NBT BANCORP INC. AND SUBSIDIARIES
ITEM 2. | 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”) and its wholly-owned subsidiaries, including NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”) and NBT Holdings, Inc. (“NBT Holdings”) (collectively referred to herein as the “Company”). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company’s Annual Report on Form 10‑K for the year ended December 31, 2022 for an understanding of the following discussion and analysis. Operating results for the three and nine month periods ending September 30, 2023 are not necessarily indicative of the results of the full year ending December 31, 2023 or any future period.
Forward-Looking Statements
Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission (“SEC”), in the Company’s press releases or other public or stockholder communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control, that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local, regional, national and international economic conditions, including actual or potential stress in the banking industry, and the impact they may have on the Company and its customers and the Company’s assessment of that impact; (2) changes in the level of nonperforming assets and charge-offs; (3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (4) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board (“FRB”); (5) inflation, interest rate, securities market and monetary fluctuations; (6) political instability; (7) acts of war, including international military conflicts, or terrorism; (8) the timely development and acceptance of new products and services and the perceived overall value of these products and services by users; (9) changes in consumer spending, borrowing and saving habits; (10) changes in the financial performance and/or condition of the Company’s borrowers; (11) technological changes; (12) acquisition and integration of acquired businesses; (13) the possibility that NBT and Salisbury Bancorp, Inc. (“Salisbury”) may be unable to achieve expected synergies and operating efficiencies in the merger within the expected timeframes; (14) the ability to increase market share and control expenses; (15) changes in the competitive environment among financial holding companies; (16) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including those under the Dodd-Frank Act, and the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018; (17) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (18) changes in the Company’s organization, compensation and benefit plans; (19) the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (20) greater than expected costs or difficulties related to the integration of new products and lines of business; and (21) the Company’s success at managing the risks involved in the foregoing items.
The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including, but not limited to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the SEC, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future periods to differ materially from those anticipated or projected.
Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
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”). 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. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation.
Critical Accounting Estimates
SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. The Company follows financial accounting and reporting policies that are in accordance with GAAP. The more significant of these policies are summarized in Note 1 to the consolidated financial statements presented in our 2022 Annual Report on Form 10-K. Refer to Note 3 in this Quarterly Report on Form 10-Q for recently adopted accounting standards. Not all significant accounting policies require management to make difficult, subjective or complex judgments. The allowance for credit losses and the allowance for unfunded commitments policies noted below are deemed to meet the SEC’s definition of a critical accounting estimate.
The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. The measurement of Current Expensed Credit Losses (“CECL”) on financial instruments requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). 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 allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. The allowance for losses on 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 allowance for losses on 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 credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.
One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast period. The quantitative model as of September 30, 2023, incorporated a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model, particularly significant unknowns relating to downside risks as of the measurement date. The baseline outlook projected a relatively low unemployment rate of 3.7% rising modestly to 4.13% by the end of the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the fourth quarter of 2023 at 3.5%, decreasing slightly to 2.9%, and then increasing to 3.8% by the end of the forecast period. The alternative downside scenario assumes deteriorated economic conditions from the baseline outlook. Under this scenario, northeast unemployment increases to 5.1% in the fourth quarter of 2023 and rises to a peak of 6.9% in the fourth quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of September 30, 2023. All else held equal, the changes in the weightings of our forecasted scenarios would impact the amount of estimated allowance for credit losses through changes in the quantitative reserve and scenario-specific qualitative adjustments. To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of September 30, 2023, the Company attributed the change in scenario weightings to the change in the allowance for credit losses, with a 10% decrease to the downside scenario and a 10% increase to the baseline scenario causing a 3.9% decrease in the overall estimated allowance for credit losses. To further demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of September 30, 2023, the Company increased the downside scenario to 100% which resulted in a 25% increase in the overall estimated allowance for credit losses.
