(34,174	)
Net cash (used in) provided by financing activities		$	(78,187	)		$	315,571
Net cash provided by (used in) financing activities										$	951,864			$	(78,187	)
Net increase in cash and cash equivalents		$	93,141			$	14,969			$	400,617			$	93,141
Cash and cash equivalents at beginning of period			180,955				159,664				216,843				180,955
Cash and cash equivalents at end of period		$	274,096			$	174,633			$	617,460			$	274,096

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		Nine Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2020				2019
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest expense		$	42,709			$	26,002			$	26,373			$	42,709
Income taxes paid, net of refund			19,945				31,077				38,137				19,945
Noncash investing activities:
Loans transferred to other real estate owned		$	654			$	996			$	1,017			$	654
Acquisitions:
Acquisitions:
Fair value of assets acquired		$	-			$	6,274			$	3,328			$	0

See accompanying notes to unaudited interim consolidated financial statements.

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Table of Contents

NBT Bancorp Inc. and Subsidiaries

Notes to Unaudited Interim Consolidated Financial Statements

September 30, ~~2019~~2020

1.	Description of Business

NBT Bancorp Inc. (the ~~“Registrant” or the~~ “Company”) is a registered financial holding company incorporated in the state of Delaware in 1986, with its principal headquarters located in Norwich, New York. The principal assets of the ~~Registrant~~Company consist of all of the outstanding shares of common stock of its subsidiaries, including: NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT Holdings, Inc. (“NBT Holdings”), CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II (collectively, the “Trusts”). The Company’s principal sources of revenue are the management fees and dividends it receives from the Bank, NBT Financial and NBT Holdings.

The Company’s business, primarily conducted through the Bank, consists of providing commercial banking, retail banking and wealth management services primarily to customers in its market area, which includes central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, ~~and~~ the southern coastal Maine ~~area.~~area and now entering Connecticut. The Company has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services. The Company’s business philosophy is to operate as a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers.

2.	~~Basis~~Summary of ~~Presentation~~Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of ~~the Registrant~~NBT Bancorp and its wholly-owned subsidiaries, the Bank, NBT Financial and NBT Holdings. Collectively, ~~the Registrant~~NBT Bancorp and its subsidiaries are referred to herein as ~~“the Company.”~~(“the Company”). The interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in ~~our 2018~~the Company’s 2019 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation. The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified.

Use of Estimates in the Preparation of Financial Statements

3.	~~Securities~~

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.

Allowance for Credit Losses – Loans

Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required the recognition of a credit loss when it was probable a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost ~~estimated fair value~~basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and ~~unrealized gains (losses) of available for sale (“AFS”) securities are as follows:~~expected to be charged-off.

(In thousands)
Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value

As of September 30, 2019
Federal agency $ 29,998 $ - $ 167 $ 29,831
State & municipal 9 - - 9
Mortgage-backed:
Government-sponsored enterprises 433,393 4,494 292 437,595
U.S. government agency securities 44,912 1,021 18 45,915
Collateralized mortgage obligations:
Government-sponsored enterprises 343,682 2,484 456 345,710
U.S. government agency securities 72,443 887 217 73,113
Total AFS securities $ 924,437 $ 8,886 $ 1,150 $ 932,173
As of December 31, 2018
Federal agency $ 84,982 $ 10 $ 693 $ 84,299
State & municipal 30,136 16 237 29,915
Mortgage-backed:
Government-sponsored enterprises 493,225 439 10,354 483,310
U.S. government agency securities 29,190 270 475 28,985
Collateralized mortgage obligations:
Government-sponsored enterprises 332,409 344 7,211 325,542
U.S. government agency securities 47,684 137 1,376 46,445
Total AFS securities $ 1,017,626 $ 1,216 $ 20,346 $ 998,496

Management estimates the allowance balance 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. Peer selection was based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term as well as changes in environmental conditions, such as changes in unemployment rates, production metrics, property values, or other relevant factors. Significant management judgment is required at each point in the measurement process.

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~~The components of net realized gains (losses) on AFS securities are~~Portfolio segment is defined as ~~follows. These amounts were reclassified out of accumulated other comprehensive income (loss) (“AOCI”) and into earnings.~~

Three Months Ended
September 30,

(In thousands) 2019 2018
Gross realized gains $ 20 $ -
Gross realized (losses) - -
Net AFS realized gains $ 20 $ -

Nine Months Ended
September 30,

(In thousands) 2019 2018
Gross realized gains $ 73 $ -
Gross realized (losses) (152 ) -
Net AFS realized (losses) $ (79 ) $ -

~~Included in net realized gains (losses) on AFS securities,~~ the Company recorded gains from calls of approximately $20 thousand for the three months ended September 30, 2019 and $25 thousand for the nine months ended September 30, 2019. There were 0 recorded gains from calls on AFS securities included in net realized gains (losses) ~~for the three and nine months ended September 30, 2018~~.

~~The amortized cost, estimated fair value and unrealized gains (losses) of held to maturity (“HTM”) securities are as follows:~~

(In thousands)
Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair Value

As of September 30, 2019
Federal agency $ 10,000 $ 6 $ - $ 10,006
Mortgage-backed:
Government-sponsored enterprises 154,701 3,139 127 157,713
U.S. government agency securities 13,679 785 - 14,464
Collateralized mortgage obligations:
Government-sponsored enterprises 213,409 2,849 365 215,893
U.S. government agency securities 112,974 4,001 64 116,911
State & municipal 173,672 2,544 14 176,202
Total HTM securities $ 678,435 $ 13,324 $ 570 $ 691,189
As of December 31, 2018
Federal agency $ 19,995 $ 52 $ - $ 20,047
Mortgage-backed:
Government-sponsored enterprises 164,618 712 2,773 162,557
U.S. government agency securities 15,230 403 - 15,633
Collateralized mortgage obligations:
Government-sponsored enterprises 257,475 1,097 3,897 254,675
U.S. government agency securities 83,148 767 - 83,915
State & municipal 243,133 331 1,616 241,848
Total HTM securities $ 783,599 $ 3,362 $ 8,286 $ 778,675

Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $4 thousand for the three and nine months ended September 30, 2019. There were 0 recorded gains from calls on HTM securities included in net realized gains (losses) for the three and nine months ended September 30, 2018.

AFS and HTM securities with amortized costs totaling $1.4 billion at September 30, 2019 and $1.5 billion at December 31, 2018 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at September 30, 2019 and December 31, 2018, AFS and HTM securities with an amortized cost of $186.3 million and $215.3 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

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The following table sets forth information with regard to investment securities with unrealized losses segregated according to the length of time the securities had been in a continuous unrealized loss position:

Less Than 12 Months 12 Months or Longer Total
(In thousands)
Fair
Value

Unrealized
Losses

Number
of
Positions

Fair
Value

Unrealized
Losses

Number
of
Positions

Fair
Value

Unrealized
Losses

Number
of
Positions

As of September 30, 2019
AFS securities:
Federal agency $ 19,965 $ (33 ) 2 $ 9,866 $ (134 ) 1 $ 29,831 $ (167 ) 3
Mortgage-backed 36,017 (69 ) 18 39,394 (241 ) 16 75,411 (310 ) 34
Collateralized mortgage obligations 60,272 (170 ) 11 72,528 (503 ) 23 132,800 (673 ) 34
Total securities with unrealized losses $ 116,254 $ (272 ) 31 $ 121,788 $ (878 ) 40 $ 238,042 $ (1,150 ) 71

HTM securities:
Mortgage-backed $ - $ - - $ 26,836 $ (127 ) 2 $ 26,836 $ (127 ) 2
Collateralized mortgage obligations 18,656 (129 ) 3 23,708 (300 ) 5 42,364 (429 ) 8
State & municipal 5,447 (14 ) 8 - - - 5,447 (14 ) 8
Total securities with unrealized losses $ 24,103 $ (143 ) 11 $ 50,544 $ (427 ) 7 $ 74,647 $ (570 ) 18

As of December 31, 2018
AFS securities:
Federal agency $ - $ - - $ 64,294 $ (693 ) 6 $ 64,294 $ (693 ) 6
State & municipal 1,715 (3 ) 3 22,324 (234 ) 35 24,039 (237 ) 38
Mortgage-backed 18,462 (65 ) 12 428,440 (10,764 ) 101 446,902 (10,829 ) 113
Collateralized mortgage obligations 12,118 (69 ) 5 320,908 (8,518 ) 62 333,026 (8,587 ) 67
Total securities with unrealized losses $ 32,295 $ (137 ) 20 $ 835,966 $ (20,209 ) 204 $ 868,261 $ (20,346 ) 224

HTM securities:
Mortgage-backed $ - $ - - $ 82,579 $ (2,773 ) 6 $ 82,579 $ (2,773 ) 6
Collateralized mortgage obligations 4,386 (7 ) 2 145,396 (3,890 ) 26 149,782 (3,897 ) 28
State & municipal 18,907 (84 ) 30 58,258 (1,532 ) 86 77,165 (1,616 ) 116
Total securities with unrealized losses $ 23,293 $ (91 ) 32 $ 286,233 $ (8,195 ) 118 $ 309,526 $ (8,286 ) 150

Declines in the fair value of HTM securities below their amortized cost, less any current period credit loss, that are deemed to be other-than-temporary are reflected in earnings as realized losses or in other comprehensive income (“OCI”). The classification is dependent upon whether the Company intends to sell the security, or whether it is more likely than not, that the Company will be required to sell the security before recovery. The other-than-temporary impairment (“OTTI”) shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be separated into (i) the amount representing the credit loss and (ii) the amount related to all other factors. The amount of the total OTTI related to the credit loss shall be recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in OCI, net of applicable taxes.

In estimating OTTI losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the historical and implied volatility of the fair value of the security.

~~Management has the intent to hold the securities classified as HTM until they mature,~~level at which time it is believed the Company will receive full value for the securities. The unrealized losses on HTM debt securities are due to increases in market interest rates over yields at the time the underlying securities were purchased. When necessary, the Company has performed a discounted cash flow analysis to determine whether or not it will receive the contractual principalan entity develops and ~~interest on certain securities. The fair value is expected to recover as the bond approaches its maturity date or repricing date or if market yields for such investments declines.~~

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Management also has the intent to hold and will not be required to sell, the debt securities classified as AFS for a period of time sufficient for a recovery of cost, which may be until maturity. The unrealized losses on AFS debt securities are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. When necessary, the Company has performed a discounted cash flow analysis to determine whether or not it will receive the contractual principal and interest on certain securities. For AFS debt securities, OTTI losses are recognized in earnings if the Company intends to sell the security. In other cases the Company considers the relevant factors noted above, as well as the Company’s intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value and whether evidence exists to support a realizable value equal to or greater than the cost basis. Any impairment loss on an equity security is equal to the full difference between the cost basis and the fair value of the security.

As of September 30, 2019 and December 31, 2018, management believes the impairments detailed in the table above are temporary. There were 0 OTTI losses realized in the Company’s unaudited interim consolidated statements of income for the three and nine months ended September 30, 2019, ~~or in the three and nine months ended~~ ~~September 30, 2018.~~

~~The following tables set forth information with regard to gains and losses on equity securities:~~

Three Months Ended September 30,
(In thousands) 2019 2018
Net gains and losses recognized on equity securities $ 4,012 $ 412
Less: Net gains and losses recognized during the period on equity securities sold during the period 3,966 511
Unrealized gains and losses recognized on equity securities still held $ 46 $ (99 )

Nine Months Ended September 30,
(In thousands) 2019 2018
Net gains and losses recognized on equity securities $ 4,099 $ 575
Less: Net gains and losses recognized during the period on equity securities sold during the period 3,966 555
Unrealized gains and losses recognized on equity securities still held $ 133 $ 20

Included in the net realized gains and losses recognized on equity securities during the three and nine months ended September 30, 2019, the Company recorded a $4.0 million gain from the sale of Visa Class B common stock, which had no readily determinable fair value at the time of the sale. As of September 30, 2019 and December 31, 2018, the carrying value of equity securities without readily determinable fair values was $4.0 million. The Company performed a qualitative assessment to determine whether the investments were impaired and identified no areas of concern as of September 30, 2019 and 2018. There were 0 impairments, downward or upward adjustments recognized for equity securities without readily determinable fair values during the three and nine months ended September 30, 2019 and 2018.

~~The following tables set forth information with regard to contractual maturities of debt securities at September 30, 2019:~~

(In thousands)
Amortized
Cost

Estimated
Fair Value

AFS debt securities:
Within one year $ 37 $ 37
From one to five years 30,404 30,393
From five to ten years 171,485 173,220
After ten years 722,511 728,523
Total AFS debt securities $ 924,437 $ 932,173
HTM debt securities:
Within one year $ 26,940 $ 26,940
From one to five years 68,113 68,531
From five to ten years 179,381 183,425
After ten years 404,001 412,293
Total HTM debt securities $ 678,435 $ 691,189

Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Except for U.S. Government securities, there were 0 holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at September 30, 2019 and December 31, 2018.

12

~~Table of Contents~~

~~4. Allowance for Loan Losses and Credit Quality of Loans~~

~~Allowance for Loan Losses~~

The allowance for loan losses is maintained at a level estimated by management to provide adequately for probable incurred losses inherent in the current loan portfolio. The appropriateness of the allowance for loan losses is continuously monitored. It is assessed for appropriateness using a methodology designed to ensure the level of the allowance reasonably reflects the loan portfolio’s risk profile and can absorb all reasonably estimable credit losses inherent in the current loan portfolio.

~~To develop and document~~documents a systematic methodology ~~for determining the~~to determine its allowance for ~~loan losses,~~credit losses. Upon adoption of CECL, management revised the ~~Company has divided the loan portfolio into 3~~manner in which loans were pooled for similar risk characteristics. Management developed segments ~~each with different~~for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or sub-segmented as needed to ensure loans of similar risk ~~characteristics and methodologies for assessing risk. Those segments~~profiles are further segregated between our loans accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired in a business combination (referred to as “acquired” loans). Each portfolio segment is broken down into class segments where appropriate. Class segments contain unique measurement attributes, risk characteristics and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type and risk characteristics define each class segment. appropriately pooled.

The following table illustrates the portfolio and class segments for the Company’s loan ~~portfolio:~~portfolio in 2020:

Portfolio Segment	Class
Commercial Loans	Commercial ~~and~~& Industrial Paycheck Protection Program
	Commercial Real Estate
	~~Business Banking~~
Consumer Loans	Auto ~~Dealer Finance~~
	~~Specialty Lending~~
	~~Direct~~ Other Consumer
Residential ~~Real Estate~~		Loans

Commercial Loans

The Company offers a variety of ~~Commercial~~commercial loan products. The Company’s underwriting analysis for commercial loans typically includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows.

Commercial and Industrial (“C&I”) – The Company offers a variety of loan options to meet the specific needs of our C&I 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~~typically collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. To reduce these risks, management also attempts to obtain personal guarantees of the owners or to obtain government loan guarantees to provide further support.

Paycheck Protection Program (“PPP”) – Section 1102 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) created the Paycheck Protection Program, a program administered by the Small Business Administration (the “SBA”) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. The Company has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for six months of the loan. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020, or as long as the appropriated funding was available. No collateral or personal guarantees are required. Neither the government nor lenders are permitted to charge the recipients any fees. The Company began accepting applications from qualified borrowers on April 3, 2020 and as of September 30, 2020 processed approximately 3,000 loans totaling over $548 million in relief.

Commercial Real Estate (“CRE”) – The Company offers CRE loans to finance real estate purchases, ~~refinancings,~~refinancing’s, expansions and improvements to commercial and agricultural properties. ~~These~~ CRE loans are loans that are secured by liens on the real estate, which may include both ~~owner occupied~~owner-occupied and ~~non-owner-occupied~~nonowner-occupied properties, such as apartments, commercial structures, health care facilities and other facilities. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 80% of the appraised value of the property. Government loan guarantees may be obtained to provide further support for agricultural property.

~~Business Banking –~~ The Company offers a variety of loan options to meet the specific needs of our Business Banking customers including term loans, mortgages and lines of credit. Such loans are generally less than $1.0 million and are made available to businesses for working capital such as inventory and receivables, business expansion, equipment purchases and agricultural needs. Generally, a collateral lien is placed on assets owned by the borrower and can include real estate, equipment, inventory, receivables or other business assets. These loans carry a higher risk than C&I and CRE loans due to the smaller size of the borrower and lower levels of capital.

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Consumer Loans

The Company offers a variety of Consumer loan products including ~~Dealer Finance, Specialty Lending~~Auto and ~~Direct~~Other Consumer loans.

~~Dealer Finance~~ Auto – The Company provides both direct and indirect financing of automobiles (“Auto”). The Company maintains relationships with many dealers primarily in the communities that we serve. Through these relationships, the Company primarily finances the purchases of automobiles indirectly through dealer relationships. ~~Approximately 95% of the Dealer Finance relationships represent automobile financing.~~ Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to six years, based upon the nature of the collateral and the size of the loan. ~~The majority of Dealer Finance Consumer loans are underwritten on a secured basis using the underlying collateral being financed.~~

~~Specialty Lending~~ Other Consumer – The Other Consumer loan segment consists primarily of specialty lending loans and direct consumer loans. The Company offers unsecured ~~Consumer~~specialty lending consumer loans across a national footprint originated through our relationships with national technology-driven consumer lending companies to finance such things as dental and medical procedures, K-12 tuition, solar energy installations and other consumer purpose loans. Advances of credit through this specialty lending business line are subject to the Company’s underwriting standards including criteria such as FICO score and debt to income thresholds.

~~Direct –~~ The Company offers a variety of direct consumer installment loans to finance ~~vehicle purchases, mobile home purchases and~~various personal expenditures. In addition to installment loans, the Company also offers personal lines of credit, overdraft protection, ~~home equity lines of credit and second mortgage loans (loans secured by a lien position on one-to-four family residential real estate) to finance home improvements,~~ debt consolidation, education and other uses. For home equity loans, consumers are able to borrow up to 85% of the equity in their homes, and are generally tied to Prime with a ten year draw followed by a fifteen year amortization. These loans carry a higher risk than first mortgage residential loans as they are often in a second position with respect to collateral. Consumer installment loans carry a fixed rate of interest with principal repayment terms typically ranging from one to ~~ten~~fifteen years, based upon the nature of the collateral and the size of the loan. Consumer installment loans are often secured with collateral consisting of a perfected lien on the asset being purchased or a perfected lien on a ~~consumer's~~consumer’s deposit account. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the ~~borrower's~~borrower’s financial condition and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

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Residential ~~Real Estate~~

Residential ~~real estate~~ loans consist primarily of loans secured by a first or second mortgage on primary ~~residences.~~residences, home equity loans and lines of credit in first and second lien positions and residential construction loans. We originate adjustable-rate and ~~fixed-rate,~~fixed rate, one-to-four-family residential ~~real estate~~ loans for the construction or purchase of a residential property or the refinancing of a mortgage. These loans are collateralized by properties located in the Company’s market area. When market conditions are favorable, for longer term, fixed-rate residential real estate mortgages without escrow, the Company retains the servicing, but sells the right to receive principal and interest to Government-sponsored enterprises. This practice allows the Company to manage interest rate risk, liquidity risk and credit risk. Loans on one-to-four-family residential ~~real estate~~ are generally originated in amounts of no more than 85% of the purchase price or appraised value (whichever is lower) or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period.

~~Allowance for Loan Loss Calculation~~ For home equity loans, consumers are able to borrow up to 85% of the equity in their homes and are generally tied to Prime with a ten-year draw followed by a fifteen-year amortization. These loans carry a higher risk than first mortgage residential loans as they are often in a second position with respect to collateral.

For ~~purposes~~the 2019 disclosures for the allowance for credit losses, the loan portfolio was segmented into the Commercial, Consumer and Residential Real Estate portfolio segments. The Commercial segment was further pooled into three classes: Commercial and Industrial, Commercial Real Estate and Business Banking. The Consumer segment was further pooled into three classes: Indirect Auto, Specialty Lending and Direct. For a description of ~~evaluating~~these portfolio segments’ and classes’ risk characteristics, see Note 5 Allowance for Loan Losses and Credit Quality of Loans to the ~~adequacy~~consolidated financial statements presented in our 2019 Annual Report on Form 10-K.

Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate (“PD”) curves through the use of segment-specific loss given default (“LGD”) risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each asset class, primarily due to the nature of the ~~allowance,~~underlying collateral. These risk factors were assessed for reasonableness against the ~~Company considers a number of significant factors~~Company’s own loss experience and adjusted in certain cases when the relationship between the Company’s historical default and loss severity deviate from that ~~affect the collectability~~ of the ~~portfolio. For individually impaired loans, these include estimates~~wider industry. The historical PDR curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle.

Using the historical relationship between economic conditions and loan performance, management’s expectation of ~~impairment, if any,~~future loan performance is incorporated using externally developed economic forecasts which are probabilistically weighted to reflect potential forecast inaccuracy and model limitations. These forecasts are applied over a period that management has determined to be reasonable and supportable. Beyond the ~~facts~~period over which management can develop or source a reasonable and ~~circumstances~~supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that ~~affect~~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/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the ~~likelihood of repayment of such loans as~~discounted cash flows methodology, expected credit losses are estimated over the effective life of the ~~evaluation date. For homogeneous pools~~loans by measuring the difference between the net present value of ~~loans, estimates~~modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the ~~Company’s exposure to~~loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level stated interest rate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring (“TDR”) will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss ~~reflect a current assessment~~is reflective of ~~a number~~the estimate of ~~factors, which could affect collectability. These factors include: past loss experience, size, trend, composition and nature of loans; changes~~lifetime losses that exist in ~~lending policies and procedures, including underwriting standards and collection, charge-offs and recoveries;~~the loan portfolio at the balance sheet date. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; ~~current economic conditions~~changes in ~~the Company’s market;~~value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss ~~experienced~~experience across one or more components of the portfolio; the ~~effect of external factors such as competition, legal and regulatory requirements; and the~~ experience, ability and depth of lending management and ~~staff.~~staff; the Company’s credit review system; and the effect of external factors; such as competition, legal and regulatory requirements.

Loans that do not share risk characteristics and meet materiality criteria are evaluated on an individual basis and are excluded from the pooled evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate. Generally, individually assessed loans are collateral dependent.

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A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Estimating credit losses on unfunded commitments requires the Bank to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit, and standby letters of credit. Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount. The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate a reserve on unfunded commitments.

Allowance for Credit Losses – Held-to-Maturity (“HTM”) Debt Securities

The Company’s HTM debt securities are also required to utilize the CECL approach to estimate expected credit losses. Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as (as applicable): internal or external (third-party) credit score or credit ratings, risk ratings or classification, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry of the borrower, vintage, historical or expected credit loss patterns, and reasonable and supportable forecast periods. Management classifies the HTM portfolio into the following major security types: U.S. government agency or U.S. government sponsored mortgage-backed and collateralized mortgage obligations securities, and state and municipal debt securities.