The Company’s policies on the CECL method for allowance for credit losses are disclosed in Note 1 to the consolidated financial statements presented in our 2022 Annual Report on Form 10-K. 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 2022 Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported. Refer to Note 3 to the unaudited interim consolidated financial 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 following information should be considered in connection with the Company’s results for the three and nine months ended September 30, 2023:
| ● | the acquisition of Salisbury by the merger of Salisbury with and into the Company was completed on August 11, 2023; |
| ● | net income for the three months ended September 30, 2023 was $24.6 million, down $14.4 million from the third quarter of 2022 and down $5.5 million from the second quarter of 2023; |
| ● | diluted earnings per share of $0.54 for the three months ended September 30, 2023, down $0.36 from the third quarter of 2022 and down $0.16 from the second quarter of 2023; |
| ● | excluding acquisition expenses, acquisition-related provision for credit losses and securities gains (losses), net income and diluted earnings per share for the three months ended September 30, 2023 were $38.3 million and $0.84, respectively; |
| ● | excluding securities gains (losses), noninterest income represents 30% of total revenues and was $40.4 million for the three months ended September 30, 2023, up $3.1 million, or 8.3%, from the third quarter of 2022 and up $3.7 million, or 10.2%, from the second quarter of 2023; |
| ● | noninterest expense, excluding $7.9 million of acquisition expenses in the third quarter of 2023 and $1.2 million in the second quarter of 2023, respectively, was up $6.2 million, or 8.1%, from the third quarter of 2022 and up $5.3 million, or 6.8%, from the second quarter of 2023; |
| ● | period end total loans were $9.67 billion, up $1.52 billion from December 31, 2022, excluding the $1.18 billion of loans acquired from Salisbury, loans grew $337.2 million, or 5.5% annualized, since December 31, 2022; |
| ● | period end total deposits were $11.40 billion, up $1.91 billion from December 31, 2022, excluding the $1.31 billion of deposits acquired from Salisbury, deposits increased $596.5 million, since December 31, 2022; |
| ● | book value per share of $28.94 at September 30, 2023; tangible book value per share(1) was $20.39 at September 30, 2023, $21.55 at June 30, 2023 and $20.25 at September 30, 2022. |
| (1) | Non-GAAP measure - Refer to non-GAAP reconciliation below. |
Salisbury Bancorp, Inc. Merger
On August 11, 2023, NBT completed its acquisition of Salisbury. Salisbury was a Connecticut-chartered commercial bank with 13 banking offices in northwestern Connecticut, the Hudson Valley region of New York, and southwestern Massachusetts. In connection with the acquisition, the Company issued 4.32 million shares and acquired approximately $1.46 billion of identifiable assets, including $1.18 billion of loans, $122.7 million in investment securities which were sold immediately after the merger, $31.2 million of core deposit intangibles and $4.7 million in a wealth management customer intangible, as well as $1.31 billion in deposits. As of the acquisition date, the fair value discount was $78.7 million for loans, net of the reclassification of the purchase credit deteriorated allowance, and was $3.0 million for subordinated debt, respectively.
Results of Operations
Net income for the three months ended September 30, 2023 was $24.6 million, or $0.54 per diluted common share, down $5.5 million from $30.1 million, or $0.70 per diluted common share for the three months ended June 30, 2023 and down $14.4 million from $39.0 million, or $0.90 per diluted common share for the third quarter of 2022.
| ● | Excluding the impact of acquisition expenses, acquisition-related provision for credit losses and securities gains (losses), the Company generated $0.84 per diluted share of earnings in the third quarter of 2023, compared to $0.91 per diluted share in the third quarter of 2022 and $0.80 per diluted share in the second quarter of 2023. |
| ● | The Company incurred acquisition expenses of $7.9 million ($0.14 per diluted share) and $1.2 million ($0.02 per diluted share) related to the merger with Salisbury in the third quarter of 2023 and the second quarter of 2023, respectively. |
Net income for the nine months ended September 30, 2023 was $88.3 million, or $2.01 per diluted common share, down $27.5 million from $115.9 million, or $2.68 per diluted common share for the nine months ended September 30, 2022.
| ● | Excluding the impact of acquisition expenses, acquisition-related provision for credit losses and securities gains (losses), the Company generated $2.53 per diluted share of earnings for the nine months ended September 30, 2023, compared to $2.70 per diluted share for the nine months ended September 30, 2022. |
| ● | In the nine months ended September 30, 2023, the Company incurred a $4.5 million ($0.08 per diluted share) securities loss on the sale of two subordinated debt securities held in the available for sale (“AFS”) portfolio and a $5.0 million ($0.09 per diluted share) securities loss on the write-off of a subordinated debt security of a failed financial institution. |
| ● | The Company incurred acquisition expenses of $9.7 million ($0.17 per diluted share) related to the merger with Salisbury in the nine months ended September 30, 2023. |
The following table sets forth certain financial highlights:
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, 2023 | | | June 30, 2023 | | | September 30, 2022 | | | September 30, 2023 | | | September 30, 2022 | |