The mortgage-backed and collateralized mortgage obligations HTM securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government as to timely repayment of principal and interest, are highly rated by major rating agencies, and have a long history of no credit losses. Therefore, the Company did not record a credit loss for these securities.

State and municipal bonds carry a Moody’s rating of A to AAA. In addition, the Company has a limited amount of New York state local municipal bonds that are not rated. The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual CUSIP over its contractual life and considers historical credit loss information, current conditions and reasonable and supportable forecasts. Given the rarity of municipal defaults and losses, the Company utilized Moody’s Municipal Loss Forecast Model as the sole source of municipal default and loss rates which provides decades of data across all municipal sectors and geographies. As with the loan portfolio, cash flows are forecast over a 6-quarter period under various, ~~regulatory agencies,~~weighted economic conditions, with a reversion to long-term average economic conditions over a 4-quarter period on a straight-line basis. Management may exercise discretion to make adjustments based on environmental factors. As of March 31, 2020, June 30, 2020 and September 30, 2020, the Company determined that the expected credit loss on its municipal bond portfolio was de minimis, and therefore, an allowance for credit losses was not recorded.

Allowance for Credit Losses – Available-for Sales (“AFS”) Debt Securities

The impairment model for AFS debt securities differs from the CECL approach utilized by HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. The cash flows should be estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

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Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the AFS debt security is uncollectible or when either of the criteria regarding intent or requirement to sell is met. As of March 31, 2020, June 30, 2020 and September 30, 2020, the Company determined that the unrealized loss positions in the AFS debt securities were not the result of credit losses, and therefore, an ~~integral component~~allowance for credit losses was not recorded.

Accrued Interest Receivable

Upon adoption of CECL on January 1, 2020, the Company made the following elections regarding accrued interest receivable: (1) presented accrued interest receivable balances separately within other assets balance sheet line item; (2) excluded interest receivable that is included in amortized cost of financing receivables from related disclosures requirements and (3) continued our policy to write off accrued interest receivable by reversing interest income. For loans, write off typically occurs upon becoming over 90 to 120 days past due and therefore the amount of such write offs are immaterial. For loans given short-term loan modifications to assist borrowers during the COVID-19 national emergency, this accounting policy would not apply as the length of time between interest recognition and the write-off of uncollectible interest could exceed 120 days. Therefore, the Company estimated an allowance for credit losses for accrued interest receivable related to loans with short-term modifications due to the pandemic. Historically, the Company has not experienced uncollectible accrued interest receivable on investment securities.

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3.	Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all related subsequent amendments thereto. ASU 2016-13 introduces new guidance that make substantive changes to the accounting for credit losses. ASU 2016-13 introduces the CECL model, which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions and reasonable and supportable forecasts and is generally expected to result in earlier recognition of credit losses. ASU 2016-13 also modifies certain provisions of the current other-than-temporary impairment model for AFS debt securities. Credit losses on AFS debt securities will be limited to the difference between the security’s amortized cost basis and its fair value and will be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. ASU 2016-13 also provides for a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their ~~examination process, periodically review~~origination. ASU 2016-13 requires expanded disclosures including, but not limited to, (1) information about the ~~Company’s~~methods and assumptions used to estimate expected credit losses, including changes in the factors that influenced management’s estimate and the reasons for those changes, (2) financing receivables and net investment in leases measured at amortized cost, further disaggregation of information about the credit quality of those assets and (3) a rollforward of the allowance for credit losses for HTM and AFS securities. The standard also changes the accounting for purchased credit-impaired debt securities and loans. ASU 2016-13 was effective for the Company on January 1, 2020. Management expects that the CECL model may create more volatility in the level of our allowance for loan ~~losses. Such agencies may require~~losses from quarter to quarter as changes in the ~~Company to make~~level of allowance for loan ~~grade changes as well as recognize additions to the allowance based on their examinations.~~losses will be dependent upon, among other things, macroeconomic forecasts and conditions, loan portfolio volumes and credit quality.

~~After~~The Company adopted CECL on January 1, 2020 (“Day 1”) using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a ~~thorough consideration~~net decrease to retained earnings of $4.3 million as of January 1, 2020 for the ~~factors discussed above, any required additions or reductions~~cumulative effect of adopting ASC 326. The transition adjustment includes a $3.0 million impact due to the allowance for loan losses are made periodically by charges or credits to the provision for loan losses. These charges are necessary to maintain the allowance at a level that management believes is reflective of overall level of incurred loss in the portfolio. While management uses available information to recognizecredit losses on loans, ~~additions~~$2.8 million impact due to the allowance for credit losses on off-balance sheet credit exposure, and ~~reductions~~$1.5 million impact to the deferred tax asset. The Company did not record an allowance for HTM debt securities on January 1, 2020 as the amount of credit risk was deemed immaterial. The Company did not record an allowance for credit losses on its AFS debt securities under the newly codified AFS debt security impairment model, as the majority of these securities are government agency-backed securities for which the risk of loss is minimal. Refer to Note 4 Securities and Note 5 Allowance for Credit Losses and Credit Quality of Loans to the Company’s unaudited interim consolidated financial statements included in this Form 10-Q for more information.

In December 2018, the Office of Comptroller of the ~~allowance may fluctuate from one reporting period to another. These fluctuations are reflective~~Currency (“OCC”), the Board of ~~changes in risk associated with portfolio content or changes in management’s assessment of any or all~~Governors of the ~~determining factors discussed above.~~Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”) approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company adopted the capital transition relief over the permissible five-year period.

On March 22, 2020, a statement was issued by the Company’s banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the recent coronavirus (“COVID-19”) pandemic. Additionally, Section 4013 of the CARES Act, which was enacted on March 27, 2020, further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructuring as defined by GAAP. To be eligible, each loan modification must be (1) related to the COVID-19 event; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the National Emergency or (b) December 31, 2020. On August 3, 2020, the Federal Financial Institutions Examination Council (“FFIEC”) issued a joint statement on additional loan accommodations related to COVID-19. The joint statement clarifies that for loan modifications in which Section 4013 is being applied, subsequent modifications could also be eligible under Section 4013. Accordingly, the Company is offering modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment. Accordingly, the Company does not account for such loan modifications as TDRs. As of September 30, 2020, there were $233 million in loans in modification programs related to COVID-19.

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In August 2018, the FASB issued ASU 2018-13, Fair value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair value Measurement. The provisions of ASU 2018-13 modify the disclosure requirements on fair value measurements in ASC 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective January 1, 2020. The adoption did not have a material impact on the consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 amends existing guidance and requires a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize and which costs to expense. ASU 2018-15 is effective for the Company on January 1, 2020. The adoption did not have a material impact on the consolidated financial statements and related disclosures.

Accounting Standards Issued Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides temporary optional expedients and exceptions to the existing guidance for applying GAAP to affected contract modifications and hedge accounting relationships in the transition away from LIBOR or other interbank offered rate on financial reporting. The guidance also allows a one-time election to sell and/or reclassify to AFS or trading HTM debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following ~~tables illustrate~~apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this ASU are effective for the Company on January 1, 2021, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans - General (Subtopic 715-20), provides changes to the disclosure requirements for defined benefit plans. The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are a result of the disclosure framework project that focuses on improvements to the effectiveness of disclosures in the notes to financial statements. The amendments remove and add certain disclosure requirements. The disclosure requirements being removed relating to public companies are: (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, (2) the amount and timing of plan assets expected to be returned to the employer, (3) the 2001 disclosure requirement relating to Japanese Welfare Pension Insurance Law, (4) related party disclosures about the amount of future annual benefits covered by insurance, and (5) the effects of a one-percentage-point change in assumed health care cost trends on the benefit cost and obligation. The disclosure requirements being added relating to public companies are (1) the weighted-average interest crediting rates for cash balance plans, and (2) an explanation of the reasons for significant gains and losses related to changes in the ~~allowance~~benefit obligation for ~~loan losses by our portfolio segments:~~

(In thousands)
Commercial
Loans

Consumer
Loans

Residential
Real Estate
Total
Balance as of June 30, 2019 $ 33,152 $ 36,534 $ 2,479 $ 72,165
Charge-offs (865 ) (6,976 ) (174 ) (8,015 )
Recoveries 132 1,746 13 1,891
Provision 1,021 5,031 272 6,324
Ending Balance as of September 30, 2019 $ 33,440 $ 36,335 $ 2,590 $ 72,365

Balance as of June 30, 2018 $ 31,059 $ 36,479 $ 4,912 $ 72,450
Charge-offs (823 ) (6,818 ) (123 ) (7,764 )
Recoveries 410 1,602 81 2,093
Provision 1,086 6,044 (1,104 ) 6,026
Ending Balance as of September 30, 2018 $ 31,732 $ 37,307 $ 3,766 $ 72,805

(In thousands)
Commercial
Loans

Consumer
Loans

Residential
Real Estate
Total
Balance as of December 31, 2018 $ 32,759 $ 37,178 $ 2,568 $ 72,505
Charge-offs (2,783 ) (21,336 ) (782 ) (24,901 )
Recoveries 344 4,887 122 5,353
Provision 3,120 15,606 682 19,408
Ending Balance as of September 30, 2019 $ 33,440 $ 36,335 $ 2,590 $ 72,365

Balance as of December 31, 2017 $ 27,606 $ 36,830 $ 5,064 $ 69,500
Charge-offs (2,535 ) (21,947 ) (513 ) (24,995 )
Recoveries 780 4,946 274 6,000
Provision 5,881 17,478 (1,059 ) 22,300
Ending Balance as of September 30, 2018 $ 31,732 $ 37,307 $ 3,766 $ 72,805

~~For acquired loans,~~the period. ASU 2018-14 is effective for the Company on January 1, 2021 and early adoption is permitted. The amendments should be applied retrospectively and the Company does not expect the guidance to have a material impact on its disclosures to the extent that we experience deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses is established based on our estimate of incurred losses at the balance sheet date. There was 0 allowance for loan losses for the acquired loan portfolio as of September 30, 2019 and December 31, 2018. There were 0 net charge-offs related to acquired loans during the three months ended September 30, 2019 and 2018, and approximately $0.1 million during the nine months ended September 30, 2019 and 2018, which are included in the table above.consolidated financial statements.

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4.	Securities

The ~~following tables illustrate the~~amortized cost, estimated fair value and unrealized gains (losses) of AFS securities are as follows:

(In thousands)		Amortized Cost				Unrealized Gains				Unrealized Losses				Estimated Fair Value
As of September 30, 2020
Federal agency		$	195,588			$	97			$	541			$	195,144
State & municipal			10,712				173				2				10,883
Mortgage-backed:
Government-sponsored enterprises			406,495				18,216				0				424,711
U.S. government agency securities			55,259				2,358				9				57,608
Collateralized mortgage obligations:
Government-sponsored enterprises			350,114				8,539				2				358,651
U.S. government agency securities			128,965				4,136				0				133,101
Corporate			17,500				331				4				17,827
Total AFS securities		$	1,164,633			$	33,850			$	558			$	1,197,925
As of December 31, 2019
Federal agency		$	34,998			$	3			$	243			$	34,758
State & municipal			2,533				0				20				2,513
Mortgage-backed:
Government-sponsored enterprises			453,614				4,982				239				458,357
U.S. government agency securities			44,758				667				156				45,269
Collateralized mortgage obligations:
Government-sponsored enterprises			328,499				1,949				467				329,981
U.S. government agency securities			104,152				718				408				104,462
Total AFS securities		$	968,554			$	8,319			$	1,533			$	975,340

There was 0 allowance for ~~loan~~credit losses ~~and~~on AFS securities as of the ~~recorded investment by portfolio segments:~~

(In thousands)

Commercial
Loans

Consumer
Loans

Residential
Real Estate
Total
As of September 30, 2019
Allowance for loan losses $ 33,440 $ 36,335 $ 2,590 $ 72,365
Allowance for loans individually evaluated for impairment - - - -
Allowance for loans collectively evaluated for impairment $ 33,440 $ 36,335 $ 2,590 $ 72,365
Ending balance of loans $ 3,351,201 $ 2,245,688 $ 1,416,920 $ 7,013,809
Ending balance of originated loans individually evaluated for impairment 3,117 7,267 7,673 18,057
Ending balance of acquired loans collectively evaluated for impairment 132,811 25,421 131,457 289,689
Ending balance of originated loans collectively evaluated for impairment $ 3,215,273 $ 2,213,000 $ 1,277,790 $ 6,706,063

As of December 31, 2018
Allowance for loan losses $ 32,759 $ 37,178 $ 2,568 $ 72,505
Allowance for loans individually evaluated for impairment 25 - - 25
Allowance for loans collectively evaluated for impairment $ 32,734 $ 37,178 $ 2,568 $ 72,480
Ending balance of loans $ 3,222,310 $ 2,284,563 $ 1,380,836 $ 6,887,709
Ending balance of originated loans individually evaluated for impairment 5,786 7,887 6,905 20,578
Ending balance of acquired loans collectively evaluated for impairment 143,690 31,624 147,277 322,591
Ending balance of originated loans collectively evaluated for impairment $ 3,072,834 $ 2,245,052 $ 1,226,654 $ 6,544,540

~~Credit Quality of Loans~~quarter ending September 30, 2020.

~~For all loan classes within the Company’s loan portfolio, loans~~The components of net realized gains (losses) on AFS securities are ~~placed on nonaccrual status when timely collection~~as follows. These amounts were reclassified out of principal and/or interest in accordance with contractual terms is in doubt. Loans are transferred to nonaccrual status generally when principal or interest payments become ninety days delinquent, unless the loan is well securedaccumulated other comprehensive income (loss) (“AOCI”) and in the process of collection or sooner when management concludes circumstances indicate that borrowers may be unable to meet contractual principal or interest payments. When a loan is transferred to a nonaccrual status, all interest previously accrued in the current period but not collected is reversed against interest income in that period. Interest accrued in a prior period and not collected is charged-off against the allowance for loan losses.into earnings.

		Three Months Ended September 30,
(In thousands)		2020				2019
Gross realized gains		$	0			$	20
Gross realized (losses)			0				0
Net AFS realized gains (losses)		$	0			$	20

~~If ultimate repayment~~

		Nine Months Ended September 30,
(In thousands)		2020				2019
Gross realized gains		$	3			$	73
Gross realized (losses)			0				(152	)
Net AFS realized gains (losses)		$	3			$	(79	)

Included in net realized gains (losses) on AFS securities, the Company recorded gains from calls of ~~a nonaccrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment~~approximately $3 thousand for the nine months ended September 30, 2020. There were 0 gains from calls for the three months ended September 30, 2020. The Company recorded gains from calls of ~~principal is not expected, any payment received on a nonaccrual loan is applied to principal until ultimate repayment becomes expected. For all loan classes within~~approximately $20 thousand for the ~~Company’s loan portfolio, nonaccrual loans are returned to accrual status when they become current as to principal~~three months ended September 30, 2019 and ~~interest and demonstrate a period of performance under~~$25 thousand for the contractual terms and, in the opinion of management, are fully collectible as to principal and interest. For loans in all portfolios, the principal amount is charged off in full or in part as soon as management determines, based on available facts, that the collection of principal in full or in part is improbable. For Commercial loans, management considers specific facts and circumstances relative to individual credits in making such a determination. For Consumer and Residential Real Estate loan classes, management uses specific guidance and thresholds from the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy.nine months ended September 30, 2019.

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The amortized cost, estimated fair value and unrealized gains (losses) of securities HTM are as follows:

(In thousands)		Amortized Cost				Unrealized Gains				Unrealized Losses				Estimated Fair Value
As of September 30, 2020
Federal agency		$	100,000			$	47			$	772			$	99,275
Mortgage-backed:
Government-sponsored enterprises			126,446				4,847				0				131,293
U.S. government agency securities			11,544				865				0				12,409
Collateralized mortgage obligations:
Government-sponsored enterprises			119,402				5,087				0				124,489
U.S. government agency securities			92,654				4,680				0				97,334
State & municipal			213,042				7,096				76				220,062
Total HTM securities		$	663,088			$	22,622			$	848			$	684,862
As of December 31, 2019
Mortgage-backed:
Government-sponsored enterprises		$	149,448			$	3,184			$	155			$	152,477
U.S. government agency securities			13,667				584				0				14,251
Collateralized mortgage obligations:
Government-sponsored enterprises			189,402				2,165				368				191,199
U.S. government agency securities			110,498				3,256				100				113,654
State & municipal			167,059				2,628				6				169,681
Total HTM securities		$	630,074			$	11,817			$	629			$	641,262

At September 30, 2020 and December 31, 2019, all of the mortgaged-backed HTM securities were comprised of U.S. government agency and Government-sponsored enterprises securities. There was 0 allowance for credit losses on HTM securities as of September 30, 2020.

Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $11 thousand for the three months ended September 30, 2020 and $15 thousand for the nine months ended September 30, 2020. Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $4 thousand for the three and nine month period ended September 30, 2019.

During the nine months ended September 30, 2020, the Company sold HTM securities with an amortized cost of $1.0 million and resulted in a realized loss of $1 thousand. Due to significant deterioration in the creditworthiness of the issuer of the HTM securities, the circumstances caused the Company to change its intent to hold the HTM securities sold to maturity, which did not affect the Company’s intent to hold the remainder of the HTM portfolio to maturity. There were 0 sales of HTM securities during the three and nine month periods ended September 30, 2019.

AFS and HTM securities with amortized costs totaling $1.4 billion at September 30, 2020 and $1.3 billion at December 31, 2019 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at September 30, 2020 and December 31, 2019, AFS and HTM securities with an amortized cost of $227.4 million and $189.8 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

The following tables set forth information with regard to ~~past due~~gains and ~~nonperforming loans by loan class:~~losses on equity securities:

(In thousands)
31-60 Days
Past Due
Accruing

61-90 Days
Past Due
Accruing

Greater
Than 90
Days Past
Due
Accruing

Total Past
Due
Accruing
Nonaccrual Current
Recorded
Total
Loans

As of September 30, 2019
Originated
Commercial Loans:
C&I $ 505 $ - $ - $ 505 $ 729 $ 836,593 $ 837,827
CRE 3,646 - 4,839 8,485 4,664 1,832,708 1,845,857
Business Banking 2,118 313 67 2,498 6,524 525,684 534,706
Total Commercial Loans $ 6,269 $ 313 $ 4,906 $ 11,488 $ 11,917 $ 3,194,985 $ 3,218,390
Consumer Loans:
Dealer Finance $ 11,167 $ 1,965 $ 1,094 $ 14,226 $ 2,241 $ 1,179,316 $ 1,195,783
Specialty Lending 3,681 1,655 1,568 6,904 - 521,601 528,505
Direct 1,778 1,090 208 3,076 2,553 490,350 495,979
Total Consumer Loans $ 16,626 $ 4,710 $ 2,870 $ 24,206 $ 4,794 $ 2,191,267 $ 2,220,267
Residential Real Estate $ 1,582 $ 100 $ 500 $ 2,182 $ 6,311 $ 1,276,970 $ 1,285,463
Total Originated Loans $ 24,477 $ 5,123 $ 8,276 $ 37,876 $ 23,022 $ 6,663,222 $ 6,724,120

Acquired
Commercial Loans:
C&I $ - $ - $ - $ - $ - $ 28,823 $ 28,823
CRE - - - - - 67,853 67,853
Business Banking 445 - - 445 366 35,324 36,135
Total Commercial Loans $ 445 $ - $ - $ 445 $ 366 $ 132,000 $ 132,811
Consumer Loans:
Direct $ 276 $ 43 $ - $ 319 $ 131 $ 24,971 $ 25,421
Total Consumer Loans $ 276 $ 43 $ - $ 319 $ 131 $ 24,971 $ 25,421
Residential Real Estate $ 1,102 $ - $ 66 $ 1,168 $ 1,104 $ 129,185 $ 131,457
Total Acquired Loans $ 1,823 $ 43 $ 66 $ 1,932 $ 1,601 $ 286,156 $ 289,689

Total Loans $ 26,300 $ 5,166 $ 8,342 $ 39,808 $ 24,623 $ 6,949,378 $ 7,013,809

		Three Months Ended September 30,
(In thousands)		2020				2019
Net gains and (losses) recognized on equity securities		$	73			$	4,012
Less: Net gains and (losses) recognized during the period on equity securities sold during the period			0				3,966
Unrealized gains and (losses) recognized on equity securities still held		$	73			$	46

		Nine Months Ended September 30,
(In thousands)		2020				2019
Net gains and (losses) recognized on equity securities		$	(565	)		$	4,099
Less: Net gains and (losses) recognized during the period on equity securities sold during the period			0				3,966
Unrealized gains and (losses) recognized on equity securities still held		$	(565	)		$	133

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(In thousands)
31-60 Days
Past Due
Accruing

61-90 Days
Past Due
Accruing

Greater
Than 90
Days Past
Due
Accruing

Total Past
Due
Accruing
Nonaccrual Current
Recorded
Total
Loans

As of December 31, 2018
Originated
Commercial Loans:
C&I $ 909 $ - $ - $ 909 $ 1,062 $ 846,148 $ 848,119
CRE 1,089 - 588 1,677 4,995 1,734,558 1,741,230
Business Banking 1,092 302 - 1,394 5,974 481,903 489,271
Total Commercial Loans $ 3,090 $ 302 $ 588 $ 3,980 $ 12,031 $ 3,062,609 $ 3,078,620
Consumer Loans:
Dealer Finance $ 14,519 $ 2,300 $ 1,186 $ 18,005 $ 1,971 $ 1,196,136 $ 1,216,112
Specialty Lending 3,479 1,773 1,562 6,814 - 518,114 524,928
Direct 2,962 1,437 552 4,951 2,592 504,356 511,899
Total Consumer Loans $ 20,960 $ 5,510 $ 3,300 $ 29,770 $ 4,563 $ 2,218,606 $ 2,252,939
Residential Real Estate $ 1,426 $ 157 $ 1,182 $ 2,765 $ 6,778 $ 1,224,016 $ 1,233,559
Total Originated Loans $ 25,476 $ 5,969 $ 5,070 $ 36,515 $ 23,372 $ 6,505,231 $ 6,565,118

Acquired
Commercial Loans:
C&I $ - $ - $ - $ - $ - $ 26,124 $ 26,124
CRE - - - - - 84,492 84,492
Business Banking 466 288 - 754 390 31,930 33,074
Total Commercial Loans $ 466 $ 288 $ - $ 754 $ 390 $ 142,546 $ 143,690
Consumer Loans:
Dealer Finance $ 1 $ 1 $ - $ 2 $ - $ 30 $ 32
Direct 152 41 15 208 227 31,157 31,592
Total Consumer Loans $ 153 $ 42 $ 15 $ 210 $ 227 $ 31,187 $ 31,624
Residential Real Estate $ 546 $ 42 $ - $ 588 $ 1,498 $ 145,191 $ 147,277
Total Acquired Loans $ 1,165 $ 372 $ 15 $ 1,552 $ 2,115 $ 318,924 $ 322,591

Total Loans $ 26,641 $ 6,341 $ 5,085 $ 38,067 $ 25,487 $ 6,824,155 $ 6,887,709

~~There~~Included in the net realized gains and (losses) recognized on equity securities during the three and nine months ended September 30, 2019, the Company recorded a $4.0 million gain from the sale of Visa Class B common stock, which had no readily determinable fair value at the time of the sale. As of September 30, 2020 and December 31, 2019, the carrying value of equity securities without readily determinable fair values was $4.0 million. The Company performed a qualitative assessment to determine whether the investments were impaired and identified no ~~material commitments to extend further credit to borrowers with nonperforming loans~~areas of concern as of September 30, ~~2019~~2020 and 2019. There were 0 impairments, downward or upward adjustments recognized for equity securities without readily determinable fair values during the three and nine months ended September 30, 2020 and 2019.