Performance: | | | | | | | | | | | | | | | |
| Diluted earnings per share | | $ | 0.54 | | | $ | 0.70 | | | $ | 0.90 | | | $ | 2.01 | | | $ | 2.68 | |
Return on average assets(2) | | | 0.76 | % | | | 1.02 | % | | | 1.33 | % | | | 0.97 | % | | | 1.31 | % |
Return on average equity(2) | | | 7.48 | % | | | 9.91 | % | | | 12.87 | % | | | 9.54 | % | | | 12.79 | % |
Return on average tangible common equity(2) | | | 10.73 | % | | | 13.13 | % | | | 17.12 | % | | | 13.00 | % | | | 17.00 | % |
Net interest margin, fully taxable equivalent (“FTE”)(2) | | | 3.21 | % | | | 3.27 | % | | | 3.51 | % | | | 3.34 | % | | | 3.22 | % |
| Capital: | | | | | | | | | | | | | | | | | | | | |
| | | 9.86 | % | | | 10.18 | % | | | 9.94 | % | | | 9.86 | % | | | 9.94 | % |
| | | 7.15 | % | | | 7.95 | % | | | 7.64 | % | | | 7.15 | % | | | 7.64 | % |
| | $ | 28.94 | | | $ | 28.26 | | | $ | 27.00 | | | $ | 28.94 | | | $ | 27.00 | |
Tangible book value per share | | $ | 20.39 | | | $ | 21.55 | | | $ | 20.25 | | | $ | 20.39 | | | $ | 20.25 | |
| | | 10.23 | % | | | 10.51 | % | | | 10.21 | % | | | 10.23 | % | | | 10.21 | % |
Common equity tier 1 capital ratio | | | 11.31 | % | | | 12.29 | % | | | 12.17 | % | | | 11.31 | % | | | 12.17 | % |
| | | 12.23 | % | | | 13.35 | % | | | 13.27 | % | | | 12.23 | % | | | 13.27 | % |
Total risk-based capital ratio | | | 14.45 | % | | | 15.50 | % | | | 15.50 | % | | | 14.45 | % | | | 15.50 | % |
The following table provides non-GAAP reconciliations:
| | | Three Months Ended | | | Nine Months Ended | |
| (In thousands, except per share data) | | September 30, 2023 | | | June 30, 2023 | | | September 30, 2022 | | | September 30, 2023 | | | September 30, 2022 | |
| Return on average tangible common equity: | | | | | | | | | | | | | | | |
| Net income | | $ | 24,606 | | | $ | 30,072 | | | $ | 38,973 | | | $ | 88,336 | | | $ | 115,874 | |
| Amortization of intangible assets (net of tax) | | | 1,206 | | | | 344 | | | | 408 | | | | 1,952 | | | | 1,294 | |
| Net income, excluding intangible amortization | | $ | 25,812 | | | $ | 30,416 | | | $ | 39,381 | | | $ | 90,288 | | | $ | 117,168 | |
| Average stockholders’ equity | | $ | 1,305,686 | | | $ | 1,217,306 | | | $ | 1,201,656 | | | $ | 1,238,192 | | | $ | 1,210,998 | |
| Less: average goodwill and other intangibles | | | 350,912 | | | | 287,974 | | | | 289,296 | | | | 309,309 | | | | 289,366 | |
| Average tangible common equity | | $ | 954,774 | | | $ | 929,332 | | | $ | 912,360 | | | $ | 928,883 | | | $ | 921,632 | |
Return on average tangible common equity(2) | | | 10.73 | % | | | 13.13 | % | | | 17.12 | % | | | 13.00 | % | | | 17.00 | % |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 1,362,821 | | | $ | 1,210,493 | | | $ | 1,156,546 | | | $ | 1,362,821 | | | $ | 1,156,546 | |
| | | 402,745 | | | | 287,701 | | | | 289,083 | | | | 402,745 | | | | 289,083 | |
| | $ | 13,827,628 | | | $ | 11,890,497 | | | $ | 11,640,742 | | | $ | 13,827,628 | | | $ | 11,640,742 | |
| | | 7.15 | % | | | 7.95 | % | | | 7.64 | % | | | 7.15 | % | | | 7.64 | % |
Tangible book value per share: | | | | | | | | | | | | | | | | | | | | |
| | $ | 1,362,821 | | | $ | 1,210,493 | | | $ | 1,156,546 | | | $ | 1,362,821 | | | $ | 1,156,546 | |
| | | 402,745 | | | | 287,701 | | | | 289,083 | | | | 402,745 | | | | 289,083 | |
| | $ | 960,076 | | | $ | 922,792 | | | $ | 867,463 | | | $ | 960,076 | | | $ | 867,463 | |
Diluted common shares outstanding | | | 47,088 | | | | 42,827 | | | | 42,839 | | | | 47,088 | | | | 42,839 | |
Tangible book value per share | | $ | 20.39 | | | $ | 21.55 | | | $ | 20.25 | | | $ | 20.39 | | | $ | 20.25 | |
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 $94.9 million for the third quarter of 2023, up $5.8 million, or 6.5%, from the previous quarter. The FTE net interest margin was 3.21% for the three months ended September 30, 2023, a decrease of 6 basis points (“bps”) from the previous quarter. Interest income increased $16.5 million, or 13.7%, as the yield on average interest-earning assets increased 21 bps from the prior quarter to 4.63%, while average interest-earning assets of $11.80 billion increased $819.7 million from the prior quarter, primarily due to the Salisbury acquisition and organic loan growth. Interest expense was up $10.7 million, or 33.9%, as the cost of interest-bearing liabilities increased 38 bps to 2.18% for the quarter ended September 30, 2023, driven by interest-bearing deposit costs increasing 49 bps. Included in net interest income was $1.4 million of acquisition-related net accretion which positively impacted net interest margin by 5 bps.
Net interest income was $94.9 million for the third quarter of 2023, up $0.4 million, or 0.4%, from the third quarter of 2022. The FTE net interest margin was 3.21% for the three months ended September 30, 2023, a decrease of 30 bps from the third quarter of 2022. Interest income increased $37.9 million, or 38.2%, as the yield on average interest-earning assets increased 95 bps from the same period in 2022 to 4.63%, while average interest-earning assets of $11.80 billion increased $1.08 billion from the third quarter of 2022 primarily due to the Salisbury acquisition and organic loan growth. Interest expense increased $37.5 million, or 791.0%, as the cost of interest-bearing liabilities increased 189 bps to 2.18% for the quarter ended September 30, 2023, driven by interest-bearing deposit costs increasing 165 bps, as well as a $533.9 million increase in the average balances of short-term borrowings and a 534 bps rate paid on those borrowings. Included in net interest income was $1.4 million of acquisition-related net accretion which positively impacted net interest margin by 5 bps.