The following tables set forth information with regard to contractual maturities of debt securities at September 30, 2020:

(In thousands)		Amortized Cost				Estimated Fair Value
AFS debt securities:
Within one year		$	706			$	731
From one to five years			20,281				21,010
From five to ten years			356,717				362,435
After ten years			786,929				813,749
Total AFS debt securities		$	1,164,633			$	1,197,925
HTM debt securities:
Within one year		$	17,239			$	17,257
From one to five years			60,391				61,713
From five to ten years			241,783				248,329
After ten years			343,675				357,563
Total HTM debt securities		$	663,088			$	684,862

Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Except for U.S. Government securities and Government-sponsored enterprises securities, there were 0 holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at September 30, 2020 and December 31, ~~2018.~~

~~Impaired Loans~~

The methodology used to establish the allowance for loan losses on impaired loans incorporates specific allocations on loans analyzed individually. Classified loans, including all troubled debt restructured loans (“TDRs”) and nonaccrual Commercial loans that are graded Substandard, Doubtful or Loss, with outstanding balances of $1.0 million or more are evaluated for impairment through the Company’s quarterly status review process. The Company considers Commercial loans less than $1.0 million to be homogeneous loans. In the third quarter of 2019 the threshold for evaluating loans for impairment was increased from $750 thousand. In determining that we will be unable to collect all principal and/or interest payments due in accordance with the contractual terms of the loan agreements, we consider factors such as payment history and changes in the financial condition of individual borrowers, local economic conditions, historical loss experience and the conditions of the various markets in which the collateral may be liquidated. For loans that are identified as impaired, impairment is measured by one of three methods: 1) the fair value of collateral less cost to sell, 2) present value of expected future cash flows or 3) the loan’s observable market price. These impaired loans are reviewed on a quarterly basis for changes in the level of impairment. Impaired amounts are charged off immediately if such amounts are determined by management to be uncollectable. Any change to the previously recognized impairment loss is recognized as a component of the provision for loan losses.2019.

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Table of Contents

The following table ~~provides~~sets forth information ~~on loans specifically evaluated~~with regard to investment securities with unrealized losses, for ~~impairment:~~which an allowance for credit losses has not been recorded at September 30, 2020, segregated according to the length of time the securities had been in a continuous unrealized loss position:

September 30, 2019 December 31, 2018
(In thousands)
Recorded
Investment
Balance
(Book)

Unpaid
Principal
Balance
(Legal)

Related
Allowance

Recorded
Investment
Balance
(Book)

Unpaid
Principal
Balance
(Legal)

Related
Allowance

Originated
With no related allowance recorded:
Commercial Loans:
C&I $ 78 $ 304 $ $ 228 $ 497 $
CRE 2,046 2,046 4,312 6,330
Business Banking 993 1,412 1,013 2,001
Total Commercial Loans $ 3,117 $ 3,762 $ 5,553 $ 8,828
Consumer Loans:
Dealer Finance $ 194 $ 279 �� $ 143 $ 241
Direct 7,073 8,464 7,744 9,831
Total Consumer Loans $ 7,267 $ 8,743 $ 7,887 $ 10,072
Residential Real Estate $ 7,673 $ 9,620 $ 6,905 $ 9,414
Total $ 18,057 $ 22,125 $ 20,345 $ 28,314

With an allowance recorded:
Commercial Loans:
C&I $ - $ - $ - $ 233 $ 238 $ 25
Total Commercial Loans $ - $ - $ - $ 233 $ 238 $ 25

Total Loans $ 18,057 $ 22,125 $ - $ 20,578 $ 28,552 $ 25

		Less Than 12 Months												12 Months or Longer												Total
(In thousands)		Fair Value				Unrealized Losses				Number of Positions				Fair Value				Unrealized Losses				Number of Positions				Fair Value				Unrealized Losses				Number of Positions
As of September 30, 2020
AFS securities:
Federal agency		$	154,448			$	(541	)			10			$	0			$	0				0			$	154,448			$	(541	)			10
State & municipal			1,448				(2	)			1				0				0				0				1,448				(2	)			1
Mortgage-backed			0				0				0				786				(9	)			3				786				(9	)			3
Collateralized mortgage obligations			553				(2	)			1				0				0				0				553				(2	)			1
Corporate			4,996				(4	)			1				0				0				0				4,996				(4	)			1
Total securities with unrealized losses		$	161,445			$	(549	)			13			$	786			$	(9	)			3			$	162,231			$	(558	)			16

HTM securities:
Federal agency		$	74,228			$	(772	)			3			$	0			$	0				0			$	74,228			$	(772	)			3
State & municipal			10,594				(76	)			10				0				0				0				10,594				(76	)			10
Total securities with unrealized losses		$	84,822			$	(848	)			13			$	0			$	0				0			$	84,822			$	(848	)			13

As of December 31, 2019
AFS securities:
Federal agency		$	14,891			$	(109	)			2			$	9,866			$	(134	)			1			$	24,757			$	(243	)			3
State & municipal			2,503				(20	)			1				0				0				0				2,503				(20	)			1
Mortgage-backed			67,986				(273	)			21				37,745				(122	)			16				105,731				(395	)			37
Collateralized mortgage obligations			113,121				(316	)			24				49,632				(559	)			17				162,753				(875	)			41
Total securities with unrealized losses		$	198,501			$	(718	)			48			$	97,243			$	(815	)			34			$	295,744			$	(1,533	)			82

HTM securities:
Mortgage-backed		$	0			$	0				0			$	25,370			$	(155	)			2			$	25,370			$	(155	)			2
Collateralized mortgage obligations			18,040				(181	)			3				22,389				(287	)			5				40,429				(468	)			8
State & municipal			2,257				(6	)			4				0				0				0				2,257				(6	)			4
Total securities with unrealized losses		$	20,297			$	(187	)			7			$	47,759			$	(442	)			7			$	68,056			$	(629	)			14

~~There~~The Company does not believe the AFS securities that were ~~0 acquired impaired loans specifically evaluated for impairment~~in an unrealized loss position as of September 30, ~~2019 or December 31, 2018.~~

~~The following tables summarize the average recorded investments on loans specifically~~2020, which consisted of 16 individual securities, represented a credit loss impairment. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. As of September 30, 2020, the majority of the AFS securities in an unrealized loss position consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises that carry the explicit and/or implicit guarantee of the U.S. government, which are widely recognized as “risk-free” and have a long history of zero credit losses. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. AIR on AFS debt securities totaled $2.6 million at September 30, 2020 and is excluded from the estimate of credit losses and reported in the financial statement line for other assets.

NaN of the bank’s HTM debt securities were past due or on non-accrual status as of the quarter ending September 30, 2020. There was 0 accrued interest reversed against interest income ~~recognized:~~for the quarter ended September 30, 2020 as all securities remained on accrual status. In addition, there were 0 collateral dependent HTM debt securities as of September 30, 2020. 53% of the Company’s HTM debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Therefore, the Company did not record an allowance for credit losses for these securities as of September 30, 2020. The remaining HTM debt securities at September 30, 2020 were comprised of state and municipal obligations with bond ratings of A to AAA. Utilizing the CECL approach, the Company determined that the expected credit loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit loss was recorded as of September 30, 2020. AIR on HTM debt securities totaled $2.7 million at September 30, 2020 and is excluded from the estimate of credit losses and reported in the financial statement line for other assets.

For the Three Months Ended
September 30, 2019 September 30, 2018
(In thousands)
Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

Originated
Commercial Loans:
C&I $ 115 $ - $ 433 $ -
CRE 2,554 30 3,645 32
Business Banking 1,002 7 1,024 4
Total Commercial Loans $ 3,671 $ 37 $ 5,102 $ 36
Consumer Loans:
Dealer Finance $ 213 $ 3 $ 177 $ 4
Direct 7,293 95 7,730 102
Total Consumer Loans $ 7,506 $ 98 $ 7,907 $ 106
Residential Real Estate $ 7,629 $ 93 $ 6,519 $ 68
Total Originated $ 18,806 $ 228 $ 19,528 $ 210

Total Loans $ 18,806 $ 228 $ 19,528 $ 210

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5.	Allowance for Credit Losses and Credit Quality of Loans

For the Nine Months Ended
September 30, 2019 September 30, 2018
(In thousands)
Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

Originated
Commercial Loans:
C&I $ 291 $ 1 $ 449 $ 1
CRE 3,577 91 3,999 96
Business Banking 1,111 18 998 12
Total Commercial Loans $ 4,979 $ 110 $ 5,446 $ 109
Consumer Loans:
Dealer Finance $ 201 $ 9 $ 187 $ 8
Direct 7,518 291 7,953 317
Total Consumer Loans $ 7,719 $ 300 $ 8,140 $ 325
Residential Real Estate $ 7,428 $ 252 $ 6,719 $ 212
Total Originated $ 20,126 $ 662 $ 20,305 $ 646

Total Loans $ 20,126 $ 662 $ 20,305 $ 646

As previously mentioned in Note 2 Summary of Significant Accounting Policies, the Company’s January 1, 2020 adoption of CECL resulted in a significant change to our methodology for estimating the allowance for credit losses since December 31, 2019. Portfolio segmentation has been redefined under CECL and therefore prior year tables are presented separately.

The Day 1 increase in the allowance for credit loss on loans relating to adoption of ASU 2016-13 was $3.0 million, which decreased retained earnings by $2.3 million and increased the deferred tax asset by $0.7 million.

There were 0 new loans purchased with credit deterioration during the nine months ended September 30, 2020. During the third quarter of 2020, the Company purchased $46.4 million of consumer loans at a 1% discount. The allowance for credit losses recorded for these loans on the purchase date was $3.2 million. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $25.5 million at September 30, 2020 and was included in the allowance for loan credit losses to estimate the impact of accrued interest receivable related to loans with short-term modifications due to the pandemic as the length of time between interest recognition and the write-off of uncollectible interest could exceed 120 days which exempts these loans from our policy election for accrued interest receivable. The estimated allowance for credit losses related to AIR at September 30, 2020 was $0.5 million.

The Day 1 and September 30, 2020 allowance for credit losses calculation incorporated a 6-quarter forecast period to account for forecast economic conditions under each scenario utilized in the measurement. For periods beyond the 6-quarter forecast, the model reverted to long-term economic conditions over a 4-quarter reversion period on a straight-line basis.

The quantitative model as of June 30, 2020 incorporated a baseline economic outlook sourced from a reputable third-party that reflected continued economic deterioration from the March 31, 2020 forecasts, with unemployment peaking in the quarter of measurement but sharply improving in the third quarter 2020, while remaining elevated well above the pre-COVID-19 pandemic levels for the entire forecast period and into 2023. National GDP is forecast to rebound strongly in the third quarter 2020 followed by moderately negative growth in the fourth quarter 2020 with increasing growth through 2022 and stabilization in 2023. The June 30, 2020 allowance for credit losses calculation incorporated a 6-quarter forecast period with a 4-quarter reversion period to long-term economic conditions on a straight-line basis. A short-term reduction in prepayment and curtailment speeds was also applied to more reasonably model payment behavior during the COVID-19 national emergency. Additionally, downside and upside scenarios were incorporated and weighted, along with the baseline outlook, to accommodate other potential economic conditions in the quantitative model. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of June 30, 2020. Additional adjustments were made for COVID-19 related factors were not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus, including direct payments to individuals, increased unemployment benefits, deferral/modification initiatives and various government-sponsored loan programs. The commercial & industrial and consumer segment models were based upon percent change in unemployment, with forecast values as of June 30, 2020, well outside the observed historical experience. Therefore, adjustment was required to produce outputs more aligned with default expectations given the forecast economic environment. These factors were considered through a separate quantitative process and incorporated into the estimate for allowance for credit losses at June 30, 2020.

The quantitative model as of September 30, 2020 incorporated a baseline economic outlook sourced from a reputable third-party which reflected an unemployment rate environment well above pre-COVID-19 levels for the entire forecast period and a gradual return to low single digits by the end of 2023. Northeast U.S. GDP was expected to grow moderately over the forecast period after a strong rebound in the third quarter of 2020 with stabilization by the end of 2023. Key assumptions in the baseline economic outlook included a large and effective stimulus package by September 30, 2020 with no secondary surge in COVID-19 cases or pandemic-related business closures. A downside scenario was incorporated and equally weighted, along with the baseline outlook in the quantitative model, which assumed deteriorated economic conditions from the base model as a stimulus package was not in place by the end of the third quarter and the related impact on credit losses is not yet known. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of September 30, 2020. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in 2020, including direct payments to individuals, increased unemployment benefits, deferral/modification initiatives and various government-sponsored loan programs. The commercial & industrial and consumer segment models were based upon percent change in unemployment, with forecast values as of September 30, 2020, well outside the observed historical experience. Therefore, adjustments were required to produce outputs more aligned with default expectations given the forecast economic environment. These factors were considered through a separate quantitative process and incorporated into the estimate for allowance for credit losses at September 30, 2020.

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Table of Contents

The following tables present the activity in the allowance for credit losses by portfolio segment:

(In thousands)		Commercial Loans				Consumer Loans				Residential				Total
Balance as of June 30, 2020		$	50,386			$	40,094			$	23,020			$	113,500
Charge-offs			(624	)			(4,097	)			(58	)			(4,779	)
Recoveries			333				2,123				62				2,518
Provision			1,651				442				1,168				3,261
Ending Balance as of September 30, 2020		$	51,746			$	38,562			$	24,192			$	114,500

(In thousands)		Commercial Loans				Consumer Loans				Residential				Total
Balance as of January 1, 2020 (after adoption of ASC 326)		$	27,156			$	32,122			$	16,721			$	75,999
Charge-offs			(2,353	)			(17,166	)			(863	)			(20,382	)
Recoveries			674				6,168				300				7,142
Provision			26,269				17,438				8,034				51,741
Ending Balance as of September 30, 2020		$	51,746			$	38,562			$	24,192			$	114,500

The increase in the allowance for credit losses from June 30, 2020 to September 30, 2020 was primarily due to the specific allowance for credit losses on individually analyzed credits and a change in loan portfolio mix shift within the consumer portfolio as indirect auto balances declined and other consumer balances increased. The increase in the allowance for credit losses from Day 1 to September 30, 2020 was primarily due to the deterioration of macroeconomic factors surrounding the COVID-19 pandemic.

Individually Evaluated Loans

As of September 30, 2020, there were 2 relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of $10.9 million. The allowance for credit loss was $3.0 million and was determined by an estimate of the fair value of the collateral which consisted of business assets (accounts receivable, inventory and machinery, real estate and equipment). As of June 30, 2020, there were 0 relationships identified to be evaluated for loss on an individual basis. As of Day 1, there were no relationships identified to be evaluated for loss on an individual basis.

The following table sets forth information with regard to past due and nonperforming loans by loan segment:

(In thousands)		31-60 Days Past Due Accruing				61-90 Days Past Due Accruing				Greater Than 90 Days Past Due Accruing				Total Past Due Accruing				Nonaccrual				Current				Recorded Total Loans
As of September 30, 2020
Commercial Loans:
C&I		$	703			$	79			$	12			$	794			$	4,172			$	1,116,189			$	1,121,155
CRE			367				51				0				418				17,242				2,324,815				2,342,475
PPP			0				0				0				0				0				514,558				514,558
Total Commercial Loans		$	1,070			$	130			$	12			$	1,212			$	21,414			$	3,955,562			$	3,978,188
Consumer Loans:
Auto		$	7,639			$	1,534			$	826			$	9,999			$	2,901			$	938,433			$	951,333
Other Consumer			3,373				1,447				1,121				5,941				370				634,011				640,322
Total Consumer Loans		$	11,012			$	2,981			$	1,947			$	15,940			$	3,271			$	1,572,444			$	1,591,655
Residential		$	1,505			$	256			$	620			$	2,381			$	11,211			$	1,977,208			$	1,990,800
Total Loans		$	13,587			$	3,367			$	2,579			$	19,533			$	35,896			$	7,505,214			$	7,560,643

As of September 30, 2020, there were 0 loans in non-accrual without an allowance for credit losses.

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Credit Quality Indicators

The Company has developed an internal loan grading system to evaluate and quantify the Company’s loan portfolio with respect to quality and risk. The system focuses on, among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries. The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and ~~provides~~provide management with an early warning system, enabling recognition and response to problem loans and potential problem loans.

Commercial Grading System

For C&I, PPP and CRE loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This ~~would include~~includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass. The increase in non-pass credits from December 31, 2019 was primarily due to the Company’s proactive approach to downgrade loans that were both in payment deferral due to the COVID-19 pandemic and in higher risk industries such as entertainment, restaurants, retail, healthcare and accommodations.

Doubtful

●

~~Doubtful~~

A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss.

Substandard

●

~~Substandard~~

Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual. Although Substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard.

Special Mention

●

~~Special Mention~~

Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent.

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~~Table of Contents~~

● Pass

Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality.

~~Business Banking Grading System~~

~~Business Banking~~ Pass loans ~~are graded as either Classified or Non-classified:~~

●

~~Classified~~

~~Classified loans are inadequately protected by the current worth and paying capacity~~also include any portion of ~~the obligor or, if applicable, the collateral pledged. These loans have~~ a well-defined weakness or weaknesses, that jeopardize the liquidation of the debt or in some cases make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Classified loans have a high probability of payment default or total substantial loss. These loans require more intensive supervision by management and are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. Classified loans where the full collection of interest and principal is in doubt are considered to have a nonaccrual status. In some cases, Classified loans are considered uncollectable and of such little value that their continuance as assets is not warranted.

●

~~Non-classified~~

~~Loans graded as Non-classified encompass all loans not graded as Classified. Payments on non-classified loans are generally made as agreed.~~government guaranteed loan, including PPP loans.

Consumer and Residential ~~Real Estate~~ Grading System

Consumer and Residential ~~Real Estate~~ loans are graded as either Nonperforming or Performing.

Nonperforming

●

~~Nonperforming~~

Nonperforming loans are loans that are 1) over 90 days past due and interest is still accruing or 2) on nonaccrual status.

●

~~Performing~~

~~All loans not meeting any of these criteria are considered Performing.~~

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Performing

All loans not meeting any of the above criteria are considered Performing.

The following tables illustrate the Company’s credit quality by loan ~~class:~~class by vintage

(In thousands) As of September 30, 2019
Originated
Commercial Credit Exposure
By Internally Assigned Grade:
C&I CRE Total
Pass $ 771,776 $ 1,762,016 $ 2,533,792
Special Mention 32,992 39,368 72,360
Substandard 33,059 44,473 77,532
Total $ 837,827 $ 1,845,857 $ 2,683,684

Business Banking Credit Exposure
By Internally Assigned Grade:

Business
Banking
Total
Non-classified $ 520,830 $ 520,830
Classified 13,876 13,876
Total $ 534,706 $ 534,706

Consumer Credit Exposure
By Payment Activity:

Dealer
Finance

Specialty
Lending
Direct Total
Performing $ 1,192,448 $ 526,937 $ 493,218 $ 2,212,603
Nonperforming 3,335 1,568 2,761 7,664
Total $ 1,195,783 $ 528,505 $ 495,979 $ 2,220,267

Residential Real Estate Credit Exposure
By Payment Activity:

Residential
Real Estate
Total
Performing $ 1,278,652 $ 1,278,652
Nonperforming 6,811 6,811
Total $ 1,285,463 $ 1,285,463

Acquired

Commercial Credit Exposure
By Internally Assigned Grade: C&I CRE Total
Pass $ 21,781 $ 67,441 $ 89,222
Special Mention 2,860 - 2,860
Substandard 4,182 412 4,594
Total $ 28,823 $ 67,853 $ 96,676

Business Banking Credit Exposure
By Internally Assigned Grade:

Business
Banking
Total
Non-classified $ 33,499 $ 33,499
Classified 2,636 2,636
Total $ 36,135 $ 36,135

Consumer Credit Exposure
By Payment Activity: Direct Total
Performing $ 25,290 $ 25,290
Nonperforming 131 131
Total $ 25,421 $ 25,421

Residential Real Estate Credit Exposure
By Payment Activity:

Residential
Real Estate
Total
Performing $ 130,287 $ 130,287
Nonperforming 1,170 1,170
Total $ 131,457 131,457

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~~Table of Contents~~

(In thousands) As of December 31, 2018
Originated
Commercial Credit Exposure
By Internally Assigned Grade: C&I CRE Total
Pass $ 796,778 $ 1,681,330 $ 2,478,108
Special Mention 11,348 13,894 25,242
Substandard 39,993 46,006 85,999
Total $ 848,119 $ 1,741,230 $ 2,589,349

Business Banking Credit Exposure
By Internally Assigned Grade:

Business
Banking
Total
Non-classified $ 476,052 $ 476,052
Classified 13,219 13,219
Total $ 489,271 $ 489,271

Consumer Credit Exposure
By Payment Activity:

Dealer
Finance

Specialty
Lending
Direct Total
Performing $ 1,212,955 $ 523,366 $ 508,755 $ 2,245,076
Nonperforming 3,157 1,562 3,144 7,863
Total $ 1,216,112 $ 524,928 $ 511,899 $ 2,252,939

Residential Real Estate Credit Exposure
By Payment Activity:

Residential
Real Estate
Total
Performing $ 1,225,599 $ 1,225,599
Nonperforming 7,960 7,960
Total $ 1,233,559 $ 1,233,559

Acquired

Commercial Credit Exposure
By Internally Assigned Grade: C&I CRE Total
Pass $ 23,283 $ 83,762 $ 107,045
Special Mention 2,831 92 2,923
Substandard 10 638 648
Total $ 26,124 $ 84,492 $ 110,616

Business Banking Credit Exposure
By Internally Assigned Grade:

Business
Banking
Total
Non-classified $ 29,945 $ 29,945
Classified 3,129 3,129
Total $ 33,074 $ 33,074

Consumer Credit Exposure
By Payment Activity:

Dealer
Finance
Direct Total
Performing $ 32 $ 31,350 $ 31,382
Nonperforming - 242 242
Total $ 32 $ 31,592 $ 31,624