Net interest income for the first nine months of 2023 was $279.0 million, up $16.6 million, or 6.3%, from the same period in 2022. FTE net interest margin was 3.34% for the nine months ended September 30, 2023, an increase of 12 bps from the same period in 2022. Interest income increased $97.0 million, or 35.3%, as the yield on average interest-earning assets increased 107 bps from the same period in 2022 to 4.44%, while average interest-earning assets of $11.24 billion increased $303.6 million primarily due to the Salisbury acquisition and organic loan growth partially offset by the decrease in short-term interest-bearing accounts (“excess liquidity”). Interest expense was up $80.3 million, or 643.4%, for the nine months ended September 30, 2023 as compared to the same period in 2022 driven by interest-bearing deposit costs increasing 118 bps, as well as a $483.6 million increase in the average balances of short-term borrowings and a 522 bps rate paid on those borrowings. Included in net interest income was $1.4 million of acquisition-related net accretion which positively impacted net interest margin by 2 bps.
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, 2023 | | | September 30, 2022 | |
| (Dollars in thousands) | | Average Balance | | | Interest | | | Yield/ Rates | | | Average Balance | | | Interest | | | Yield/ Rates | |
| Assets: | | | | | | | | | | | | | | | | | | |
| Short-term interest-bearing accounts | | $ | 121,384 | | | $ | 1,304 | | | | 4.26 | % | | $ | 191,463 | | | $ | 1,209 | | | | 2.51 | % |
Securities taxable(1) | | | 2,364,809 | | | | 11,314 | | | | 1.90 | % | | | 2,491,315 | | | | 11,478 | | | | 1.83 | % |
Securities tax-exempt(1)(3) | | | 219,427 | | | | 1,850 | | | | 3.34 | % | | | 211,306 | | | | 1,318 | | | | 2.47 | % |
| Federal Reserve Bank and FHLB stock | | | 53,841 | | | | 917 | | | | 6.76 | % | | | 25,182 | | | | 220 | | | | 3.47 | % |
Loans(2)(3) | | | 9,043,582 | | | | 122,277 | | | | 5.36 | % | | | 7,808,025 | | | | 85,326 | | | | 4.34 | % |
| Total interest-earning assets | | $ | 11,803,043 | | | $ | 137,662 | | | | 4.63 | % | | $ | 10,727,291 | | | $ | 99,551 | | | | 3.68 | % |
| Other assets | | | 968,220 | | | | | | | | | | | | 887,378 | | | | | | | | | |
| Total assets | | $ | 12,771,263 | | | | | | | | | | | $ | 11,614,669 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
| Money market deposit accounts | | $ | 2,422,451 | | | $ | 17,739 | | | | 2.91 | % | | $ | 2,332,341 | | | $ | 877 | | | | 0.15 | % |
| NOW deposit accounts | | | 1,513,420 | | | | 2,165 | | | | 0.57 | % | | | 1,548,115 | | | | 800 | | | | 0.21 | % |
| Savings deposits | | | 1,707,094 | | | | 176 | | | | 0.04 | % | | | 1,854,122 | | | | 149 | | | | 0.03 | % |
| Time deposits | | | 1,178,352 | | | | 10,678 | | | | 3.60 | % | | | 455,168 | | | | 407 | | | | 0.35 | % |
| Total interest-bearing deposits | | $ | 6,821,317 | | | $ | 30,758 | | | | 1.79 | % | | $ | 6,189,746 | �� | | $ | 2,233 | | | | 0.14 | % |
| Federal funds purchased | | | 6,033 | | | | 82 | | | | 5.39 | % | | | 1,522 | | | | 13 | | | | 3.39 | % |
| Repurchase agreements | | | 71,516 | | | | 253 | | | | 1.40 | % | | | 69,048 | | | | 17 | | | | 0.10 | % |
| Short-term borrowings | | | 540,380 | | | | 7,277 | | | | 5.34 | % | | | 6,440 | | | | 54 | | | | 3.33 | % |
| Long-term debt | | | 29,800 | | | | 294 | | | | 3.91 | % | | | 3,331 | | | | 20 | | | | 2.38 | % |
| Subordinated debt, net | | | 109,160 | | | | 1,612 | | | | 5.86 | % | | | 98,748 | | | | 1,360 | | | | 5.46 | % |
| Junior subordinated debt | | | 101,196 | | | | 1,923 | | | | 7.54 | % | | | 101,196 | | | | 1,039 | | | | 4.07 | % |
| Total interest-bearing liabilities | | $ | 7,679,402 | | | $ | 42,199 | | | | 2.18 | % | | $ | 6,470,031 | | | $ | 4,736 | | | | 0.29 | % |
| Demand deposits | | $ | 3,498,424 | | | | | | | | | | | $ | 3,708,131 | | | | | | | | | |
| Other liabilities | | | 287,751 | | | | | | | | | | | | 234,851 | | | | | | | | | |
| Stockholders’ equity | | | 1,305,686 | | | | | | | | | | | | 1,201,656 | | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 12,771,263 | | | | | | | | | | | $ | 11,614,669 | | | | | | | | | |
| Net interest income (FTE) | | | | | | $ | 95,463 | | | | | | | | | | | $ | 94,815 | | | | | |
| Interest rate spread | | | | | | | | | | | 2.45 | % | | | | | | | | | | | 3.39 | % |