Residential Real Estate Credit Exposure By Payment Activity:		Residential Real Estate				Total
(In thousands)										2020				2019				2018				2017				2016				Prior				Revolving Loans Amortized Cost Basis				Revolving Loans Converted to Term				Total
C&I
By Internally Assigned Grade:
Pass										$	249,835			$	204,978			$	100,664			$	51,944			$	41,297			$	36,030			$	335,169			$	273			$	1,020,190
Special Mention											14,004				10,680				6,410				5,684				3,547				3,634				20,136				50				64,145
Substandard											635				5,614				9,437				3,574				920				5,510				9,586				9				35,285
Doubtful											0				1,351				0				184				0				0				0				0				1,535
Total C&I										$	264,474			$	222,623			$	116,511			$	61,386			$	45,764			$	45,174			$	364,891			$	332			$	1,121,155

CRE
By Internally Assigned Grade:
Pass										$	313,029			$	376,023			$	250,936			$	309,705			$	216,756			$	417,746			$	88,356			$	14,816			$	1,987,367
Special Mention											3,215				41,533				36,718				56,202				40,432				67,110				10,004				0				255,214
Substandard											282				2,937				8,942				8,573				5,709				57,484				6,455				0				90,382
Doubtful											0				1,897				0				0				0				7,615				0				0				9,512
Total CRE										$	316,526			$	422,390			$	296,596			$	374,480			$	262,897			$	549,955			$	104,815			$	14,816			$	2,342,475

PPP
By Internally Assigned Grade:
Pass										$	514,558			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	514,558
Total PPP										$	514,558			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	514,558

Auto
By Payment Activity:
Performing		$	145,779			$	145,779			$	153,299			$	347,290			$	229,833			$	138,721			$	58,144			$	20,296			$	23			$	0			$	947,606
Nonperforming			1,498				1,498				208				1,135				1,353				655				376				0				0				0				3,727
Total		$	147,277			$	147,277
Total Auto										$	153,507			$	348,425			$	231,186			$	139,376			$	58,520			$	20,296			$	23			$	0			$	951,333

Other Consumer
By Payment Activity:
Performing										$	181,867			$	195,369			$	141,910			$	63,712			$	17,729			$	19,465			$	18,498			$	281			$	638,831
Nonperforming											169				509				305				220				99				179				10				0				1,491
Total Other Consumer										$	182,036			$	195,878			$	142,215			$	63,932			$	17,828			$	19,644			$	18,508			$	281			$	640,322

Residential
By Payment Activity:
Performing										$	158,672			$	222,947			$	225,715			$	191,436			$	171,022			$	724,257			$	271,304			$	13,616			$	1,978,969
Nonperforming											548				137				718				1,138				364				8,788				11				127				11,831
Total Residential										$	159,220			$	223,084			$	226,433			$	192,574			$	171,386			$	733,045			$	271,315			$	13,743			$	1,990,800

Total Loans										$	1,590,321			$	1,412,400			$	1,012,941			$	831,748			$	556,395			$	1,368,114			$	759,552			$	29,172			$	7,560,643

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Table of Contents

Troubled Debt ~~Restructured Loans~~Restructuring

When the Company modifies a loan in a troubled debt restructuring, such modifications generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; or change in scheduled payment amount. Residential ~~Real Estate~~ and Consumer TDRs occurring during ~~2019 and 2018~~2020 were due to the reduction in the interest rate or extension of the term. ~~Commercial TDRs during 2019 and 2018 were both a reduction of the interest rate or change in terms.~~

~~When the Company modifies a loan~~An allowance for impaired commercial and consumer loans that have been modified in a ~~troubled debt restructuring, management measures for impairment, if any,~~TDR is measured based on the present value of the expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan an impairment charge would be ~~recognized.~~recorded.

The Company began offering loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act, along with a joint agency statement issued by banking regulatory agencies, provides that modifications made in response to COVID-19 do not need to be accounted for as a TDR. The Company evaluated the modification programs provided to its borrowers and has concluded the modifications were generally made in accordance with the CARES Act guidance to borrowers who were in good standing prior to the COVID-19 pandemic and are not required to be designated as TDRs. See Note 3 Recent Accounting Pronouncements for more information.

The following tables illustrate the recorded investment and number of modifications designated as TDRs, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring:

		Three Months Ended September 30, 2020												Nine Months Ended September 30, 2020
(Dollars in thousands)		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Consumer Loans:
Auto			0			$	0			$	0				1			$	44			$	44
Total Consumer Loans			0			$	0			$	0				1			$	44			$	44
Residential			10			$	659			$	715				24			$	1,619			$	1,745
Total Troubled Debt Restructurings			10			$	659			$	715				25			$	1,663			$	1,789

The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period:

		Three Months Ended September 30, 2020								Nine Months Ended September 30, 2020
(Dollars in thousands)		Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
Commercial Loans:
C&I			0			$	0				1			$	387
CRE			0				0				1				168
Total Commercial Loans			0			$	0				2			$	555
Residential			9			$	299				45			$	2,280
Total Troubled Debt Restructurings			9			$	299				47			$	2,835

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Table of Contents

Allowance for Loan Losses

Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

The following table illustrates the changes in the allowance for loan losses by our portfolio segments:

(In thousands)		Commercial Loans				Consumer Loans				Residential Real Estate				Total
Balance as of June 30, 2019		$	33,152			$	36,534			$	2,479			$	72,165
Charge-offs			(865	)			(6,976	)			(174	)			(8,015	)
Recoveries			132				1,746				13				1,891
Provision			1,021				5,031				272				6,324
Ending Balance as of September 30, 2019		$	33,440			$	36,335			$	2,590			$	72,365

(In thousands)		Commercial Loans				Consumer Loans				Residential Real Estate				Total
Balance as of December 31, 2018		$	32,759			$	37,178			$	2,568			$	72,505
Charge-offs			(2,783	)			(21,336	)			(782	)			(24,901	)
Recoveries			344				4,887				122				5,353
Provision			3,120				15,606				682				19,408
Ending Balance as of September 30, 2019		$	33,440			$	36,335			$	2,590			$	72,365

The following table illustrates the allowance for loan losses and the recorded investment by portfolio segments:

(In thousands)		Commercial Loans				Consumer Loans				Residential Real Estate				Total
As of December 31, 2019
Allowance for loan losses		$	34,525			$	35,647			$	2,793			$	72,965
Allowance for loans individually evaluated for impairment			0				0				0				0
Allowance for loans collectively evaluated for impairment		$	34,525			$	35,647			$	2,793			$	72,965
Ending balance of loans		$	3,444,266			$	2,246,676			$	1,445,156			$	7,136,098
Ending balance of originated loans individually evaluated for impairment			3,488				7,044				7,721				18,253
Ending balance of acquired loans collectively evaluated for impairment			115,266				23,733				125,879				264,878
Ending balance of originated loans collectively evaluated for impairment		$	3,325,512			$	2,215,899			$	1,311,556			$	6,852,967

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Table of Contents

The following tables set forth information with regard to past due and nonperforming loans by loan class:

(In thousands)		31-60 Days Past Due Accruing				61-90 Days Past Due Accruing				Greater Than 90 Days Past Due Accruing				Total Past Due Accruing				Nonaccrual				Current				Recorded Total Loans
As of December 31, 2019
Originated
Commercial Loans:
C&I		$	1,227			$	0			$	0			$	1,227			$	1,177			$	838,502			$	840,906
CRE			3,576				0				0				3,576				4,847				1,941,143				1,949,566
Business Banking			794				162				0				956				7,035				530,537				538,528
Total Commercial Loans		$	5,597			$	162			$	0			$	5,759			$	13,059			$	3,310,182			$	3,329,000
Consumer Loans:
Indirect Auto		$	11,860			$	2,108			$	1,005			$	14,973			$	2,175			$	1,176,487			$	1,193,635
Specialty Lending			3,153				2,087				1,307				6,547				0				535,516				542,063
Direct			2,564				564				478				3,606				2,475				481,164				487,245
Total Consumer Loans		$	17,577			$	4,759			$	2,790			$	25,126			$	4,650			$	2,193,167			$	2,222,943
Residential Real Estate		$	1,179			$	190			$	663			$	2,032			$	5,872			$	1,311,373			$	1,319,277
Total Originated Loans		$	24,353			$	5,111			$	3,453			$	32,917			$	23,581			$	6,814,722			$	6,871,220

Acquired
Commercial Loans:
C&I		$	149			$	0			$	0			$	149			$	0			$	19,215			$	19,364
CRE			0				0				0				0				0				60,937				60,937
Business Banking			397				287				0				684				382				33,899				34,965
Total Commercial Loans		$	546			$	287			$	0			$	833			$	382			$	114,051			$	115,266
Consumer Loans:
Direct		$	136			$	58			$	0			$	194			$	105			$	23,434			$	23,733
Total Consumer Loans		$	136			$	58			$	0			$	194			$	105			$	23,434			$	23,733
Residential Real Estate		$	575			$	20			$	264			$	859			$	1,106			$	123,914			$	125,879
Total Acquired Loans		$	1,257			$	365			$	264			$	1,886			$	1,593			$	261,399			$	264,878

Total Loans		$	25,610			$	5,476			$	3,717			$	34,803			$	25,174			$	7,076,121			$	7,136,098

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Table of Contents

The following table provides information on impaired loans specifically evaluated for impairment:

		December 31, 2019
(In thousands)		Recorded Investment Balance (Book)				Unpaid Principal Balance (Legal)				Related Allowance
Originated
With no related allowance recorded:
Commercial Loans:
C&I		$	76			$	302			$
CRE			2,410				2,437
Business Banking			1,002				1,443
Total Commercial Loans		$	3,488			$	4,182
Consumer Loans:
Indirect Auto		$	154			$	242
Direct			6,862				8,335
Specialty Lending			28				28
Total Consumer Loans		$	7,044			$	8,605
Residential Real Estate		$	7,721			$	9,754
Total		$	18,253			$	22,541

Total Loans		$	18,253			$	22,541			$	0

The following table summarizes the average recorded investments on loans specifically evaluated for impairment and the interest income recognized:

		Three Months Ended								Nine Months Ended
		September 30, 2019								September 30, 2019
(In thousands)		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
Originated
Commercial Loans:
C&I		$	115			$	0			$	291			$	1
CRE			2,554				30				3,577				91
Business Banking			1,002				7				1,111				18
Total Commercial Loans		$	3,671			$	37			$	4,979			$	110
Consumer Loans:
Indirect Auto		$	213			$	3			$	201			$	9
Direct			7,293				95				7,518				291
Total Consumer Loans		$	7,506			$	98			$	7,719			$	300
Residential Real Estate		$	7,629			$	93			$	7,428			$	252
Total Originated		$	18,806			$	228			$	20,126			$	662

Total Loans		$	18,806			$	228			$	20,126			$	662

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The following tables illustrate the Company’s credit quality by loan class:

(In thousands)		As of December 31, 2019
Originated
Commercial Credit Exposure By Internally Assigned Grade:		C&I				CRE				Total
Pass		$	782,763			$	1,868,678			$	2,651,441
Special Mention			28,380				30,519				58,899
Substandard			29,257				50,369				79,626
Doubtful			506				0				506
Total		$	840,906			$	1,949,566			$	2,790,472

Business Banking Credit Exposure By Internally Assigned Grade:		Business Banking				Total
Non-classified		$	524,725			$	524,725
Classified			13,803				13,803
Total		$	538,528			$	538,528

Consumer Credit Exposure By Payment Activity:		Indirect Auto				Specialty Lending				Direct				Total
Performing		$	1,190,455			$	540,756			$	484,292			$	2,215,503
Nonperforming			3,180				1,307				2,953				7,440
Total		$	1,193,635			$	542,063			$	487,245			$	2,222,943

Residential Real Estate Credit Exposure By Payment Activity:		Residential Real Estate				Total
Performing		$	1,312,742			$	1,312,742
Nonperforming			6,535				6,535
Total		$	1,319,277			$	1,319,277

Acquired
Commercial Credit Exposure
By Internally Assigned Grade:		C&I				CRE				Total
Pass		$	17,801			$	60,545			$	78,346
Special Mention			1,269				0				1,269
Substandard			294				392				686
Total		$	19,364			$	60,937			$	80,301

Business Banking Credit Exposure By Internally Assigned Grade:		Business Banking				Total
Non-classified		$	32,030			$	32,030
Classified			2,935				2,935
Total		$	34,965			$	34,965

Consumer Credit Exposure
By Payment Activity:		Direct				Total
Performing		$	23,628			$	23,628
Nonperforming			105				105
Total		$	23,733			$	23,733

Residential Real Estate Credit Exposure By Payment Activity:		Residential Real Estate				Total
Performing		$	124,509			$	124,509
Nonperforming			1,370				1,370
Total		$	125,879			$	125,879

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The following table illustrates the recorded investment and number of modifications for modified loans, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring:

		Three Months Ended September 30, 2019												Three Months Ended September 30, 2018												Three Months Ended September 30, 2019												Nine Months Ended September 30, 2019
(Dollars in thousands)		Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Commercial Loans:
C&I																											0			$	0			$	0				1			$	65			$	65
Business Banking																											0				0				0				2				388				388
Total Commercial Loans																											0			$	0			$	0				3			$	453			$	453
Consumer Loans:
Dealer Finance			-			$	-			$	-				8			$	90			$	89
Indirect Auto																											0			$	0			$	0				9			$	134			$	134
Direct			1				30				37				-				-				-				1				30				37				9				418				434
Total Consumer Loans			1			$	30			$	37				8			$	90			$	89				1			$	30			$	37				18			$	552			$	568
Residential Real Estate			2			$	186			$	203				-			$	-			$	-				2			$	186			$	203				10			$	942			$	990
Total Troubled Debt Restructurings			3			$	216			$	240				8			$	90			$	89				3			$	216			$	240				31			$	1,947			$	2,011

Nine Months Ended
September 30, 2019

Nine Months Ended
September 30, 2018

(Dollars in thousands)
Number of
Contracts

Pre-
Modification
Outstanding
Recorded
Investment

Post-
Modification
Outstanding
Recorded
Investment

Number of
Contracts

Pre-
Modification
Outstanding
Recorded
Investment

Post-
Modification
Outstanding
Recorded
Investment

Commercial Loans:
C&I 1 $ 65 $ 65 - $ - $ -
Business Banking 2 388 388 3 369 371
Total Commercial Loans 3 $ 453 $ 453 3 $ 369 $ 371
Consumer Loans:
Dealer Finance 9 $ 134 $ 134 15 $ 185 $ 183
Direct 9 418 434 2 41 41
Total Consumer Loans 18 $ 552 $ 568 17 $ 226 $ 224
Residential Real Estate 10 $ 942 $ 990 5 $ 323 $ 323
Total Troubled Debt Restructurings 31 $ 1,947 $ 2,011 25 $ 918 $ 918

24

~~Table of Contents~~

The following ~~tables illustrate~~table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period:

Three Months Ended
September 30, 2019

Three Months Ended
September 30, 2018

(Dollars in thousands)
Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Consumer Loans:
Dealer Finance 1 $ 10 - $ -
Direct 9 332 17 816
Total Consumer Loans 10 $ 342 17 $ 816
Residential Real Estate 9 $ 572 5 $ 398
Total Troubled Debt Restructurings 19 $ 914 22 $ 1,214

		Three Months Ended September 30, 2019								Nine Months Ended September 30, 2019
(Dollars in thousands)		Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
Consumer Loans:
Indirect Auto			1			$	10				2			$	17
Direct			9				332				24				1,109
Total Consumer Loans			10			$	342				26			$	1,126
Residential Real Estate			9			$	572				19			$	1,087
Total Troubled Debt Restructurings			19			$	914				45			$	2,213

Nine Months Ended
September 30, 2019

Nine Months Ended
September 30, 2018

(Dollars in thousands)
Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Commercial Loans:
Business Banking - $ - 2 $ 258
Total Commercial Loans - $ - 2 $ 258
Consumer Loans:
Dealer Finance 2 $ 17 - $ -
Direct 24 1,109 35 1,740
Total Consumer Loans 26 $ 1,126 35 $ 1,740
Residential Real Estate 19 $ 1,087 17 $ 1,239
Total Troubled Debt Restructurings 45 $ 2,213 54 $ 3,237

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~~5. Leases~~

6.	Subordinated Debt

~~Operating leases~~ On June 23, 2020, the Company issued $100.0 million aggregate principal amount of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualifies as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in ~~which we~~arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated notes issuance costs of $2.2 million are the lessee are recorded as operating lease right of use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the unaudited interim consolidated balance sheets. The Company does not have any significant finance leases in which we are the lessee as of September 30, 2019 and December 31, 2018.

Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognizedbeing amortized on a ~~straight-line~~straight line basis into interest expense over ~~the lease term, and is recorded in occupancy expense in the unaudited interim consolidated statements of income.~~

We have made a policy election to exclude the recognition requirements to all classes of leases with original terms of 12 months or less. Instead, the short-term lease payments are recognized in profit or loss on a straight-line basis over the lease term.five years.

The Company ~~has lease agreements~~may redeem the subordinated notes (1) in whole or in part beginning with ~~lease~~the interest payment date of July 1, 2025, and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes and insurance areon any interest payment date thereafter or (2) in whole but not ~~included~~in part upon the occurrence of a “Tax Event”, a “Tier 2 Capital Event” or in the ~~measurement~~event the Company is required to register as an investment company pursuant to the Investment Company Act of 1940, as amended. The redemption price for any redemption is 100% of the ~~lease liability since they are generally able~~principal amount of the subordinated notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any redemption of the subordinated notes will be ~~segregated.~~

~~Our leases relate primarily~~subject to ~~office space and bank branches, and some contain options~~the receipt of the approval of the Board of Governors of the Federal Reserve System to ~~renew~~ the lease. These options to renew are generally not considered reasonably certain to exercise, and are therefore not included in the lease term until such time that the option to renew is reasonably certain. As of September 30, 2019, operating lease ROU assets and liabilities were $34.3 million and $36.8 million, respectively.

~~The table below summarizes our net lease cost:~~

(In thousands)
Three Months Ended
September 30, 2019

Nine Months Ended
September 30, 2019

Operating lease cost $ 1,806 $ 5,396
Variable lease cost 524 1,782
Short-term lease cost 86 263
Sublease income (119 ) (332 )
Total operating lease cost $ 2,297 $ 7,109

~~The table below show future minimum rental commitments related to non-cancelable operating leases for the next five years and thereafter as of September 30, 2019.~~

(In thousands)
2019 $ 1,807
2020 7,179
2021 6,429
2022 5,590
2023 4,751
Thereafter 15,892
Total lease payments $ 41,648
Less: interest (4,878 )
Present value of lease liabilities $ 36,770

The following table shows the weighted average remaining operating lease term, the weighted average discount rate and supplemental information on the unaudited interim consolidated statements of cash flows for operating leases:

(In thousands except for percent and period data)
September 30, 2019
Weighted average remaining lease term, in years

7.71

Weighted average discount rate

3.03
%
Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$
4,652

ROU assets obtained in exchange for lease liabilities

38,958

~~As of September 30, 2019 there are no new significant leases that have not yet commenced.~~extent then required under applicable laws or regulations, including capital regulations.

The following table ~~shows~~summarizes the ~~future minimum rental payments related to non-cancelable operating leases with original terms of one year or more as of December 31, 2018.~~Company’s subordinated debt:

(In thousands)
2019 $ 6,890
2020 6,467
2021 5,613
2022 4,773
2023 3,972
Thereafter 13,869
Total $ 41,584

(Dollars in thousands)		September 30, 2020
Subordinated notes issued June 2020 – fixed interest rate of 5.00% through June 2025 and a variable interest rate equivalent to three-month SOFR plus 4.85% thereafter, maturing July 1, 2030		$	100,000
Unamortized debt issuance costs			(2,057	)
Total subordinated debt, net		$	97,943

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~~6. Defined Benefit Post-Retirement Plans~~

7.	Defined Benefit Post-Retirement Plans

The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at September 30, ~~2019.~~2020. Benefits paid from the plan are based on age, years of service, compensation and social security benefits and are determined in accordance with defined formulas. The Company’s policy is to fund the Plan in accordance with Employee Retirement Income Security Act of 1974 standards. Assets of the Plan are invested in publicly traded stocks and mutual funds.

In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives. The Company also assumed supplemental retirement plans for former executives of Alliance Financial Corporation (“Alliance”) when the Company acquired Alliance.

These supplemental employee retirement plans and the Plan are collectively referred to herein as “Pension ~~Benefits.”~~Benefits”.

In addition, the Company provides certain health care benefits for retired employees. Benefits were accrued over the employees’ active service period. Only employees that were employed by the Company on or before January 1, 2000 are eligible to receive post-retirement health care benefits. In addition, the Company assumed post-retirement medical life insurance benefits for certain Alliance employees, retirees and their spouses, if applicable, in the Alliance acquisition. These post-retirement benefits are referred to herein as “Other ~~Benefits.”~~Benefits”.

The Company made 0 voluntary contributions to the pension and other benefits plans during the three and nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.

The components of expense for Pension Benefits and Other Benefits are set forth below:

		Pension Benefits								Other Benefits								Pension Benefits								Other Benefits
		Three Months Ended September 30,								Three Months Ended September 30,								Three Months Ended September 30,								Three Months Ended September 30,
(In thousands)		2019				2018				2019				2018				2020				2019				2020				2019
Components of net periodic cost (benefit):
Components of net periodic (benefit) cost:
Service cost		$	431			$	415			$	1			$	3			$	446			$	431			$	2			$	1
Interest cost			986				912				67				82				809				986				55				67
Expected return on plan assets			(1,869	)			(2,119	)			-				-				(2,105	)			(1,869	)			0				0
Net amortization			658				242				14				44				368				658				13				14
Total net periodic cost (benefit)		$	206			$	(550	)		$	82			$	129
Total net periodic (benefit) cost																		$	(482	)		$	206			$	70			$	82

		Pension Benefits								Other Benefits								Pension Benefits								Other Benefits
		Nine Months Ended September 30,								Nine Months Ended September 30,								Nine Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2019				2018				2019				2018				2020				2019				2020				2019
Components of net periodic cost (benefit):
Components of net periodic (benefit) cost:
Service cost		$	1,301			$	1,256			$	5			$	8			$	1,338			$	1,301			$	6			$	5
Interest cost			2,948				2,752				229				245				2,427				2,948				165				229
Expected return on plan assets			(5,615	)			(6,364	)			-				-				(6,315	)			(5,615	)			0				0
Net amortization			1,936				745				49				131				1,104				1,936				39				49
Total net periodic cost (benefit)		$	570			$	(1,611	)		$	283			$	384
Total net periodic (benefit) cost																		$	(1,446	)		$	570			$	210			$	283

The service cost component of the net periodic (benefit) cost ~~(benefit)~~ is included in Salaries and Employee Benefits and the interest cost, expected return on plan assets and net amortization components are included in Other Noninterest Expense on the unaudited interim consolidated statements of income.