| Net interest margin (FTE) | | | | | | | | | | | 3.21 | % | | | | | | | | | | | 3.51 | % |
| Taxable equivalent adjustment | | | | | | $ | 568 | | | | | | | | | | | $ | 337 | | | | | |
| Net interest income | | | | | | $ | 94,895 | | | | | | | | | | | $ | 94,478 | | | | | |
| (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%. |
| Nine Months Ended | | September 30, 2023 | | | September 30, 2022 | |
| (Dollars in thousands) | | Average Balance | | | Interest | | | Yield/ Rates | | | Average Balance | | | Interest | | | Yield/ Rates | |
| Assets: | | | | | | | | | | | | | | | | | | |
| Short-term interest-bearing accounts | | $ | 61,677 | | | $ | 1,751 | | | | 3.80 | % | | $ | 575,517 | | | $ | 2,742 | | | | 0.64 | % |
Securities taxable(1) | | | 2,400,237 | | | | 34,218 | | | | 1.91 | % | | | 2,406,042 | | | | 31,460 | | | | 1.75 | % |
Securities tax-exempt(1)(3) | | | 207,812 | | | | 4,675 | | | | 3.01 | % | | | 242,033 | | | | 3,664 | | | | 2.02 | % |
| Federal Reserve Bank and FHLB stock | | | 48,860 | | | | 2,282 | | | | 6.24 | % | | | 25,064 | | | | 654 | | | | 3.49 | % |
Loans(2)(3) | | | 8,516,793 | | | | 330,314 | | | | 5.19 | % | | | 7,683,159 | | | | 237,290 | | | | 4.13 | % |
| Total interest-earning assets | | $ | 11,235,379 | | | $ | 373,240 | | | | 4.44 | % | | $ | 10,931,815 | | | $ | 275,810 | | | | 3.37 | % |
| Other assets | | | 880,655 | | | | | | | | | | | | 905,931 | | | | | | | | | |
| Total assets | | $ | 12,116,034 | | | | | | | | | | | $ | 11,837,746 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
| Money market deposit accounts | | $ | 2,207,126 | | | $ | 36,107 | | | | 2.19 | % | | $ | 2,541,927 | | | $ | 2,801 | | | | 0.15 | % |
| NOW deposit accounts | | | 1,525,089 | | | | 4,989 | | | | 0.44 | % | | | 1,570,318 | | | | 1,260 | | | | 0.11 | % |
| Savings deposits | | | 1,732,205 | | | | 462 | | | | 0.04 | % | | | 1,831,485 | | | | 442 | | | | 0.03 | % |
| Time deposits | | | 893,407 | | | | 20,330 | | | | 3.04 | % | | | 475,966 | | | | 1,328 | | | | 0.37 | % |
| Total interest-bearing deposits | | $ | 6,357,827 | | | $ | 61,888 | | | | 1.30 | % | | $ | 6,419,696 | | | $ | 5,831 | | | | 0.12 | % |
| Federal funds purchased | | | 32,784 | | | | 1,266 | | | | 5.16 | % | | | 513 | | | | 13 | | | | 3.39 | % |
| Repurchase agreements | | | 66,162 | | | | 416 | | | | 0.84 | % | | | 67,279 | | | | 46 | | | | 0.09 | % |
| Short-term borrowings | | | 485,804 | | | | 18,975 | | | | 5.22 | % | | | 2,170 | | | | 54 | | | | 3.33 | % |
| Long-term debt | | | 22,373 | | | | 631 | | | | 3.77 | % | | | 7,509 | | | | 140 | | | | 2.49 | % |
| Subordinated debt, net | | | 101,114 | | | | 4,281 | | | | 5.66 | % | | | 98,641 | | | | 4,078 | | | | 5.53 | % |
| Junior subordinated debt | | | 101,196 | | | | 5,372 | | | | 7.10 | % | | | 101,196 | | | | 2,325 | | | | 3.07 | % |
| Total interest-bearing liabilities | | $ | 7,167,260 | | | $ | 92,829 | | | | 1.73 | % | | $ | 6,697,004 | | | $ | 12,487 | | | | 0.25 | % |
| Demand deposits | | $ | 3,439,275 | | | | | | | | | | | $ | 3,709,761 | | | | | | | | | |
| Other liabilities | | | 271,307 | | | | | | | | | | | | 219,983 | | | | | | | | | |
| Stockholders’ equity | | | 1,238,192 | | | | | | | | | | | | 1,210,998 | | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 12,116,034 | | | | | | | | | | | $ | 11,837,746 | | | | | | | | | |
| Net interest income (FTE) | | | | | | $ | 280,411 | | | | | | | | | | | $ | 263,323 | | | | | |
| Interest rate spread | | | | | | | | | | | 2.71 | % | | | | | | | | | | | 3.12 | % |
| Net interest margin (FTE) | | | | | | | | | | | 3.34 | % | | | | | | | | | | | 3.22 | % |
| Taxable equivalent adjustment | | | | | | $ | 1,365 | | | | | | | | | | | $ | 912 | | | | | |
| Net interest income | | | | | | $ | 279,046 | | | | | | | | | | | $ | 262,411 | | | | | |
| (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%. |
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) 2023 over 2022 | |
| (In thousands) | | Volume | | | Rate | | | Total | |
| Short-term interest-bearing accounts | | $ | (549 | ) | | $ | 644 | | | $ | 95 | |
| Securities taxable | | | (596 | ) | | | 432 | | | | (164 | ) |
| Securities tax-exempt | | | 52 | | | | 480 | | | | 532 | |
| Federal Reserve Bank and FHLB stock | | | 380 | | | | 317 | | | | 697 | |
| Loans | | | 14,784 | | | | 22,167 | | | | 36,951 | |
| Total FTE interest income | | $ | 14,072 | | | $ | 24,039 | | | $ | 38,111 | |
| Money market deposit accounts | | $ | 35 | | | $ | 16,827 | | | $ | 16,862 | |
| NOW deposit accounts | | | (18 | ) | | | 1,383 | | | | 1,365 | |
| Savings deposits | | | (13 | ) | | | 40 | | | | 27 | |
| Time deposits | | | 1,522 | | | | 8,749 | | | | 10,271 | |
| Federal funds purchased | | | 58 | | | | 11 | | | | 69 | |
| Repurchase agreements | | | 1 | | | | 235 | | | | 236 | |
| Short-term borrowings | | | 7,171 | | | | 52 | | | | 7,223 | |
| Long-term debt | | | 253 | | | | 21 | | | | 274 | |
| Subordinated debt, net | | | 150 | | | | 102 | | | | 252 | |
| Junior subordinated debt | | | - | | | | 884 | | | | 884 | |
| Total FTE interest expense | | $ | 9,158 | | | $ | 28,305 | | | $ | 37,463 | |
| Change in FTE net interest income | | $ | 4,914 | | | $ | (4,266 | ) | | $ | 648 | |
| Nine Months Ended September 30, | | Increase (Decrease) 2023 over 2022 | |
| (In thousands) | | Volume | | | Rate | | | Total | |
| Short-term interest-bearing accounts | | $ | (4,300 | ) | | $ | 3,309 | | | $ | (991 | ) |
| Securities taxable | | | (76 | ) | | | 2,834 | | | | 2,758 | |
| Securities tax-exempt | | | (575 | ) | | | 1,586 | | | | 1,011 | |
| Federal Reserve Bank and FHLB stock | | | 889 | | | | 739 | | | | 1,628 | |
| Loans | | | 27,708 | | | | 65,316 | | | | 93,024 | |
| Total FTE interest income | | $ | 23,645 | | | $ | 73,785 | | | $ | 97,430 | |
| Money market deposit accounts | | $ | (417 | ) | | $ | 33,723 | | | $ | 33,306 | |
| NOW deposit accounts | | | (37 | ) | | | 3,766 | | | | 3,729 | |
| Savings deposits | | | (25 | ) | | | 45 | | | | 20 | |
| Time deposits | | | 2,075 | | | | 16,927 | | | | 19,002 | |
| Federal funds purchased | | | 1,243 | | | | 10 | | | | 1,253 | |
| Repurchase agreements | | | (1 | ) | | | 371 | | | | 370 | |
| Short-term borrowings | | | 18,873 | | | | 48 | | | | 18,921 | |
| Long-term debt | | | 390 | | | | 101 | | | | 491 | |
| Subordinated debt, net | | | 103 | | | | 100 | | | | 203 | |
| Junior subordinated debt | | | - | | | | 3,047 | | | | 3,047 | |
| Total FTE interest expense | | $ | 22,204 | | | $ | 58,138 | | | $ | 80,342 | |
| Change in net FTE interest income | | $ | 1,442 | | | $ | 15,646 | | | $ | 17,088 | |
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) | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Service charges on deposit accounts | | $ | 3,979 | | | $ | 3,581 | | | $ | 11,260 | | | $ | 11,032 | |
| Card services income | | | 5,503 | | | | 5,654 | | | | 15,469 | | | | 24,100 | |
| Retirement plan administration fees | | | 12,798 | | | | 11,496 | | | | 35,995 | | | | 37,451 | |
| Wealth management | | | 9,297 | | | | 8,402 | | | | 25,611 | | | | 25,294 | |
| Insurance services | | | 4,361 | | | | 3,892 | | | | 12,008 | | | | 11,258 | |
| Bank owned life insurance income | | | 1,568 | | | | 1,560 | | | | 4,974 | | | | 4,625 | |
| Net securities (losses) | | | (183 | ) | | | (148 | ) | | | (9,822 | ) | | | (914 | ) |
| Other | | | 2,913 | | | | 2,735 | | | | 8,195 | | | | 8,641 | |
| Total noninterest income | | $ | 40,236 | | | $ | 37,172 | | | $ | 103,690 | | | $ | 121,487 | |
Noninterest income for the three months ended September 30, 2023 was $40.2 million, up $8.2 million, or 25.6%, from the prior quarter and up $3.1 million, or 8.2%, from the third quarter of 2022. Excluding net securities gains (losses), noninterest income for the three months ended September 30, 2023 was $40.4 million, up $3.7 million, or 10.2%, from the prior quarter and up $3.1 million, or 8.3%, from the third quarter of 2022. The increase from the prior quarter was primarily driven by an increase in card services income, retirement plan administration, wealth management fees and insurance services. The increase from the third quarter of 2022 was driven by an increase in retirement plan administration, wealth management and insurance services fees. The increase in retirement plan administration from both the prior quarter and the third quarter of 2022 was due primarily to seasonal activity-based fees in the quarter, favorable market conditions, new account growth and the acquisition of Retirement Direct, LLC on July 1, 2023. Wealth management fees increased from both the prior quarter and the third quarter of 2022 due primarily to the Salisbury acquisition and seasonal activity-based fees.