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~~7. Earnings Per Share~~

8.	Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company’s dilutive stock options and restricted stock units).

The following is a reconciliation of basic and diluted EPS for the periods presented in the unaudited interim consolidated statements of income:

		Three Months Ended September 30,								Three Months Ended September 30,
(In thousands, except per share data)		2019				2018				2020				2019
Basic EPS:
Weighted average common shares outstanding			43,825				43,714				43,643				43,825
Net income available to common stockholders		$	32,379			$	29,807			$	35,113			$	32,379
Basic EPS		$	0.74			$	0.68			$	0.80			$	0.74

Diluted EPS:
Weighted average common shares outstanding			43,825				43,714				43,643				43,825
Dilutive effect of common stock options and restricted stock			313				337				299				313
Weighted average common shares and common share equivalents			44,138				44,051				43,942				44,138
Net income available to common stockholders		$	32,379			$	29,807			$	35,113			$	32,379
Diluted EPS		$	0.73			$	0.68			$	0.80			$	0.73

		Nine Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except per share data)		2019				2018				2020				2019
Basic EPS:
Weighted average common shares outstanding			43,806				43,692				43,704				43,806
Net income available to common stockholders		$	92,061			$	83,914			$	70,194			$	92,061
Basic EPS		$	2.10			$	1.92			$	1.61			$	2.10

Diluted EPS:
Weighted average common shares outstanding			43,806				43,692				43,704				43,806
Dilutive effect of common stock options and restricted stock			302				317				293				302
Weighted average common shares and common share equivalents			44,108				44,009				43,997				44,108
Net income available to common stockholders		$	92,061			$	83,914			$	70,194			$	92,061
Diluted EPS		$	2.09			$	1.91			$	1.60			$	2.09

There were ~~1,500~~3,250 stock options for the ~~quarters~~three and nine months ended September30, ~~2019 and~~ ~~September~~ ~~30, 2018~~2020, that were not considered in the calculation of diluted EPS since the stock options’ exercise price was greater than the average market price during these periods.

There were 1,500 stock options for the three and nine months ended September 30, 2019, ~~and~~ ~~September~~ ~~30, 2018,~~ that were not considered in the calculation of diluted EPS since the stock options’ exercise price was greater than the average market price during these periods.

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~~8. Reclassification Adjustments Out of Other Comprehensive Income (Loss)~~

9.	Reclassification Adjustments Out of Other Comprehensive Income (Loss)

The following table summarizes the reclassification adjustments out of ~~accumulated other comprehensive income (loss) (“AOCI”):~~AOCI:

Detail About AOCI Components		Amount Reclassified From AOCI							Affected Line Item in the Consolidated Statement of Comprehensive Income (Loss)		Amount Reclassified From AOCI							Affected Line Item in the Consolidated Statement of Comprehensive Income (Loss)
		Three Months Ended									Three Months Ended
(In thousands)		September 30, 2019				September 30, 2018					September 30, 2020				September 30, 2019
AFS securities:
Gains on AFS securities		$	(20	)		$	-		Net securities gains
(Gains) on AFS securities											$	0			$	(20	)	Net securities (gains)
Amortization of unrealized gains related to securities transfer			190				168		Interest income		$	157			$	190		Interest income
Tax effect		$	(42	)		$	(42	)	Income tax (benefit)		$	(39	)		$	(42	)	Income tax (benefit)
Net of tax		$	128			$	126				$	118			$	128

Cash flow hedges:
Net unrealized (gains) on cash flow hedges reclassified to interest expense		$	(395	)		$	(638	)	Interest expense
Net unrealized losses (gains) on cash flow hedges reclassified to interest expense											$	101			$	(395	)	Interest expense
Tax effect		$	98			$	159		Income tax expense		$	(25	)		$	98		Income tax (benefit) expense
Net of tax		$	(297	)		$	(479	)			$	76			$	(297	)

Pension and other benefits:
Amortization of net losses		$	649			$	263		Other noninterest expense		$	359			$	649		Other noninterest expense
Amortization of prior service costs			23				23		Other noninterest expense			22				23		Other noninterest expense
Tax effect		$	(168	)		$	(71	)	Income tax (benefit)		$	(95	)		$	(168	)	Income tax (benefit)
Net of tax		$	504			$	215				$	286			$	504

Total reclassifications, net of tax		$	335			$	(138	)			$	480			$	335

Detail About AOCI Components		Amount Reclassified From AOCI							Affected Line item in the Consolidated Statement of Comprehensive Income (Loss)		Amount Reclassified From AOCI							Affected Line item in the Consolidated Statement of Comprehensive Income (Loss)
		Nine Months Ended									Nine Months Ended
(In thousands)		September 30, 2019				September 30, 2018					September 30, 2020				September 30, 2019
AFS securities:
Losses on AFS securities		$	79			$	-		Net securities gains
(Gains) losses on AFS securities											$	(3	)		$	79		Net securities (gains) losses
Amortization of unrealized gains related to securities transfer			556				533		Interest income			495				556		Interest income
Tax effect		$	(159	)		$	(133	)	Income tax (benefit)		$	(123	)		$	(159	)	Income tax (benefit)
Net of tax		$	476			$	400				$	369			$	476

Cash flow hedges:
Net unrealized (gains) on cash flow hedges reclassified to interest expense		$	(1,932	)		$	(1,537	)	Interest expense
Net unrealized losses (gains) on cash flow hedges reclassified to interest expense											$	192			$	(1,932	)	Interest expense
Tax effect		$	483			$	384		Income tax expense		$	(48	)		$	483		Income tax (benefit) expense
Net of tax		$	(1,449	)		$	(1,153	)			$	144			$	(1,449	)

Pension and other benefits:
Amortization of net losses		$	1,916			$	809		Other noninterest expense		$	1,075			$	1,916		Other noninterest expense
Amortization of prior service costs			69				67		Other noninterest expense			68				69		Other noninterest expense
Tax effect		$	(496	)		$	(219	)	Income tax (benefit)		$	(286	)		$	(496	)	Income tax (benefit)
Net of tax		$	1,489			$	657				$	857			$	1,489

Total reclassifications, net of tax		$	516			$	(96	)			$	1,370			$	516

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~~9. Derivative Instruments and Hedging Activities~~

10.	Derivative Instruments and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

Derivatives Not Designated as Hedging Instruments

The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the consolidated balance sheet at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of income.

As of September 30, ~~2019~~2020, the Company had 1016 risk participation agreements with financial institution counterparties for interest rate swaps related to participated loans. The fair values included in other assets and other liabilities on the unaudited interim consolidated balance sheet applicable to these agreements ~~amount~~amounted to ~~$81~~$350 thousand and ~~$116~~$152 thousand, respectively as of September 30, ~~2019.~~2020. As of December 31, ~~2018~~2019, the Company had 915 risk participation agreements with ~~the~~financial institution counterparties for interest rate swaps related to participated loans. The fair values included in other assets and other liabilities on the unaudited interim consolidated balance sheet ~~of $36~~applicable to these agreements amounted to $112 thousand and ~~$17~~$82 thousand, respectively. Risk participation agreements provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions.

Derivatives Designated as Hedging Instruments

The Company has entered into interest rate swaps to modify the interest rate characteristics of certain short-term Federal Home Loan Bank (“FHLB”) advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges.

The following table depicts the fair value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements:

		September 30,				December 31,				September 30,				December 31,
(In thousands)		2019				2018				2020				2019
Derivatives Not Designated as Hedging Instruments:
Fair value adjustment included in other assets and other liabilities
Interest rate derivatives		$	52,925			$	17,572			$	122,546			$	41,650
Notional amount:
Interest rate derivatives			793,805				653,369				2,265,651				963,209
Risk participation agreements			72,496				70,785				109,311				97,614
Derivatives Designated as Hedging Instruments:
Fair value adjustment included in other assets
Interest rate derivatives			142				2,428				0				4
Fair value adjustment included in other liabilities
Interest rate derivatives			61				-				136				45
Notional amount:
Interest rate derivatives			100,000				225,000				25,000				50,000

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For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the ~~hedge~~hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s short-term rate borrowings. During the next twelve months, the Company estimates that an additional ~~$0.1 million~~$124 thousand will be reclassified from AOCI as a reduction to interest expense.

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The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of income:

		Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2019				2018				2019				2018				2020				2019				2020				2019
Derivatives Designated as Hedging Instruments:
Interest rate derivatives - included component
Amount of (loss) or gain recognized in OCI		$	9			$	175			$	(475	)		$	1,647
Amount of (gain) reclassified from AOCI into interest expense			(395	)			(638	)			(1,932	)			(1,537	)
Amount of gain (loss) recognized in other comprehensive income																		$	0			$	9			$	(274	)		$	(475	)
Amount of loss (gain) reclassified from AOCI into interest expense																			101				(395	)			192				(1,932	)

The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship:

		Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2019				2018				2019				2018				2020				2019				2020				2019
Derivatives Not Designated as Hedging Instruments:
(Decrease) increase in other income		$	(10	)		$	(13	)		$	96			$	110			$	(20	)		$	(10	)		$	127			$	96

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~~10. Fair Value Measurements and Fair Value of Financial Instruments~~

11.	Fair Value Measurements and Fair Value of Financial Instruments

GAAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted prices for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the methodologies used in pricing the securities by its ~~third party~~third-party providers.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or ~~0n-transferability~~non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flows.

For the three and nine months ended September 30, 2019 the Company made 0 transfers of assets between the levels of the fair value hierarchy. For the year ended December 31, 2018, the Company made 0 transfer of assets from Level 1 to Level 2 and made a $4.0 million transfer from Level 2 to Level 1.

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The following tables set forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted for at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

(In thousands)		Level 1				Level 2				Level 3				September 30, 2019				Level 1				Level 2				Level 3				September 30, 2020
Assets:
AFS securities:
AFS securities
Federal agency		$	-			$	29,831			$	-			$	29,831			$	0			$	195,144			$	0			$	195,144
State & municipal			-				9				-				9				0				10,883				0				10,883
Mortgage-backed			-				483,510				-				483,510				0				482,319				0				482,319
Collateralized mortgage obligations			-				418,823				-				418,823				0				491,752				0				491,752
Corporate																			0				17,827				0				17,827
Total AFS securities		$	-			$	932,173			$	-			$	932,173			$	0			$	1,197,925			$	0			$	1,197,925
Equity securities			22,818				4,000				-				26,818				26,758				4,000				0				30,758
Derivatives			-				53,148				-				53,148				0				122,896				0				122,896
Total		$	22,818			$	989,321			$	-			$	1,012,139			$	26,758			$	1,324,821			$	0			$	1,351,579

Liabilities:
Derivatives		$	-			$	53,102			$	-			$	53,102			$	0			$	122,834			$	0			$	122,834
Total		$	-			$	53,102			$	-			$	53,102			$	0			$	122,834			$	0			$	122,834

(In thousands)		Level 1				Level 2				Level 3				December 31, 2018				Level 1				Level 2				Level 3				December 31, 2019
Assets:
AFS securities:
AFS securities
Federal agency		$	-			$	84,299			$	-			$	84,299			$	0			$	34,758			$	0			$	34,758
State & municipal			-				29,915				-				29,915				0				2,513				0				2,513
Mortgage-backed			-				512,295				-				512,295				0				503,626				0				503,626
Collateralized mortgage obligations			-				371,987				-				371,987				0				434,443				0				434,443
Total AFS securities		$	-			$	998,496			$	-			$	998,496			$	0			$	975,340			$	0			$	975,340
Equity securities			19,053				4,000				-				23,053				23,771				4,000				0				27,771
Derivatives			-				20,000				-				20,000				0				41,766				0				41,766
Total		$	19,053			$	1,022,496			$	-			$	1,041,549			$	23,771			$	1,021,106			$	0			$	1,044,877

Liabilities:
Derivatives		$	-			$	17,572			$	-			$	17,572			$	0			$	41,777			$	0			$	41,777
Total		$	-			$	17,572			$	-			$	17,572			$	0			$	41,777			$	0			$	41,777

GAAP requires disclosure of assets and liabilities measured and recorded at fair value on a non-recurring basis such as goodwill, loans held for sale, other real estate owned, collateral-dependent impaired loans, mortgage servicing rights and HTM securities. The ~~only~~ non-recurring fair value measurements recorded during the three and nine month periods ended September 30, ~~2019~~2020 and the year ended December 31, ~~2018~~2019 were related to impaired loans, ~~and~~ write-downs of other real estate ~~owned.~~owned and write-down of branch assets to fair value. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the ~~specific reserves~~allowance for credit losses for individually evaluated collateral dependent ~~impaired~~ loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10% to ~~35%~~50%. Based on the valuation techniques used, the fair value measurements for collateral dependent ~~impaired~~individually evaluated loans are classified as Level 3.

As of September 30, ~~2019~~ ~~the Company had~~ 0 ~~collateral dependent loans.~~ ~~As of December 31, 2018,~~ 2020 the Company had collateral dependent individually evaluated loans with a carrying value $~~0.2~~of $10.9 million, which had ~~specific reserves included in the~~an estimated allowance for ~~loan losses~~credit loss of $25 ~~thousand~~.$3.0 million. As of December 31, 2019 the Company had 0 collateral dependent loans.

During the nine months ended September 30, 2020, the Company recorded a $0.5 million write-off of branch locations due to a pending disposition of the locations. During the three and nine months ended September 30, 2019, the Company recorded a $~~1.0~~$1.0 million write-down of a branch location to fair value of $~~0.2~~$0.2 million due to a pending disposition of the location.

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The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, AFS securities, equity securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and derivatives.

						September 30, 2019								December 31, 2018									September 30, 2020						December 31, 2019
(In thousands)		Fair Value Hierarchy				Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value			Fair Value Hierarchy		Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
Financial assets:
HTM securities			2			$	678,435			$	691,189			$	783,599			$	778,675		2		$	663,088		$	684,862		$	630,074		$	641,262
Net loans			3				6,959,430				6,917,768				6,822,147				6,754,460		3			7,447,966			7,535,955			7,074,864			6,999,690
Financial liabilities:
Time deposits			2			$	860,291			$	857,455			$	930,678			$	920,534		2		$	659,971		$	666,646		$	861,193		$	858,085
Long-term debt			2				84,239				84,609				73,724				73,927		2			64,126			65,086			64,211			64,373
Subordinated debt																					1			100,000			102,781			0			0
Junior subordinated debt			2				101,196				104,311				101,196				100,114		2			101,196			104,447			101,196			105,694

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial ~~trust and investment management~~wealth operation that contributes net fee income annually. The ~~trust and investment~~wealth management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value.

HTM Securities

The fair value of the Company’s HTM securities is primarily measured using information from a ~~third party~~third-party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Net Loans

The fair value of the Company’s loans was estimated in accordance with the exit price notion as defined by Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 820, ~~Fair Value Measurement~~ ~~(“ASC 820”).~~ Net loans include portfolio loans and loans held for sale. Loans were first segregated by type and then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments which also includes credit risk, illiquidity risk and other market factors to calculate the exit price fair value in accordance with ASC 820.

Time Deposits

The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Long-Term Debt

The fair value of long-term debt was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments.

Subordinated Debt

The fair value of subordinated debt has been measured using the observable market price as of the period reported.

Junior Subordinated Debt

The fair value of junior subordinated debt has been estimated using a discounted cash flow analysis.

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~~11. Commitments and Contingencies~~

12.	Commitments and Contingencies

The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, standby letters of credit and certain agricultural real estate loans sold to investors with recourse, with the sold portion having a government guarantee that is assignable back to the Company upon repurchase of the loan in the event of default. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, unused lines of credit, standby letters of credit and loans sold with recourse is represented by the contractual amount of those investments. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s credit worthiness. Commitments to extend credit and unused lines of credit totaled ~~$2.0~~$2.1 billion at September 30, ~~2019~~2020 and ~~$1.7~~$1.9 billion at December 31, ~~2018.~~ 2019.

Since many loan commitments, standby letters of credit and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.

The Company guarantees the obligations or performance of customers by issuing standby letters of credit to ~~third parties.~~third-parties. These standby letters of credit are frequently issued in support of ~~third party~~third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. Standby letters of credit totaled ~~$30.7~~$52.3 million at September 30, ~~2019~~2020 and ~~$41.2~~$34.5 million at December 31, ~~2018.~~2019. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the fair value of the Company’s standby letters of credit was not significant.

~~12.~~

~~Recent Accounting Pronouncements~~

~~Recently Adopted Accounting Standards~~

~~In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02,~~ ~~Leases (Topic 842)~~. ASU 2016-02 requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a right-of-use asset and lease liability. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option or not exercise an option to terminate the lease. In January 2018, the FASB issued ASU 2018-01, ~~Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842~~. ASU 2018-01 was issued to address concerns about the cost and complexity of complying with the transition provisions of ASU 2016-02. Both ASU 2016-02 and ASU 2018-01 are effective for the Company on January 1, 2019. Lessees and lessors are required to apply the provisions of ASU 2016-02 at the beginning of the earliest period presented using a modified retrospective approach. At its November 29, 2017 meeting, the FASB proposed allowing entities the option of applying the provisions of ASU 2016-02 at the effective date without adjusting the comparative periods presented. In July 2018, the FASB issued ASU 2018-10, ~~Codification Improvements to Topic 842, Leases. ASU 2018-10 was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Also in July 2018, the FASB issued ASU 2018-11,~~ ~~Targeted Improvements~~, which allows for an optional transition method in which the provisions of ASC Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements.

The Company adopted ASU 2016-02 as of January 1, 2019 and elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the carryforward of the historical lease classification, the practical expedient related to land easements and the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet and recognize those lease payments in the consolidated statements of income on a straight-line basis over the lease term. The adoption of ASU 2016-02 and related transition guidance resulted in the recognition of additional net lease assets and liabilities of approximately $34 million and $37 million, respectively, as of January 1, 2019. The standard did not materially affect our consolidated net earnings or regulatory capital ratios. Refer to Note 5, Leases for more information.

~~In March 2017, the FASB issued ASU 2017-08,~~ ~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20)~~. ASU 2017-08 requires amortization of premiums to the earliest call date on debt securities with call features that are explicit, on contingent and callable at fixed prices on present dates. The ASU does not impact securities held at a discount; the discount continues to be amortized to the contractual maturity. The guidance is required to be applied with a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. ASU 2017-08 is effective for the Company on January 1, 2019. The adoption did not have an impact on the consolidated financial statements and related disclosures and no cumulative effect adjustment was required upon adoption.

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~~In October 2018, the FASB issued ASU 2018-16,~~ ~~Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes~~. The ASU 2018-16 amends existing guidance permits the use of the OIS rate based on SOFR as a United States benchmark interest rate for hedge accounting purposes under Topic 815 in addition to other allowable rates stated in the guidance. ASU 2018-16 is effective for the Company on January 1, 2019 and should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The adoption did not have an impact on the Company’s consolidated financial statements.

~~Accounting Standards Issued Not Yet Adopted~~

~~In August 2018, the FASB issued ASU 2018-13,~~ ~~Fair value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair value Measurement~~. The provisions of ASU 2018-13 modify the disclosure requirements on fair value measurements in ASC 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective January 1, 2020 but may be early adopted in any interim period. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures and does not expect the impact to be material.

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ (“CECL”). ASU 2016-13 introduces new guidance that make substantive changes to the accounting for credit losses. ASU 2016-13 introduces the CECL model, which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions and reasonable and supportable forecasts and is generally expected to result in earlier recognition of credit losses. ASU 2016-13 also modifies certain provisions of the current OTTI model for AFS debt securities. Credit losses on AFS debt securities will be limited to the difference between the security’s amortized cost basis and its fair value and will be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. ASU 2016-13 also provides for a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their origination. ASU 2016-13 requires expanded disclosures including, but not limited to, (i) information about the methods and assumptions used to estimate expected credit losses, including changes in the factors that influenced management’s estimate and the reasons for those changes, (ii) for financing receivables and net investment in leases measured at amortized cost, further disaggregation of information about the credit quality of those assets and (iii) a rollforward of the allowance for credit losses for HTM and AFS securities. ASU 2016-13 is effective for the Company on January 1, 2020. Early adoption is permitted for all organizations for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018; however, the Company does not intend to early adopt this ASU. Management is evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures, and processes and controls; however, adoption is likely to lead to significant changes in accounting policies related to, and the methods employed in estimating, the allowance for loan and lease losses. It is possible that the impact will be material to the Company’s consolidated financial statements. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. To date, the Company has completed a gap analysis, adopted a detailed implementation plan, established a formal governance structure for the project, selected and is in the process of implementing a software solution to serve as its CECL platform, hired talent to support the CECL model, documented accounting policy elections, drafted policies to comply with the new standard, selected credit loss methods for key portfolio segments and performed parallel calculations of certain elements of the model to analyze against incurred loss results. The Company has selected a discounted probability of default, loss given default econometric model for the majority of its portfolio segments. In the third quarter of 2019, the Company began a third party model validation process and continues to document process and controls, refine the qualitative framework and perform testing of significant model assumptions including sensitivity analysis and back testing. ~~At this time, the Company has performed estimations of the day 1 impact for internal use only as we continue to finalize all aspects of the CECL implementation.~~

~~In April 2019, the FASB issued ASU 2019-04,~~ ~~Codification Improvements to Topic 326, Financial Instruments-Credit Losses~~, which, among other things, clarifies that recoveries should be incorporated within the estimation of the allowance for credit losses. Expected recoveries should not exceed the aggregate amount of prior write offs and expected future write offs. The inclusion of expected recoveries in the measurement of expected credit losses may result in a negative credit allowance in certain circumstances.

~~In May 2019, the FASB issued ASU 2019-05,~~ ~~Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. The Company is considering the impact of the irrevocable election of the fair value option (election to elect fair value option for certain financial assets).~~

~~In August 2018, the FASB issued ASU 2018-14,~~ ~~Compensation – Retirement Benefits – Defined Benefit Plans - General (Subtopic 715-20)~~, provides changes to the disclosure requirements for defined benefit plans. The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are a result of the disclosure framework project that focuses on improvements to the effectiveness of disclosures in the notes to financial statements. The amendments remove and add certain disclosure requirements. The disclosure requirements being removed relating to public companies are (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, (2) the amount and timing of plan assets expected to be returned to the employer, (3) the 2001 disclosure requirement relating to Japanese Welfare Pension Insurance Law, (4) related party disclosures about the amount of future annual benefits covered by insurance, and (5) the effects of a one-percentage-point change in assumed health care cost trends on the benefit cost and obligation. The disclosure requirements being added relating to public companies are (1) the weighted-average interest crediting rates for cash balance plans, and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for the Company on January 1, 2021 and early adoption is permitted. The amendments should be applied retrospectively and the Company does not expect the guidance to have a material impact on its disclosures to the consolidated financial statements.

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract~~. ASU 2018-15 amends existing guidance and requires a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize and which costs to expense. ASU 2018-15 is effective for the Company on January 1, 2020, and early adoption is permitted. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact that the guidance will have on its consolidated financial statements.

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NBT BANCORP INC. AND SUBSIDIARIES

Item 2 - ~~MANAGEMENT'S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion and analysis is to provide a concise description of the consolidated financial condition and results of operations of NBT Bancorp Inc. ~~("NBT"~~(“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~~Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the ~~Company's~~Company’s Annual Report on Form 10‑K for the year ended December 31, ~~2018~~2019 for an understanding of the following discussion and analysis. Operating results for the three and nine month periods ending September 30, ~~2019~~2020 are not necessarily indicative of the results of the full year ending December 31, ~~2019~~2020 or any future period.

Forward-looking Statements

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. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact; (2) changes in the level of nonperforming assets and 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 Federal Reserve Board ~~("FRB"~~(“FRB”); (5) inflation, interest rate, securities market and monetary fluctuations; (6) political instability; (7) acts of war or terrorism; (8) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (9) changes in consumer spending, borrowings and savings habits; (10) changes in the financial performance and/or condition of the Company’s borrowers; (11) technological changes; (12) acquisitions 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, Economic Growth, Regulatory Relief, Consumer Protection Act of 2018, Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and regulatory pronouncements around CARES Act; (16) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) and other accounting standard setters; (17) changes in the Company’s organization, compensation and benefit plans; (18) the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; (19) greater than expected costs or difficulties related to the integration of new products and lines of business; (20) the adverse impact on the U.S. economy, including the markets in which we operate, of the novel coronavirus, which causes the Coronavirus disease 2019 (“COVID-19”), global pandemic; (21) the impact of a slowing U.S. economy and ~~(20)~~increased unemployment on the performance of our loan portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products; and (22) the Company’s success at managing the risks involved in the foregoing items.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the potential adverse effect of the current COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company, its customers and the global economy and financial markets. The extent to which the COVID-19 pandemic impacts the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its impact on the Company’s customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, and the pace of recovery when the COVID-19 pandemic subsides, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors including, but not limited to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the Securities and Exchange Commission, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future periods to differ materially from those anticipated or projected.

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Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

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Non-GAAP Measures

This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures adjust GAAP measures to exclude the effects of acquisition-related intangible amortization expense on earnings, equity and assets as well as providing a fully taxable equivalent ("FTE") yield on securities and loans. Where non-GAAP disclosures are used in this Form 10-Q, the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables. Management believes that these non-GAAP measures provide useful information that is important to an understanding of the results of the Company’s core business as well as provide information standard in the financial institution industry. Non-GAAP measures should not be considered a substitute for financial measures determined in accordance with GAAP and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company.

Critical Accounting Policies

The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for ~~loan~~credit losses, pension accounting and provision for income taxes.

The allowance for credit losses consists of the allowance for credit losses and the reserve for unfunded commitments. As a result of the Company’s January 1, 2020, adoption of Accounting Standards Updates (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) and its related amendments, our methodology for estimating the reserve for credit losses changed significantly from December 31, 2019. The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.” The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. The reserve for unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.

Management of the Company considers the accounting policy relating to the allowance for ~~loan~~credit losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses ~~inherent~~over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ~~loan portfolio and the material effect that such judgments can have on the results of operations.~~allowance for credit losses in those future periods. While management’s current evaluation of the allowance for ~~loan~~credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. ~~For example, if historical~~Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan ~~loss experience significantly worsened or if current~~portfolio, as well as the prevailing economic conditions ~~significantly deteriorated, additional provision~~and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for ~~loan~~credit losses, ~~would be required~~and therefore, greater volatility to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Company’s nonperforming loans and potential problem loans have a significant impact on the overall analysis of the adequacy of the allowance for loan losses. While management has concluded that the current evaluation of collateral values is reasonable, if collateral values were significantly lower, the Company’s allowance for loan loss policy would also require additional provision for loan losses.our reported earnings.

Management is required to make various assumptions in valuing the Company’s pension assets and liabilities. These assumptions include the expected rate of return on plan assets, the discount rate and the rate of increase in future compensation levels. Changes to these assumptions could impact earnings in future periods. The Company takes into account the plan asset mix, funding obligations and expert opinions in determining the various rates used to estimate pension expense. The Company also considers the Citigroup Pension Liability Index, market interest rates and discounted cash flows in setting the appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.

The Company is subject to examinations from various taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgments used to record tax-related assets or liabilities have been appropriate. Should tax laws change or the taxing authorities determine that management’s assumptions were inappropriate, an adjustment may be required which could have a material effect on the Company’s results of operations.

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The Company’s policies on the incurred method for the allowance for loan losses, pension accounting and provision for income taxes are disclosed in Note 1 to the consolidated financial statements presented in our ~~2018~~2019 Annual Report on Form 10-K. All accounting policies are important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements presented in our ~~2018~~2019 Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported.

~~Refer to~~ The Company’s policies on the CECL method for allowance for credit losses is presented in Note 122 to the unaudited interim consolidated ~~financial~~finance statements in this Quarterly Report on Form 10- Q. Refer to Note 3 to the unaudited interim consolidated finance statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards.

Overview

Significant factors management reviews to evaluate the Company’s operating results and financial condition include, but are not limited to: net income and earnings per share, return on ~~average~~ assets and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology advancements, market share and peer comparisons. The Company’s results in the first nine months of 2020 have been impacted by the COVID-19 pandemic and the CECL accounting methodology, including the estimated impact of the COVID-19 pandemic on expected credit losses. The following information should be considered in connection with the ~~Company's~~Company’s results for the three and nine months ended September 30, ~~2019:~~2020:

Net income up $10.4 million from the second quarter of 2020 and up $2.7 million from the third quarter of 2019.

Diluted earnings per share up $0.24 from the second quarter of 2020 and up $0.07 from the third quarter of 2019.

Provision expense for the three months ended September 30, 2020 was $3.3 million, with an increase from the second quarter of 2020 in allowance to total loans due to $3.0 million in specific reserves for two nonperforming commercial relationships and a change in loan mix while net charge-offs of $2.3 million were down compared with the prior quarter.

The net interest margin on a fully table equivalent (“FTE”) basis for the third quarter of 2020 was 3.17%, down 21 basis points (“bps”) from the second quarter of 2020 and down 40 bps from the third quarter of 2019.

·	~~Announced a 3.8% increase in the quarterly dividend~~

·	~~Third quarter diluted earnings per share up 5.8% from the prior quarter and up 7.4% from prior year~~

·	~~Third quarter net income up 6.0% from the prior quarter and up 8.6% from prior year~~

·	~~FTE net interest margin of 3.61% for the nine months ended September 30, 2019, up 4 basis points ("bps") from 2018~~

·•

~~Tangible equity ratio of 8.65%, up 106 bps from~~Pre-provision net revenue (“PPNR”)⁽¹⁾ for the third quarter of ~~2018~~⁽¹⁾2020 was $49.6 million compared to $50.7 million in the previous quarter and $48.2 million in the third quarter of 2019. The 2% decline in PPNR from the previous quarter reflected lower net interest income, slightly higher operating expenses, partly offset by higher noninterest income.

·

~~The Company's Board~~•

Book value per share of ~~Directors authorized a stock repurchase program~~$26.74 at September 30, 2020; tangible book value per share grew 3% for the quarter and 8% from prior year to $20.02⁽²⁾at September 30, 2020.

(1) PPNR is a Non-GAAP financial measure that management believes is useful in evaluating the underlying operating results of the Company excluding the volatility in loan loss provision due to CECL adoption and the impact of the COVID-19 pandemic, net securities gains (losses) and non-recurring income and/or expense.

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2020				2019				2020				2019
Net income before income tax expense		$	46,101			$	41,701			$	89,461			$	118,306
FTE adjustment			325				374				983				1,318
Provision for loan losses			3,261				6,324				51,741				19,408
Net securities (gains) losses			(84	)			(4,036	)			548				(4,024	)
Nonrecurring expense			-				3,800				650				3,800
Unfunded loan commitments reserve			-				-				1,800				-
PPNR		$	49,603			$	48,163			$	145,183			$	138,808

(2) Non-GAAP measure - ~~Stockholders'~~Stockholders’ equity less goodwill and intangible assets divided by ~~total assets less goodwill and intangible assets.~~common shares outstanding.

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COVID-19 Pandemic and Company Response

The year 2020 began with overall stable U.S. economic conditions that were significantly impacted by the COVID-19 pandemic and subsequent shut-down of non-essential business throughout the Company’s footprint. A prolonged global pandemic like COVID-19 could adversely affect our operations. The results of operations and the ultimate effect of pandemic will depend on numerous factors that are highly uncertain including how long restrictions for business and individuals will last, further information around the severity of the virus itself, additional actions taken by federal, state and local governments to contain and treat COVID-19 and what, if any, additional government relief will be provided.

In response, the Company immediately formed an Executive Task Force and engaged its established Incident Response Team under its Business Continuity Plan to execute a comprehensive pandemic response plan. The Company has taken significant steps to address the needs of its customers impacted by COVID-19. The Company provided payment relief for all its customers for 180 days or less, waiving associated late fees while not reporting these payment deferrals as late payments to the credit bureaus for all its consumer customers who were current prior to this event. The Company continues to responsibly lend to qualified consumer and commercial customers and designed special lending programs as well as participating in government sponsored relief programs to respond to customers’ needs during the pandemic.

The Company has been a participant in the Small Business Administration’s Paycheck Protection Program (“PPP”), a new loan guarantee program created under the CARES Act targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the Small Business Administration (“SBA”), whose guarantee is backed by the full faith and credit of the United States. PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders receive pre-determined fees for processing and servicing PPP loans. In addition, PPP loans are risk-weighted at zero percent under the generally-applicable Standardized Approach used to calculate risk-weighted assets for regulatory capital purposes. The Company processed approximately 3,000 loans totaling over $548 million in relief. An online solution for the PPP loan forgiveness process launched with a successful pilot completed in the third quarter. The Company also is participating in the Main Street Lending Program as defined in the CARES Act.

The Company established a committee to ensure employee and customer safety through staged reopening and monitoring. The five focus areas for the Company’s reopening are employee well-being, alternate work plans, physical workspace, working with customers and vendors, and policies, training and communication. The Committee monitored state and local responses and adapted physical locations across its footprint in its re-opening plans and will continue to monitor and adapt its response as the impact of COVID-19 continues to develop. The Company has taken significant actions to address the needs of employees and customers:

● Employees

- 90% of non-branch employees moved to remote work by April 1; 45% have since returned to a worksite; remaining 55% are either hybrid or full-time remote.

- Adopted health and safety precautions in our branches.

- Offered additional benefits for health, childcare/eldercare needs and well-being including paid-time-off flexibility and childcare assistance program.

- Cross-training and redeployment programs directing staff resources to areas of greatest need.

● Customers

- All branch lobbies are open.

- Leveraged technology tools such as robotic process automation for payment extension requests and onboarding loans; increased use of electronic signatures.

- Digital communication channels significantly enhanced with dedicated webpages, emails and social media content.

- Offered payment deferrals and forbearance.

Results of Operations

Net income for the three months ended September 30, ~~2019~~2020 was ~~$32.4~~$35.1 million, up ~~6.0%~~$10.4 million from ~~$30.6~~$24.7 million for the second quarter of ~~2019~~2020 and up ~~8.6%~~$2.7 million from ~~$29.8~~$32.4 million for the third quarter of ~~2018.~~2019. Diluted earnings per share for the three months ended September 30, ~~2019~~2020 was ~~$0.73,~~$0.80, as compared with ~~$0.69~~$0.56 for the prior quarter, ~~an increase of 5.8%,~~ and ~~$0.68~~$0.73 for the third quarter of ~~2018, an increase of 7.4%.~~2019. Return on average assets (annualized) was ~~1.34%~~1.29% for the three months ended September 30, ~~2019~~2020 as compared to ~~1.28%~~0.94% for the prior quarter and ~~1.25%~~1.34% for the same period last year. Return on average equity (annualized) was 12.09% for the three months ended September 30, 2020 as compared to 8.76% for the prior quarter and 11.83% for the three months ended September 30, ~~2019 as compared to 11.63% for the prior quarter and 11.96% for the three months ended September 30, 2018.~~2019. Return on average tangible common equity (annualized) was 16.51% for the three months ended September 30, 2020 as compared to 12.14% for the prior quarter and 16.43% for the three months ended September 30, ~~2019 as compared to 16.38% for the prior quarter and 17.42% for the three months ended September 30, 2018.~~2019.

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Net income for the nine months ended September 30, ~~2019~~2020 was ~~$92.1~~$70.2 million, ~~up 9.7%~~down $21.9 from ~~$83.9~~$92.1 million for the same period last year. Diluted earnings per share for the nine months ended September 30, ~~2019~~2020 was ~~$2.09,~~$1.60 as compared with ~~$1.91~~$2.09 for the same period in ~~2018, an increase of 9.4%.~~2019. Return on average assets (annualized) was ~~1.29%~~0.90% for the nine months ended September 30, ~~2019~~2020 as compared to ~~1.20%~~1.29% for the same period last year. Return on average equity (annualized) was 8.23% for the nine months ended September 30, 2020 as compared to 11.66% for the nine months ended September 30, ~~2019 as compared to 11.54% for the nine months ended September 30, 2018.~~2019. Return on average tangible common equity (annualized) was 11.36% for the nine months ended September 30, 2020 as compared to 16.42% for the nine months ended September 30, ~~2019 as compared to 16.83% for the nine months ended September 30, 2018.~~2019.

Return on average tangible common equity is a non-GAAP measure and excludes amortization of intangible assets (net of tax) from net income and average tangible equity calculated as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2019				2018				2019				2018				2020				2019				2020				2019
Net income		$	32,379			$	29,807			$	92,061			$	83,914			$	35,113			$	32,379			$	70,194			$	92,061
Amortization of intangible assets (net of tax)			656				791				2,051				2,298				642				656				1,930				2,051
Net income, excluding intangible amortization		$	33,035			$	30,598			$	94,112			$	86,212			$	35,755			$	33,035			$	72,124			$	94,112

Average stockholders' equity		$	1,085,961			$	988,551			$	1,055,375			$	972,316
Average stockholders’ equity																		$	1,155,056			$	1,085,961			$	1,139,871			$	1,055,375
Less: average goodwill and other intangibles			288,077				291,814				288,967				287,403				293,572				288,077				291,472				288,967
Average tangible common equity		$	797,884			$	696,737			$	766,408			$	684,913			$	861,484			$	797,884			$	848,399			$	766,408

Net Interest Income

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

Net interest income was ~~$78.1~~$77.9 million for the third quarter of ~~2019,~~2020, down ~~$0.6~~$2.5 million, or ~~0.7%~~3.1%, from the previous quarter. The FTE net interest margin was ~~3.57%~~3.17% for the three months ended September 30, ~~2019,~~2020, down 421 bps from the previous ~~quarter and interest~~quarter. Interest income decreased ~~$0.9~~$2.5 million, or 0.9%. The yield on average interest-earning assets decreased 6 bps to 4.22%, and average interest-earning assets decreased $58 million from the prior quarter to $8.7 billion. The lower asset yield primarily reflects the impact of lower short-term rates on floating-rate loans, while contraction in average earning assets was driven by a smaller investment portfolio. Interest expense was down $0.3 million, or 1.9%, due to a $168 million decrease in average interest-bearing liabilities from the prior quarter. The cost of interest-bearing liabilities for the quarter ended September 30, 2019 remained comparable to the prior quarter at 0.96%, driven by the 17 bp decrease in short-term borrowings cost, offset by the 3 bp increase in interest-bearing deposit costs.

Net interest income was $78.1 million for the third quarter of 2019, up $0.5 million, or 0.7%, from the third quarter of 2018. The FTE net interest margin of 3.57% was comparable to the third quarter of 2018. Interest income increased $4.2 million, or 4.7%2.8%, as the yield on average interest-earning assets decreased 23 bps from the prior quarter to 3.45%, while average interest-earning assets of $9.8 billion increased 17$220.9 million from the prior quarter, primarily due to an increase in short-term interest-bearing accounts due to excess liquidity and an increase in average investment securities. Interest expense was comparable to the prior quarter, as the cost of interest-bearing liabilities remained flat at 0.45% for the quarter ended September 30, 2020, driven by interest-bearing deposit costs decreasing 4 bps along with average interest-bearing liability decreasing $28.6 million.

Net interest income was $77.9 million for the third quarter of 2020, flat from the third quarter of 2019. The FTE net interest margin was 3.17% for the three months ended September 30, 2020, down 40 bps from the third quarter of 2019. Interest income decreased $7.4 million, or 8.0%, as the yield on average interest-earning assets decreased 77 bps from the same period in ~~2018, and~~2019 to 3.45%, while average interest-earning assets increased ~~$42.3 million, or 0.5%,~~$1.1 billion, primarily due to ~~a $147.9 million~~excess liquidity and an increase in average ~~loans.~~loans due to PPP loan originations. Interest expense ~~increased $3.7~~decreased $7.3 million, or 50.8%, as the cost of interest-bearing liabilities ~~increased 25~~decreased 51 bps, driven by interest-bearing deposit costs ~~increasing 33 bps.~~

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~~Table~~decreasing 51 bps along with a 97 bps decrease in short-term borrowings cost. The Federal Reserve lowered its target fed funds rate by 150 basis points in the first quarter of ~~Contents~~

2020.

Net interest income for the first nine months of ~~2019~~2020 was ~~$234.4~~$235.6 million, up ~~$7.6~~$1.2 million, or ~~3.4%~~0.5%, from the same period in ~~2018.~~2019. FTE net interest margin of ~~3.61%~~3.35% for the nine months ended September 30, ~~2019,~~2020, was updown from ~~3.57%~~3.61% for the same period in ~~2018. Average~~2019. Interest income decreased $15.1 million, or 5.5%, as the yield on average interest-earning assets ~~were up $187.7~~decreased 54 bps from the same period in 2019 to 3.72%, while average interest-earning assets increased $693.3 million primarily due to excess liquidity and an increase in average loans due to PPP loan originations. Interest expense was down $16.3 million, or ~~2.2%~~38.3%, for the nine months ended September 30, ~~2019,~~2020 as compared to the same period in 2018, driven by a $216.0 million increase in loans. Interest income increased $23.2 million, or 9.2%, due to the increase in earning assets combined with a 25 bp improvement in loan yields. Interest expense was up $15.6 million, for the nine months ended September 30, 2019 ~~as compared to the same period in 2018~~ as the cost of interest-bearing liabilities ~~increased 34~~decreased 38 bps to 0.57%, driven by interest-bearing deposit costs ~~increasing 36~~decreasing 32 bps ~~combined~~along with ~~a 40 bp increase~~the 72 bps decrease in short-term ~~borrowing costs.~~borrowings cost. The Federal Reserve ~~reduced~~lowered its target fed funds rate ~~twice~~by 150 basis points in the ~~third~~first quarter of ~~2019 by a total~~2020.

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Table of 50 bps. Prior to the Federal Reserve’s change in policy, the Company’s full-cycle deposit beta during the period of policy tightening from December 2015 through July 2019 was 15.2%. The Company’s average cost of deposits increased by 34 bps versus the 225 bps increase in the fed funds rate.Contents

Average Balances and Net Interest Income

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

Three Months Ended		September 30, 2019												September 30, 2018												September 30, 2020												September 30, 2019
(Dollars in thousands)		Average Balance				Interest				Yield/ Rates				Average Balance				Interest				Yield/ Rates				Average Balance				Interest				Yield/ Rates				Average Balance				Interest				Yield/ Rates
Assets:
Short-term interest bearing accounts		$	57,530			$	283				1.95	%		$	3,328			$	51				6.08	%
Short-term interest-bearing accounts																										$	477,946			$	130				0.11	%		$	57,530			$	283				1.95	%
Securities available for sale (1) (3)			940,256				5,711				2.41	%			1,197,910				6,697				2.22	%			1,137,604				5,603				1.96	%			940,256				5,711				2.41	%
Securities held to maturity (1) (3)			698,617				4,879				2.77	%			591,220				3,843				2.58	%			621,812				4,008				2.56	%			698,617				4,879				2.77	%
Federal Reserve Bank and FHLB stock			40,525				719				7.04	%			50,107				783				6.20	%			29,720				529				7.08	%			40,525				719				7.04	%
Loans (2) (3)			6,987,476				81,163				4.61	%			6,839,565				77,359				4.49	%			7,559,218				75,049				3.95	%			6,987,476				81,163				4.61	%
Total interest-earning assets		$	8,724,404			$	92,755				4.22	%		$	8,682,130			$	88,733				4.05	%		$	9,826,300			$	85,319				3.45	%		$	8,724,404			$	92,755				4.22	%
Other assets		$	852,616											$	776,219												967,194												852,616
Total assets		$	9,577,020											$	9,458,349											$	10,793,494											$	9,577,020

Liabilities and Stockholders' Equity:
Liabilities and stockholders’ equity:
Money market deposit accounts		$	2,015,297			$	6,281				1.24	%		$	1,724,853			$	2,526				0.58	%		$	2,364,606			$	1,680				0.28	%		$	2,015,297			$	6,281				1.24	%
NOW deposit accounts			1,056,001				340				0.13	%			1,164,513				485				0.17	%			1,207,064				144				0.05	%			1,056,001				340				0.13	%
Savings deposits			1,274,793				188				0.06	%			1,279,520				188				0.06	%			1,447,021				192				0.05	%			1,274,793				188				0.06	%
Time deposits			893,837				3,936				1.75	%			881,792				2,958				1.33	%			684,708				2,251				1.31	%			893,837				3,936				1.75	%
Total interest-bearing deposits		$	5,239,928			$	10,745				0.81	%		$	5,050,678			$	6,157				0.48	%		$	5,703,399			$	4,267				0.30	%		$	5,239,928			$	10,745				0.81	%
Short-term borrowings			490,694				1,989				1.61	%			766,372				3,000				1.55	%			277,890				446				0.64	%			490,694				1,989				1.61	%
Long-term debt			84,250				498				2.35	%			73,762				431				2.32	%			64,137				398				2.47	%			84,250				498				2.35	%
Subordinated debt																											97,934				1,375				5.59	%			-				-				-
Junior subordinated debt			101,196				1,095				4.29	%			101,196				1,089				4.27	%			101,196				565				2.22	%			101,196				1,095				4.29	%
Total interest-bearing liabilities		$	5,916,068			$	14,327				0.96	%		$	5,992,008			$	10,677				0.71	%		$	6,244,556			$	7,051				0.45	%		$	5,916,068			$	14,327				0.96	%
Demand deposits		$	2,389,617											$	2,356,216											$	3,111,617											$	2,389,617
Other liabilities			185,374												121,574												282,265												185,374
Stockholders' equity			1,085,961												988,551
Total liabilities and stockholders' equity		$	9,577,020											$	9,458,349
Stockholders’ equity																											1,155,056												1,085,961
Total liabilities and stockholders’ equity																										$	10,793,494											$	9,577,020
Net interest income (FTE)						$	78,428											$	78,056											$	78,268											$	78,428
Interest rate spread											3.26	%											3.34	%											3.00	%											3.26	%
Net interest margin (FTE)											3.57	%											3.57	%											3.17	%											3.57	%
Taxable equivalent adjustment						$	374											$	529											$	325											$	374
Net interest income						$	78,054											$	77,527											$	77,943											$	78,054

(1)	Securities are shown at average amortized cost.