Noninterest income for the nine months ended September 30, 2023 was $103.7 million, down $17.8 million, or 14.6%, from the same period in 2022. During the nine months ended September 30, 2023, the Company incurred a $4.5 million securities loss on the sale of two subordinated debt securities held in the AFS portfolio and a $5.0 million securities loss on the write-off of a subordinated debt security of a failed financial institution. Excluding net securities gains (losses), noninterest income for the nine months ended September 30, 2023 was $113.5 million, down $8.9 million, or 7.3%, from the same period in 2022. The decrease from the prior year was primarily due to lower card services income from the impact of the statutory price cap provisions of the Durbin Amendment of approximately $8.0 million and lower retirement plan administration fees driven by a decrease in certain activity-based fees.
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, | |
| (In thousands) | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Salaries and employee benefits | | $ | 49,248 | | | $ | 48,371 | | | $ | 144,237 | | | $ | 140,595 | |
| Technology and data services | | | 9,677 | | | | 9,096 | | | | 27,989 | | | | 26,588 | |
| Occupancy | | | 7,090 | | | | 6,481 | | | | 21,233 | | | | 19,761 | |
| Professional fees and outside services | | | 4,149 | | | | 3,817 | | | | 12,486 | | | | 11,999 | |
| Office supplies and postage | | | 1,700 | | | | 1,469 | | | | 5,004 | | | | 4,441 | |
| FDIC assessment | | | 1,657 | | | | 787 | | | | 4,397 | | | | 2,399 | |
| Advertising | | | 667 | | | | 559 | | | | 1,841 | | | | 1,943 | |
| Amortization of intangible assets | | | 1,609 | | | | 544 | | | | 2,603 | | | | 1,725 | |
| Loan collection and other real estate owned, net | | | 569 | | | | 549 | | | | 2,115 | | | | 1,690 | |
| Acquisition expenses | | | 7,917 | | | | - | | | | 9,724 | | | | - | |
| Other | | | 6,514 | | | | 5,021 | | | | 17,284 | | | | 13,815 | |
| Total noninterest expense | | $ | 90,797 | | | $ | 76,694 | | | $ | 248,913 | | | $ | 224,956 | |
Noninterest expense for the three months ended September 30, 2023 was $90.8 million, up $12.0 million, or 15.2%, from the prior quarter and up $14.1 million, or 18.4%, from the third quarter of 2022. The Company incurred acquisition expenses of $7.9 million and $1.2 million, related to the merger with Salisbury in the third and second quarter of 2023, respectively. Excluding acquisition expenses, noninterest expense for the three months ended September 30, 2023 was $82.9 million, up $5.3 million, or 6.8%, from the prior quarter and up $6.2 million, or 8.1%, from the third quarter of 2022. The increase from the prior quarter was primarily driven by the Salisbury acquisition and merit increases for employees. The increase from the third quarter of 2022 was driven by the Salisbury acquisition and merit increases, the increase in Federal Deposit Insurance Corporation (“FDIC”) assessment expense was driven by the statutory increase in the FDIC assessment rate and the increase in amortization of intangible assets was due to the amortization of intangible assets related to the Salisbury acquisition. The Company recorded a core deposit intangible of $31.2 million and a wealth management customer list intangible of $4.7 million related to the Salisbury acquisition.
Noninterest expense for the nine months ended September 30, 2023 was $248.9 million, up $24.0 million, or 10.6%, from the same period in 2022. The Company incurred acquisition expenses of $9.7 million for the nine months ended September 30, 2023. Excluding acquisition expenses, noninterest expense for the nine months ended September 30, 2023 was $239.2 million, up $14.2 million, or 6.3%, from the same period in 2022. The increase from the prior year was driven by higher salaries and employee benefits due to the Salisbury acquisition, increased salaries and wages including merit pay increases and higher health and welfare benefits, which were partially offset by lower levels of incentive compensation. In addition, the increase in technology and data services was due to continued investment in digital platform solutions, the increase in FDIC assessment expense was driven by the statutory increase in the FDIC assessment rate, increased occupancy costs were driven by the addition of Salisbury locations and other expenses were higher due to the increase in actuarially determined expenses related to the Company’s retirement plans.