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

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

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Nine Months Ended		September 30, 2019												September 30, 2018												September 30, 2020												September 30, 2019
(Dollars in thousands)		Average Balance				Interest				Yield/ Rates				Average Balance				Interest				Yield/ Rates				Average Balance				Interest				Yield/ Rates				Average Balance				Interest				Yield/ Rates
Assets:
Short-term interest bearing accounts		$	30,970			$	457				1.97	%		$	3,242			$	133				5.48	%
Short-term interest-bearing accounts																										$	311,577			$	464				0.20	%		$	30,970			$	457				1.97	%
Securities available for sale (1) (3)			968,517				17,695				2.44	%			1,245,672				20,714				2.22	%			1,028,962				16,956				2.20	%			968,517				17,695				2.44	%
Securities held to maturity (1) (3)			750,305				15,921				2.84	%			526,097				9,924				2.52	%			619,379				12,562				2.71	%			750,305				15,921				2.84	%
Federal Reserve Bank and FHLB stock			45,254				2,271				6.71	%			48,391				2,248				6.21	%			35,349				1,674				6.33	%			45,254				2,271				6.71	%
Loans (2) (3)			6,944,518				241,932				4.66	%			6,728,479				222,184				4.41	%			7,437,566				231,168				4.15	%			6,944,518				241,932				4.66	%
Total interest-earning assets		$	8,739,564			$	278,276				4.26	%		$	8,551,881			$	255,203				3.99	%		$	9,432,833			$	262,824				3.72	%		$	8,739,564			$	278,276				4.26	%
Other assets		$	821,859											$	763,108												938,296												821,859
Total assets		$	9,561,423											$	9,314,989											$	10,371,129											$	9,561,423

Liabilities and Stockholders' Equity:
Liabilities and stockholders’ equity:
Money market deposit accounts		$	1,912,572			$	16,255				1.14	%		$	1,693,627			$	5,459				0.43	%		$	2,275,765			$	8,646				0.51	%		$	1,912,572			$	16,255				1.14	%
NOW deposit accounts			1,105,919				1,157				0.14	%			1,199,306				1,366				0.15	%			1,153,780				548				0.06	%			1,105,919				1,157				0.14	%
Savings deposits			1,269,723				550				0.06	%			1,272,452				543				0.06	%			1,369,219				553				0.05	%			1,269,723				550				0.06	%
Time deposits			929,819				11,843				1.70	%			847,899				7,799				1.23	%			762,548				8,436				1.48	%			929,819				11,843				1.70	%
Total interest-bearing deposits		$	5,218,033			$	29,805				0.76	%		$	5,013,284			$	15,167				0.40	%		$	5,561,312			$	18,183				0.44	%		$	5,218,033			$	29,805				0.76	%
Short-term borrowings			607,155				7,986				1.76	%			728,627				7,421				1.36	%			412,312				3,215				1.04	%			607,155				7,986				1.76	%
Long-term debt			80,162				1,391				2.32	%			82,372				1,359				2.21	%			64,165				1,184				2.46	%			80,162				1,391				2.32	%
Subordinated debt																											35,750				1,503				5.62	%			-				-				-
Junior subordinated debt			101,196				3,404				4.50	%			101,196				3,030				4.00	%			101,196				2,186				2.89	%			101,196				3,404				4.50	%
Total interest-bearing liabilities		$	6,006,546			$	42,586				0.95	%		$	5,925,479			$	26,977				0.61	%		$	6,174,735			$	26,271				0.57	%		$	6,006,546			$	42,586				0.95	%
Demand deposits		$	2,332,965											$	2,303,751											$	2,800,297											$	2,332,965
Other liabilities			166,537												113,443												256,226												166,537
Stockholders' equity			1,055,375												972,316
Total liabilities and stockholders' equity		$	9,561,423											$	9,314,989
Stockholders’ equity																											1,139,871												1,055,375
Total liabilities and stockholders’ equity																										$	10,371,129											$	9,561,423
Net interest income (FTE)						$	235,690											$	228,226											$	236,553											$	235,690
Interest rate spread											3.31	%											3.38	%											3.15	%											3.31	%
Net interest margin (FTE)											3.61	%											3.57	%											3.35	%											3.61	%
Taxable equivalent adjustment						$	1,318											$	1,472											$	983											$	1,318
Net interest income						$	234,372											$	226,754											$	235,570											$	234,372

(1)	Securities are shown at average amortized cost.

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

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

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The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume) and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.

Three Months Ended September 30,
Increase (Decrease)
2019 over 2018

(In thousands) Volume Rate Total
Short-term interest bearing accounts $ 289 $ (57 ) $ 232
Securities available for sale (1,528 ) 542 (986 )
Securities held to maturity 735 301 1,036
Federal Reserve Bank and FHLB stock (161 ) 97 (64 )
Loans 1,693 2,111 3,804
Total interest income (FTE) $ 1,028 $ 2,994 $ 4,022
Money market deposit accounts $ 488 $ 3,267 $ 3,755
NOW deposit accounts (42 ) (103 ) (145 )
Savings deposits (1 ) 1 -
Time deposits 41 937 978
Short-term borrowings (1,114 ) 103 (1,011 )
Long-term debt 62 5 67
Junior subordinated debt - 6 6
Total interest expense (FTE) $ (566 ) $ 4,216 $ 3,650
Change in net interest income (FTE) $ 1,594 $ (1,222 ) $ 372

Nine Months Ended September 30,		Increase (Decrease) 2019 over 2018
Three Months Ended September 30,														Increase (Decrease) 2020 over 2019
(In thousands)		Volume				Rate				Total				Volume				Rate				Total
Short-term interest bearing accounts		$	460			$	(136	)		$	324
Short-term interest-bearing accounts														$	337			$	(490	)		$	(153	)
Securities available for sale			(4,923	)			1,904				(3,019	)			1,069				(1,177	)			(108	)
Securities held to maturity			4,637				1,360				5,997				(519	)			(352	)			(871	)
Federal Reserve Bank and FHLB stock			(151	)			174				23				(194	)			4				(190	)
Loans			7,279				12,469				19,748				6,198				(12,312	)			(6,114	)
Total interest income (FTE)		$	7,302			$	15,771			$	23,073
Total FTE interest income														$	6,891			$	(14,327	)		$	(7,436	)
Money market deposit accounts		$	790			$	10,006			$	10,796			$	929			$	(5,530	)		$	(4,601	)
NOW deposit accounts			(102	)			(107	)			(209	)			43				(239	)			(196	)
Savings deposits			(1	)			8				7				24				(20	)			4
Time deposits			812				3,232				4,044				(812	)			(873	)			(1,685	)
Short-term borrowings			(1,368	)			1,933				565				(646	)			(897	)			(1,543	)
Long-term debt			(37	)			69				32				(125	)			25				(100	)
Subordinated debt															1,375				-				1,375
Junior subordinated debt			-				374				374				-				(530	)			(530	)
Total interest expense (FTE)		$	94			$	15,515			$	15,609
Change in net interest income (FTE)		$	7,208			$	256			$	7,464
Total FTE interest expense														$	788			$	(8,064	)		$	(7,276	)
Change in FTE net interest income														$	6,103			$	(6,263	)		$	(160	)

Nine Months Ended September 30,		Increase (Decrease) 2020 over 2019
(In thousands)		Volume				Rate				Total
Short-term interest-bearing accounts		$	755			$	(748	)		$	7
Securities available for sale			1,069				(1,808	)			(739	)
Securities held to maturity			(2,669	)			(690	)			(3,359	)
Federal Reserve Bank and FHLB stock			(473	)			(124	)			(597	)
Loans			16,542				(27,306	)			(10,764	)
Total FTE interest income		$	15,224			$	(30,676	)		$	(15,452	)
Money market deposit accounts		$	2,657			$	(10,266	)		$	(7,609	)
NOW deposit accounts			48				(657	)			(609	)
Savings deposits			42				(39	)			3
Time deposits			(1,964	)			(1,443	)			(3,407	)
Short-term borrowings			(2,101	)			(2,670	)			(4,771	)
Long-term debt			(290	)			83				(207	)
Subordinated debt			1,503				-				1,503
Junior subordinated debt			-				(1,218	)			(1,218	)
Total FTE interest expense		$	(105	)		$	(16,210	)		$	(16,315	)
Change in net FTE interest income		$	15,329			$	(14,466	)		$	863

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Noninterest Income

Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of operations. The following table sets forth information by category of noninterest income for the periods indicated:

Three Months Ended
September 30,

Nine Months Ended
September 30,

(In thousands) 2019 2018 2019 2018
Insurance and other financial services revenue $ 6,421 $ 6,172 $ 19,115 $ 18,502
Service charges on deposit accounts 4,330 4,503 12,790 12,721
ATM and debit card fees 6,277 5,906 17,958 16,995
Retirement plan administration fees 7,600 7,244 23,170 19,879
Trust 5,209 4,808 14,491 14,951
Bank owned life insurance 1,556 1,288 4,119 3,852
Net securities gains 4,036 412 4,024 575
Other 4,291 3,048 12,115 11,341
Total noninterest income $ 39,720 $ 33,381 $ 107,782 $ 98,816

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		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2020				2019				2020				2019
Service charges on deposit accounts		$	3,087			$	4,330			$	9,613			$	12,790
ATM and debit card fees			7,194				6,277				19,184				17,958
Retirement plan administration fees			9,685				7,600				26,840				23,170
Wealth management			7,695				7,630				21,791				21,315
Insurance			3,742				4,000				11,303				12,291
Bank owned life insurance			1,255				1,556				4,010				4,119
Net securities gains (losses)			84				4,036				(548	)			4,024
Other			4,985				4,291				15,968				12,115
Total noninterest income		$	37,727			$	39,720			$	108,161			$	107,782

Noninterest income for the three months ended September 30, ~~2019~~2020 was ~~$39.7~~$37.7 million, up ~~$5.5~~$2.7 million, or ~~16.0%~~7.8%, from the prior quarter and ~~up $6.3~~down $2.0 million, or ~~19.0%~~5.0%, from the third quarter of ~~2018. In the third quarter of 2019, the Company sold Visa Class B common stock for a gain of $4.0 million.~~2019. Excluding net securities gains (losses), noninterest income for the three months ended September 30, ~~2019~~2020 would have been ~~$35.7~~$37.6 million, up ~~$1.4~~$2.8 million, or ~~4.0%~~8.1%, from the prior quarter and up ~~$2.7~~$2.0 million, or ~~8.2%~~5.5%, from the third quarter of ~~2018.~~2019. The increase from the prior quarter was primarily driven by higher ~~insurance~~service charges on deposit accounts due to lower overdraft charges during the COVID-19 pandemic that recovered but continue to run lower than that prior year levels, higher ATM and ~~other finance services~~debit card fees due to increased volume and higher per transaction rates, higher retirement plan administration fees due to the April 1, 2020 acquisition of Alliance Benefit Group of Illinois, Inc. (“ABG”), which contributed $1.7 million in revenues during the third quarter of 2020 and higher wealth management fees due to seasonality of tax revenue ~~along with an increase in trust income.~~and market conditions. The increase from the third quarter of ~~2018~~2019 was primarily due to the increase in retirement plan administration fees due to the ABG acquisition, higher ATM and debit card fess due to increased volume and higher per transaction rates, an increase in other noninterest income due primarily to higher mortgage banking income, which was partly offset by lower service charges on deposit accounts due to lower overdraft charges during the COVID-19 pandemic.

Noninterest income for the nine months ended September 30, 2020 was $108.2 million, up $0.4 million, or 0.4%, from the same period in 2019. Excluding net securities gains (losses), noninterest income for the nine months ended September 30, 2020 would have been $108.7 million, up $5.0 million, or 4.8%, from the same period in 2019. The increase from the prior year was driven by an increase in retirement plan administration fees due to the ABG acquisition, an increase in other noninterest income due primarily to higher swap fee ~~income.~~

~~Noninterest~~ income ~~for the nine months ended September 30, 2019 was $107.8 million, up $9.0 million, or 9.1%, from the same period~~and mortgage banking income, and an increase in 2018. Excluding net securities gains, noninterest income for the nine months ended September 30, 2019 would have been $103.8 million, up $5.5 million, or 5.6%, from the same period in 2018. The increase from the prior year was driven by higher retirement plan administration fees due to the acquisition of Retirement Plan Services, LLC (“RPS”) in the second quarter of 2018 and higher ATM and debit card fees due to ~~an increase in~~increased volume and higher per transaction rates, partly offset by lower service charges on deposit accounts due to lower overdraft charges during the ~~number of accounts and usage.~~COVID-19 pandemic.

Noninterest Expense

Noninterest expenses are also an important factor in the Company’s results of operations. The following table sets forth the major components of noninterest expense for the periods indicated:

		Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2019				2018				2019				2018				2020				2019				2020				2019
Salaries and employee benefits		$	39,352			$	38,394			$	117,275			$	112,687			$	40,451			$	39,352			$	120,918			$	117,275
Occupancy			5,335				5,380				17,053				17,034				5,294				5,335				16,354				17,053
Data processing and communications			4,492				4,434				13,599				13,221				4,058				4,492				12,370				13,599
Professional fees and outside services			3,535				3,580				10,562				10,408				3,394				3,535				10,694				10,562
Equipment			4,487				4,319				13,762				12,508				5,073				4,487				14,494				13,762
Office supplies and postage			1,667				1,563				4,835				4,640				1,530				1,667				4,621				4,835
FDIC (credit) expense			(20	)			1,223				1,946				3,516
FDIC expense (credit)																			645				(20	)			1,949				1,946
Advertising			677				739				1,821				1,776				530				677				1,461				1,821
Amortization of intangible assets			874				1,054				2,735				3,064				856				874				2,573				2,735
Loan collection and other real estate owned, net			976				1,234				2,722				3,479				620				976				2,365				2,722
Other			8,374				4,577				18,130				13,324				3,857				8,374				14,730				18,130
Total noninterest expense		$	69,749			$	66,497			$	204,440			$	195,657			$	66,308			$	69,749			$	202,529			$	204,440

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Table of Contents

Noninterest expense for the three months ended September 30, ~~2019~~2020 was ~~$69.7~~$66.3 million, up ~~$3.5~~$1.0 million, or ~~5.3%~~1.5%, from the prior quarter and ~~up $3.3~~down $3.4 million, or 4.9%, from the third quarter of ~~2018.~~2019. The increase from the prior quarter was due to higher salaries and employee benefits due to timing of medical expenses during the COVID-19 pandemic and equipment expense was higher due to higher technology costs associated with several digital upgrades. The decrease in noninterest expense from the third quarter of ~~2018~~2019 was primarily driven by higher other noninterest expense items and increases in salaries and employee benefits, partially offset by lower FDIC insurance expense. Salaries and employee benefits expense increased from the prior quarter and the third quarter of 2018 due to ~~wage increases~~lower travel and ~~$0.7 million in one-time charges related to efficiency initiatives. FDIC insurance expense decreased from~~training expenses during the ~~prior quarter~~pandemic, lower pension costs and the third quarter of 2018 due to receipt of the Small Bank Assessment Credit in the third quarter of 2019. Other noninterest expense increased from the prior quarter and the third quarter of 2018 due to $3.1 million in reorganization expenses incurred during the third quarter of 2019 primarily related to branch optimization strategies to improve future operating efficiencies. This was partly offset by higher salaries and employee benefits due to the addition of ABG’s salaries and benefits, higher FDIC expense due to the benefit of the FDIC insurance assessment small bank credit in the third quarter of 2019 and higher equipment expense due to higher technology costs associated with several digital upgrades.

Noninterest expense for the nine months ended September 30, ~~2019~~2020 was ~~$204.4~~$202.5 million, ~~up $8.8~~down $1.9 million, or ~~4.5%~~0.9%, from the same period in ~~2018.~~2019. The ~~increase~~decrease from the prior year was driven by the previously mentioned $3.1 million in reorganization expenses in 2019, and lower data processing communication expense and lower occupancy expense driven by the COVID-19 pandemic. This was partly offset by higher salaries and employee benefits equipment expense and other noninterest expenses in the first nine months of 2019 as compared to the same period of 2018, partially offset by lower FDIC insurance expense. The increase in salaries and employee benefits was primarily due to the ~~RPS~~ABG acquisition ~~in the second quarter of 2018, the previously mentioned $0.7 million in one-time charges~~ and ~~general wage and benefit increases. The $4.8 million increase in other noninterest expenses was~~higher equipment expense due to ~~the $3.1 million in reorganization expenses previously mentioned and an increase in the amortization expense for pension plan actuarial costs.~~higher technology costs associated with several digital upgrades.

Income Taxes

Income tax expense for the three months ended September 30, ~~2019~~2020 was ~~$9.3~~$11.0 million, up ~~$0.5~~$4.4 million from the prior quarter and up ~~$0.7~~$1.7 million from the third quarter of ~~2018.~~2019. The effective tax rate of 23.8% for the third quarter of 2020 was higher compared to 21.0% in the prior quarter and higher compared to 22.4% for the third quarter of ~~2019 was comparable~~2019. The higher effective tax rate compared to the second quarter of ~~2019~~2020 was due to higher level of taxable income relative to total income and included a true-up of tax expense to bring the full year estimated effective tax rate to 21.8%. The higher effective tax rate compared to the third quarter of ~~2018. The increase in income tax expense from the prior quarter and from the third quarter of 2018~~2019 was ~~primarily~~ due to a higher level of taxable income relative to total income.

Income tax expense for the nine months ended September 30, ~~2019~~2020 was ~~$26.2~~$19.3 million, ~~up $2.5~~down $7.0 million ~~or 10.7%,~~ from the same period of ~~2018.~~2019. The effective tax rate of ~~22.2%~~21.5% for the first nine months of ~~2019~~2020 was updown from ~~22.0%~~22.2% for the same period in the prior year. The ~~increase~~decrease in income tax expense from the prior year was due to a ~~higher~~lower level of taxable ~~income.~~

income as a result of the COVID-19 pandemic and increased provision for loan losses.

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ANALYSIS OF FINANCIAL CONDITION

Securities

Total securities ~~decreased $167.7~~increased $258.6 million, or ~~9.3%~~15.8%, from December 31, ~~2018~~2019 to September 30, ~~2019.~~2020. The securities portfolio represents ~~16.9%~~17.4% of total assets as of September 30, ~~2019~~2020 as compared to ~~18.9%~~16.8% as of December 31, ~~2018.~~2019.

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

	September 30, 2019			December 31, 2018			September 30, 2020				December 31, 2019
Mortgage-backed securities:
With maturities 15 years or less		26%			26%			19	%			25	%
With maturities greater than 15 years		10%			10%			10	%			12	%
Collateral mortgage obligations		46%			40%
Collateralized mortgage obligations								38	%			45	%
Municipal securities		11%			15%			12	%			10	%
U.S. agency notes		6%			8%			19	%			6	%
Corporate								1	%			-
Equity securities		1%			1%			1	%			2	%
Total		100%			100%			100	%			100	%

The Company’s mortgage-backed securities, U.S. agency notes and collateralized mortgage obligations are all guaranteed by Fannie Mae, Freddie Mac, Federal Home Loan Bank, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). GNMA securities are considered similar in credit quality to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in our investment portfolio. Refer to Note 3 to the ~~Company's~~Company’s unaudited interim consolidated financial statements included in this Form 10-Q for information related to ~~other-than-temporary~~credit impairment considerations.

Loans

A summary of loans, net of deferred fees and origination costs, by ~~category~~ type⁽¹⁾for the periods indicated follows:

(In thousands)		September 30, 2019				December 31, 2018				September 30, 2020				December 31, 2019
Commercial		$	1,317,649			$	1,291,568			$	1,297,408			$	1,302,209
Commercial real estate			2,033,552				1,930,742				2,281,843				2,142,057
Residential real estate			1,416,920				1,380,836
Dealer finance			1,195,783				1,216,144
Paycheck protection program											514,558				-
Residential real estate mortgages											1,448,530				1,445,156
Indirect auto											989,369				1,193,635
Specialty lending			528,505				524,928				566,973				542,063
Home equity			452,535				474,566				404,346				444,082
Other consumer			68,865				68,925				57,616				66,896
Total loans		$	7,013,809			$	6,887,709			$	7,560,643			$	7,136,098

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

Total loans increased by ~~$126.1~~$424.5 million ~~at September 30, 2019~~ from December 31, ~~2018. Loan growth in the first nine months of~~ 2019 ~~resulted~~to September 30, 2020. Excluding PPP loans, period end loans decreased $90.0 million from ~~growth in the~~December 31, 2019. Commercial and industrial loans decreased $4.8 million to $1.3 billion; commercial real estate loans increased $139.8 million to $2.3 billion; and ~~residential real estate portfolios partly offset~~total consumer loans decreased $225.0 million to $3.5 billion, driven by managed run-off ~~in our consumer portfolios.~~of indirect auto loans. Total loans represent approximately ~~72.6%~~69.7% of assets as of September 30, ~~2019,~~2020, as compared to ~~72.1%~~73.4% as of December 31, ~~2018.~~2019.

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

The allowance for loan losses is maintained at a level estimated by management to provide appropriately for risk of probable incurred losses inherent in the current loan portfolio. The adequacy of the allowance for loan losses is continuously monitored using a methodology designed to ensure that the level of the allowance reasonably reflects the loan portfolio’s risk profile. It is evaluated to ensure that it is sufficient to absorb all reasonably estimable incurred credit losses inherent in the current loan portfolio.

Management considers the accounting policy relating to the allowance for ~~loan~~credit losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to ~~cover~~estimate expected credit losses inover the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.

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~~For purposes~~As a result of ~~evaluating~~our January 1, 2020, adoption of CECL and its related amendments, our methodology for estimating the ~~adequacy~~reserve for credit losses changed significantly from December 31, 2019. The Company recorded a net decrease to retained earnings of the allowance, the Company considers a number of significant factors that affect the collectability of the portfolio. For individually analyzed loans, these factors include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans$4.3 million as of January 1, 2020 for the evaluation date. For homogeneous pools of loans, estimates of the Company’s exposure to credit loss reflect a thorough current assessment of a number of factors, which affect collectability. These factors include: past loss experience; the size, trend, composition and nature of the loans; changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; trends experienced in nonperforming and delinquent loans; current economic conditions in the Company’s market; portfolio concentrations that may affect loss experienced across one or more components of the portfolio; thecumulative effect of external factors such as competition, legal and regulatory requirements; and the experience, ability and depth of lending management and staff. In addition, various regulatory agencies, as an integral component of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additionsadopting ASU 2016-13. The transition adjustment includes a $3.0 million impact due to the allowance ~~based~~for credit losses on ~~their judgment about information available~~loans, $2.8 million impact due to ~~them at~~ the ~~time of their examination, which may not be currently available~~allowance for unfunded commitments reserve, and $1.5 million impact to ~~management.~~

the deferred tax asset. After a thorough consideration and validation of the factors discussed ~~above,~~in Note 2 to the Company’s unaudited interim consolidated financial statements included in this Form 10-Q, required additions or reductions to the allowance for ~~loan~~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 ~~inherent risk~~loss expected over the contractual life of ~~probable loss in~~ the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for ~~loan~~credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

The ~~following table reflects changes~~allowance for credit losses totaled $114.5 million at September 30, 2020, compared to $113.5 million at June 30, 2020 and $72.4 million at September 30, 2019. The allowance for credit losses as a percentage of loans was 1.51% (1.62% excluding PPP loans) at September 30, 2020, compared to 1.49% (1.59% excluding PPP loans) at June 30, 2020 and 1.03% at September 30, 2019. The increase in the allowance for credit losses from June 30, 2020 to September 30, 2020 was primarily due to the specific allowance for credit losses on individually analyzed credits and a change in loan portfolio mix shift within the consumer portfolio as indirect auto balances declined and other consumer balances increased. The increase in the allowance for credit losses ~~for~~from September 30, 2019 was primarily due to the ~~periods presented.~~implementation of CECL and the incorporation of a deteriorated economic forecast due to the COVID-19 pandemic.

Allowance for Loan Losses Three Months Ended
(Dollars in thousands) September 30, 2019 September 30, 2018
Balance, beginning of period $ 72,165 $ 72,450
Recoveries 1,891 2,093
Charge-offs (8,015 ) (7,764 )
Net charge-offs $ (6,124 ) $ (5,671 )
Provision for loan losses 6,324 6,026
Balance, end of period $ 72,365 $ 72,805
Composition of Net Charge-offs
Commercial $ (733 ) 12 % $ (413 ) 7 %
Residential Real Estate (161 ) 3 % (42 ) 1 %
Consumer (5,230 ) 85 % (5,216 ) 92 %
Net charge-offs $ (6,124 ) 100 % $ (5,671 ) 100 %
Annualized net charge-offs to average loans 0.35 % 0.33 %

Allowance for Loan Losses Nine Months Ended
(Dollars in thousands) September 30, 2019 September 30, 2018
Balance, beginning of period $ 72,505 $ 69,500
Recoveries 5,353 6,000
Charge-offs (24,901 ) (24,995 )
Net charge-offs $ (19,548 ) $ (18,995 )
Provision for loan losses 19,408 22,300
Balance, end of period $ 72,365 $ 72,805
Composition of Net Charge-offs
Commercial $ (2,439 ) 12 % $ (1,755 ) 9 %
Residential Real Estate (660 ) 3 % (239 ) 1 %
Consumer (16,449 ) 85 % (17,001 ) 90 %
Net charge-offs $ (19,548 ) 100 % $ (18,995 ) 100 %
Annualized net charge-offs to average loans 0.38 % 0.38 %

The provision for loan losses was $3.3 million for three months ended September 30, 2020, compared to $18.8 million in the prior quarter and $6.3 million for the same period in the prior year. Provision expense decreased from the prior quarter due to lower net charge-offs and a fairly stable to somewhat improved economic conditions in the CECL forecast. Provision expense decreased from the same period in the prior year due primarily to a decrease in net charge-offs. Net charge-offs ~~of $6.1~~totaled $2.3 million ~~for~~during the three months ended September 30, ~~2019 were down as~~2020, compared to ~~$6.5~~net charge-offs of $5.3 million ~~for~~during the ~~prior~~second quarter of 2020 and ~~up compared to $5.7~~$6.1 million ~~for~~in the third quarter of 2018. Provision expense was lower at $6.3 million for the three months ended September 30, 2019, as compared with $7.3 million for the prior quarter and up from $6.0 million for the third quarter of 2018. Annualized net charge-offs to average loans for the third quarter of 2019 was 0.35%, down from 0.38% for the prior quarter and up from 0.33% for the third quarter of 2018.2019.

~~Net charge-offs of $19.5~~The provision for loan losses was $51.7 million for the nine months ended September 30, ~~2019 were up~~2020, compared to ~~$19.0 million for the same period of 2018. Provision expense was~~ $19.4 million for the nine months ended September 30, ~~2019, as~~2019. Net charge-offs totaled $13.2 million during the nine months ended September 30, 2020, compared ~~with $22.3 million for the same period of 2018. Annualized~~to net charge-offs ~~to average loans for~~of $19.5 million during the ~~first~~ nine months ~~of 2019 was 0.38%, comparable to the first nine months of 2018.~~

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ended September 30, 2019. The ~~allowance~~higher provision for loan losses ~~totaled $72.4 million at~~in the nine months ended September 30, 2020 when compared to the nine months ended September 30, 2019 was driven by both the implementation of CECL and the incorporation of a deteriorated economic forecast due to the COVID-19 pandemic. The Company expects that with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

As of September 30, 2020, the unfunded commitment reserve totaled $5.5 million, compared to ~~$72.2~~$5.5 million atas of June 30, ~~2019~~2020 and ~~$72.8~~$0.9 million atas of September 30, ~~2018.~~2019. The ~~allowance for loan losses as a percentage of loans was 1.03% (1.08% excluding acquired loans) at September 30, 2019,~~increase in the unfunded commitment reserve in 2020 compared to ~~1.04% (1.08% excluding acquired loans) at June 30,~~ 2019 is related to an increase in expected losses due to the adoption of CECL and ~~1.06% (1.11% excluding acquired loans) at September 30, 2018.~~the deterioration of the economic forecast due to COVID-19.

Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. In the third quarter of 2019 the threshold for evaluating classified and nonperforming loans specifically evaluated for impairment was increased from $750 thousand to $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.

		September 30, 2019								December 31, 2018								September 30, 2020								December 31, 2019
(Dollars in thousands)		Amount				%				Amount				%				Amount				%				Amount				%
Nonaccrual loans
Nonaccrual loans:
Commercial		$	11,624				46	%		$	11,804				46	%		$	20,707				58	%		$	12,379				49	%
Residential Real Estate			5,558				23	%			6,526				26	%
Residential real estate																			7,986				22	%			5,233				21	%
Consumer			4,098				17	%			4,068				16	%			3,270				9	%			4,046				16	%
Troubled debt restructured loans			3,343				14	%			3,089				12	%			3,933				11	%			3,516				14	%
Total nonaccrual loans		$	24,623				100	%		$	25,487				100	%		$	35,896				100	%		$	25,174				100	%

Loans 90 days or more past due and still accruing
Loans 90 days or more past due and still accruing:
Commercial		$	4,906				59	%		$	588				12	%		$	12				-			$	-				-
Residential Real Estate			566				7	%			1,182				23	%
Residential real estate																			620				24	%			927				25	%
Consumer			2,870				34	%			3,315				65	%			1,947				76	%			2,790				75	%
Total loans 90 days or more past due and still accruing		$	8,342				100	%		$	5,085				100	%		$	2,579				100	%		$	3,717				100	%

Total nonperforming loans		$	32,965							$	30,572							$	38,475							$	28,891
OREO			2,144								2,441								1,605								1,458
Total nonperforming assets		$	35,109							$	33,013							$	40,080							$	30,349

Total nonperforming loans to total loans			0.47	%							0.44	%							0.51	%							0.40	%
Total nonperforming assets to total assets			0.36	%							0.35	%							0.37	%							0.31	%
Allowance for loan losses to total nonperforming loans			219.52	%							237.16	%							297.60	%							252.55	%

~~Nonperforming~~Excluding PPP loan originations, nonperforming loans to total loans was ~~0.47%~~0.55% at September 30, ~~2019,~~2020, up 816 bps from 0.39% at June 30, ~~2019~~2020 and up 68 bps from ~~0.41%~~0.47% at September 30, ~~2018.~~2019. The increase in nonperforming loans resulted primarily from two COVID-19 impacted commercial relationships totaling $10.9 million moving to non-accrual. Past due loans as a percentage of total loans was 0.26% at September 30, 2020 (0.28% excluding PPP loan originations), down from 0.30% at June 30, 2020 (0.32% excluding PPP loan originations) and down from 0.57% at September 30, ~~2019, up from 0.52% at June 30, 2019 and up from 0.53% at September 30, 2018.~~ 2019.

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The ~~increase in nonperforming and past due loans~~Company began offering short-term loan modifications to ~~total loans primarily resulted from a commercial real estate relationship migrating to over ninety days past due~~assist borrowers during the ~~quarter.~~COVID-19 national emergency. The ~~loan is still accruing interest and is well secured~~CARES Act, along with a joint agency statement issued by ~~underlying collateral.~~

~~For acquired loans~~banking regulatory agencies, provides that ~~are~~short-term modifications made in response to COVID-19 do not ~~deemed~~need to be ~~impaired at acquisition, credit discounts representing~~accounted for as a TDR. The Company evaluated the ~~principal losses expected over~~short-term modification programs provided to its borrowers and has concluded the ~~life of the loan are a component of the initial fair value and amortized over the life of the asset.~~

~~As a result of the application of this accounting methodology, certain credit-related ratios may not necessarily be directly comparable with periods~~modifications were generally made to borrowers who were in good standing prior to the ~~acquisitions, or comparable with other institutions. The credit metrics most impacted by our acquisitions~~COVID-19 pandemic and the modifications were ~~the allowance~~temporary and minor in nature and therefore do not qualify for ~~loans losses to total loans and total allowance for loan losses to nonperforming loans.~~designation as TDRs. As of September 30, ~~2019, the allowance for loan losses to~~2020, 3.1% of total ~~originated~~ loans outstanding were in payment deferral programs, of which 80% are commercial borrowers and ~~the total allowance for loan losses to originated nonperforming loans were 1.08% and 231.21%, respectively.~~20% are consumer borrowers. As of ~~December 31, 2018, the allowance for loan losses~~September 30, 2020, there were $233 million in loans in modification programs related to ~~total originated loans and the total allowance for loan losses to originated nonperforming loans were 1.10% and 254.92%, respectively.~~COVID-19.

In addition to nonperforming loans discussed above, the Company has also identified approximately ~~$81.5~~$134.1 million in potential problem loans at September 30, ~~2019~~2020 as compared to ~~$90.0~~$84.1 million at December 31, ~~2018.~~2019. The increase in potential problem loans is primarily due to the Company’s proactive approach to risk ratings throughout the deferral process and relates to higher risk industries impacted by the COVID-19 pandemic. Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations. As of September 30, 2020, 9.5% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses. To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.

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Deposits

Total deposits were ~~$7.7~~$9.0 billion at September 30, ~~2019,~~2020, up ~~$375.0 million,~~$1.4 billion, or ~~5.1%~~18.1%, from December 31, ~~2018.~~2019. Total average deposits increased ~~$234.0~~$810.6 million, or ~~3.2%~~10.7%, from the same period last year. The growth was driven primarily by ~~growth~~an increase of $467.3 million, or 20.0%, in ~~interest bearing~~demand deposits, combined with an increase in interest-bearing deposits of ~~$204.7~~$343.3 million, or ~~4.1%~~6.6%, due to growth in ~~MMDA~~money market deposit account (“MMDA”) partly offset by a decrease in time accounts. The high rate of deposit growth was primarily due to funding of PPP loans and ~~time accounts, combined with a $29.2 million, or a 1.3% increase in demand deposits.~~various government support programs.

Borrowed Funds

The ~~Company's~~Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled ~~$443.3~~$183.5 million at September 30, ~~2019~~2020 compared to ~~$871.7~~$655.3 million at December 31, ~~2018.~~2019. The notional value of interest rate swaps hedging cash flows related to short-term borrowings totaled ~~$100.0~~$25.0 million at September 30, ~~2019~~2020 and ~~$225.0~~$50.0 million at December 31, ~~2018.~~2019. Long-term debt was ~~$84.2~~$64.1 million at September 30, ~~2019~~2020 and ~~$73.7~~$64.2 million at December 31, ~~2018.~~2019.

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

Subordinated Debt

On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated debt issuance cost, which is being amortized on a straight-line basis, was $2.2 million. As of September 30, 2020 the subordinated debt net of unamortized issuance costs was $97.9 million.

Capital Resources

~~Stockholders'~~Stockholders’ equity of ~~$1.1~~$1.2 billion represented ~~11.37%~~10.75% of total assets at September 30, ~~2019~~2020 compared with ~~$1.0~~$1.1 billion, or ~~10.65%~~11.53% as of December 31, ~~2018. The increase in stockholders'~~2019. Stockholders’ equity ~~resulted primarily from~~was consistent with December 31, 2019 as net income of ~~$92.1~~$70.2 million for the nine months ending September 30, ~~2019~~2020 and ~~changes~~an increase in ~~OCI~~accumulated other comprehensive income of ~~$20.3~~$21.0 million ~~partially~~was offset by dividends declared of ~~$34.2~~$35.4 million during the period, repurchase of common stock of $8.0 million and a $4.3 million negative adjustment due to the adoption of CECL.

The Company ~~did not purchase~~repurchased 263,507 shares of ~~its~~ common stock during the ~~nine months ended September 30, 2019.~~first quarter of 2020 at a weighted average price of $30.25 excluding commissions under a previous announced plan. As of September 30, ~~2019,~~2020, there were ~~1,000,000~~736,493 shares available for repurchase under athis plan authorized on October ~~23, 2017, which expires~~28, 2019 and set to expire on December 31, ~~2019. On October 28, 2019,~~2021. The Company suspended repurchases during the ~~NBT Board of Directors authorized a repurchase program for NBT~~first quarter and does not expect to repurchase ~~up to an~~ additional ~~1,000,000~~ shares ~~of its outstanding common stock. This plan expires on December 31, 2021.~~at this time.

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The Board of Directors considers the ~~Company's~~Company’s earnings position and earnings potential when making dividend decisions. The Board of Directors approved a fourth-quarter ~~2019~~2020 cash dividend of $0.27 per share at a meeting held on October ~~28, 2019.~~26, 2020. The dividend ~~which represents a $0.01, or 3.8% increase,~~ will be paid on December ~~13, 2019~~15, 2020 to stockholders of record as of ~~November 29, 2019.~~December 1, 2020.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at September 30, ~~2019~~2020 under applicable bank regulatory requirements. Capital measurements are well in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based capital ratios must be 5%, 6.5%, 8% and 10%, respectively.

Capital Measurements		September 30, 2019				December 31, 2018				September 30, 2020				December 31, 2019
Tier 1 leverage ratio			10.15	%			9.52	%			9.48	%			10.33	%
Common equity tier 1 capital ratio			11.14	%			10.49	%			11.63	%			11.29	%
Tier 1 capital ratio			12.42	%			11.79	%			12.88	%			12.56	%
Total risk-based capital ratio			13.38	%			12.78	%			15.43	%			13.52	%
Cash dividends as a percentage of net income			37.12	%			38.44	%			50.46	%			38.02	%
Per common share:
Book value		$	25.09			$	23.31			$	26.74			$	25.58
Tangible book value (1)		$	18.52			$	16.66			$	20.02			$	19.03
Tangible equity ratio (2)			8.65	%			7.85	%			8.27	%			8.84	%

(1)	Stockholders’ equity less goodwill and intangible assets divided by common shares outstanding.

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

~~(1) Stockholders' equity less goodwill~~In March 2020, the Office of Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, and ~~intangible assets divided by common shares outstanding.~~

~~(2) Non-GAAP measure - Stockholders’ equity less goodwill~~the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses (after-tax) has been deferred and ~~intangible assets divided by total assets less goodwill~~will phase into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, the Company is allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020 and ~~intangible assets.~~December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020 and December 31, 2021, will also phase into regulatory capital at 25% per year commencing January 1, 2022. The Company adopted the capital transition relief over the permissible five-year period.

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Liquidity and Interest Rate Sensitivity Management

Market Risk

Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations.

Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.

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To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s Asset Liability Committee (“ALCO”), meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

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

The primary tool utilized by 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, 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. ~~Two~~Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of ~~100~~50 bps ~~takes~~take place over a ~~12 month~~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 ~~into~~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 risks.

In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets ~~particularly prime and LIBOR-based loans) repricing downward faster than the~~rolling over at lower yields while interest-bearing liabilities ~~that~~ remain at or near their floors. In the rising rate scenarios, net interest income is projected to experience a ~~slight decline~~modest increase from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, MMDA and time accounts. Net interest income for the next twelve months in the + 200/~~- 100~~+100/-50 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the September 30, ~~2019~~2020 balance sheet position:

Interest Rate Sensitivity Analysis
Change in interest rates	Percent change in	Percent change in
(in bps points)	net interest income	net interest income
+200	(0.77%)	0.89%
-100	(2.00%)
+100		1.37%
-50		(0.26%)

The Company anticipates that ~~in the current environment,~~ the trajectory of net interest income will depend significantly on the ~~ability~~depth and duration of the current economic downturn. In response to ~~manage deposit pricing in a competitive market. Deposit rates began to rise in 2018 as~~the economic impact of the pandemic, the federal funds rate ~~increased four times, through December 2018 bringing~~was reduced by 150 bps in March 2020, and term interest rates fell sharply across the ~~cycle total to nine increases totaling 225 basis points. Beginning in July 2019, the federal funds rate decreased three times for a total of 75 bps.~~yield curve. The Company ~~anticipates that~~has reduced deposit rates, ~~may move~~but future reductions are likely to be smaller and more selective. With deposit rates near their lower ~~responding~~bound, the Company will focus on managing asset yields in order to maintain the ~~lower federal funds rate.~~net interest margin. Competitive pressure may limit the Company’s ability to ~~quickly reduce deposit rates following reductions~~maintain asset yields in the ~~federal funds rate. In order to maintain the net interest margin in 2019, the Company will continue to focus funding growth through lower cost core deposits.~~current environment, however.

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Liquidity Risk

Liquidity isinvolves the ability to meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. ALCO is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate ~~strategies.~~strategies, regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions.

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The primary liquidity measurement the Company utilizes is called the “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, ~~2019,~~2020, the Company’s Basic Surplus measurement was ~~16.1%~~25.5% of total assets or approximately ~~$1.6~~$2.8 billion as compared to the December 31, ~~2018~~2019 Basic Surplus of ~~11.2%~~15.8% or ~~$1.1~~$1.5 billion and was above the Company’s minimum of 5% (calculated at ~~$483.1~~$542.5 million and ~~$477.8~~$485.8 million, orof period end total assets as September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively) set forth in its liquidity policies.

At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Federal Home Loan Bank ~~("FHLB"~~(“FHLB”) advances outstanding totaled ~~$440.3~~$159.2 million and ~~$795.8~~$585.8 million, respectively. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately ~~$1.3~~$1.5 billion at September 30, ~~2019~~2020 and ~~$0.8~~$1.2 billion at December 31, ~~2018.~~2019. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional ~~$567.1~~$720.8 million and ~~$630.0~~$627.6 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to purchase brokered time deposits and borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of ~~$1.4~~$1.8 billion at September 30, ~~2019~~2020 and ~~$1.3~~$1.4 billion at December 31, ~~2018.~~2019. In addition, the Bank has a ~~"Borrower-in-Custody"~~“Borrower-in-Custody” program with the FRB with the ~~addition of the~~ ability to pledge automobile ~~loans.~~loans as collateral. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Bank had the capacity to borrow ~~$822.2~~$713.6 million and ~~$854.7~~$837.3 million, respectively, from this program. The ~~Company's~~Company’s internal policies authorize borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled ~~$1.9~~$2.6 billion at September 30, ~~2019~~2020 and ~~$1.5~~$1.8 billion at December 31, ~~2018.~~2019.

This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considered its Basic Surplus position to be very strong. However, certain events may adversely impact the Company’s liquidity position in ~~2019. Increasing~~2020. The large inflow of deposits experienced in the second quarter of 2020 could reverse itself and flow out. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits could result in a decrease in the Company’s deposit base or increase funding costs. Additionally, liquidity will come under additional pressure if loan growth exceeds deposit growth in 2019.deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Significant monetary and fiscal policy actions taken by the federal government have helped to mitigate these risks. Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.

At September 30, 2020, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.

The Company’s primary source of funds is the Bank. Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends. The approval of the ~~Office of Comptroller of the Currency (the “OCC”)~~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, ~~2019,~~2020, approximately ~~$159.8~~$173.5 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.

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Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4 - CONTROLS AND PROCEDURES

The ~~Company's~~Company’s management, with the participation of the ~~Company's~~Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the ~~Company's~~Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, ~~2019,~~2020, the ~~Company's~~Company’s disclosure controls and procedures were effective.

Effective January 1, 2020, the Company adopted the CECL accounting standard. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes ~~made~~ in the ~~Company's~~Company’s internal control over financial reporting that occurred during the ~~Company's most recent fiscal quarter~~period covered by this report that have materially affected, or are reasonably likely to materially affect, the ~~Company's~~Company’s internal control over financial reporting.

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PART ~~II.~~II OTHER INFORMATION

Item 1 – LEGAL PROCEEDINGS

There are no material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is subject, except as described in the Company’s ~~2018~~2019 Annual Report on Form 10-K.

Item 1A – RISK FACTORS

There are no material changes to the risk factors as previously discussed in Part I, Item 1A of our ~~2018~~2019 Annual Report on Form ~~10-K.~~10-K, for the year ended December 31, 2019 and updated in Part II, Item 1A of our Quarterly Report on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020.

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Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~(a)~~

~~Not applicable~~

(a) Not applicable

~~(b)~~

~~Not applicable~~

~~(c)~~

~~None~~

(b) Not applicable

(c) None

Item 3 – DEFAULTS UPON SENIOR SECURITIES

None

Item 4 – MINE SAFETY DISCLOSURES

None

Item 5 – OTHER INFORMATION

None

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Item 6 – EXHIBITS

3.1	Restated Certificate of Incorporation of NBT Bancorp Inc. as amended through July 1, 2015 (filed as Exhibit 3.1 to ~~Registrant's~~Registrant’s Form 10-Q, filed on August 10, 2015 and incorporated herein by reference).
3.2	Amended and Restated Bylaws of NBT Bancorp Inc. effective May 22, 2018 (filed as Exhibit 3.1 to Registrant’s Form 8-K, filed on May 23, 2018 and incorporated herein by reference).
3.3	Certificate of Designation of the Series A Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4.1 of the Registrant’s Form 8-K, filed on November 18, 2004 and incorporated herein by reference).
31.1	Certification by the Chief Executive Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
31.2	Certification by the Chief Financial Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
32.1	Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this ~~8th~~6th day of November ~~2019.~~2020.

	NBT BANCORP INC.

By:	/s/ ~~Michael J. Chewens~~	John V. Moran
	~~Michael J. Chewens, CPA~~	John V. Moran
	~~Senior~~ Executive Vice President
	Chief Financial Officer

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