Income Taxes
Income tax expense for the three months ended September 30, 2023 was $7.1 million, down $1.6 million from the prior quarter and down $4.4 million from the third quarter of 2022 due to a decrease in pre-tax net income. The effective tax rate was 22.4% for the third quarter of 2023, consistent with the prior quarter and compared to 22.8% for the third quarter of 2022.
Income tax expense for the nine months ended September 30, 2023 was $25.3 million, down $8.3 million from the same period of 2022 due to a decrease in pre-tax net income. The effective tax rate was 22.3% for the nine months ended September 30, 2023, compared to 22.5% for the nine months ended September 30, 2022.
ANALYSIS OF FINANCIAL CONDITION
Securities
Total securities decreased $128.4 million, or 5.2%, from December 31, 2022 to September 30, 2023. The securities portfolio represented 17.0% of total assets as of September 30, 2023 as compared to 21.1% of total assets as of December 31, 2022.
The following table details the composition of securities available for sale, securities held to maturity and equity securities for the periods indicated:
| | | September 30, 2023 | | | December 31, 2022 | |
| Mortgage-backed securities: | | | | | | |
| With maturities 15 years or less | | | 12 | % | | | 13 | % |
| With maturities greater than 15 years | | | 10 | % | | | 11 | % |
| Collateral mortgage obligations | | | 36 | % | | | 37 | % |
| Municipal securities | | | 17 | % | | | 15 | % |
| U.S. agency notes | | | 21 | % | | | 21 | % |
| Corporate | | | 2 | % | | | 2 | % |
| Equity securities | | | 2 | % | | | 1 | % |
| Total | | | 100 | % | | | 100 | % |
The Company’s mortgage-backed securities, U.S. agency notes and collateralized mortgage obligations are all guaranteed by Fannie Mae, Freddie Mac, the Federal Home Loan Bank, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). 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.
Loans
A summary of the loan portfolio by major categories(1), net of deferred fees and origination costs, for the periods indicated follows:
| (In thousands) | | September 30, 2023 | | | December 31, 2022 | |
| Commercial & industrial | | $ | 1,424,579 | | | $ | 1,266,031 | |
| Commercial real estate | | | 3,575,595 | | | | 2,807,941 | |
| Residential real estate | | | 2,111,670 | | | | 1,649,870 | |
| Indirect auto | | | 1,099,558 | | | | 989,587 | |
| Residential solar | | | 934,082 | | | | 856,798 | |
| Home equity | | | 340,777 | | | | 314,124 | |
| Other consumer | | | 181,114 | | | | 265,796 | |
| Total loans | | $ | 9,667,375 | | | $ | 8,150,147 | |
| (1) | Loans are summarized by business line which does not align to how the Company assesses credit risk in the estimate for credit losses under CECL. |
Total loans increased by $1.52 billion, or 24.9% annualized, from December 31, 2022 to September 30, 2023, which included $1.18 billion of loans acquired from Salisbury. Commercial and industrial loans increased $158.5 million to $1.42 billion; commercial real estate loans increased $767.7 million to $3.58 billion; and total consumer loans increased $591.0 million to $4.67 billion. Excluding loans acquired from Salisbury, loans grew $337.2 million, or 5.5% annualized, since December 31, 2022. Total loans represent approximately 69.9% of total assets as of September 30, 2023, as compared to 69.4% as of December 31, 2022.
Allowance for Credit Losses, Provision for Loan Losses and Nonperforming Assets
Beginning January 1, 2023, the Company adopted Accounting Standards Updates (“ASU”) 2022-02 Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) which resulted in an insignificant change to the Company’s methodology for estimating the allowance for credit losses on Troubled Debt Restructurings (“TDRs”) since December 31, 2022. The January 1, 2023 decrease in allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $0.6 million, which increased retained earnings by $0.5 million and decreased the deferred tax asset by $0.1 million.
Management considers the accounting policy relating to the allowance for credit losses to be a critical estimate given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.
The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. 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 expected to be charged-off.
Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
Management estimates the allowance balance for credit losses using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required at each point in the measurement process.
The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted probability of default and loss given default modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.
Additional information about our Allowance for Loan Losses is included in Note 6 to the consolidated financial statements. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
The allowance for credit losses totaled $114.6 million at September 30, 2023, compared to $100.4 million at June 30, 2023 and $96.8 million at September 30, 2022. The allowance for credit losses as a percentage of loans was 1.19% at September 30, 2023, compared to 1.20% at June 30, 2023 and 1.22% at September 30, 2022. The allowance for credit losses was 472.31% of nonperforming loans at September 30, 2023, compared to 510.01% at June 30, 2023 and 443.43% at September 30, 2022. The allowance for credit losses was 552.67% of nonaccrual loans at September 30, 2023, compared to 593.00% of nonaccrual loans at June 30, 2023 and compared to 506.86% at September 30, 2022. The increase in allowance for credit losses from June 30, 2023 to September 30, 2023 was due to the $14.5 million of allowance for acquired Salisbury loans which included both the $5.8 million allowance for purchase credit deteriorated (“PCD”) loans reclassified from loans and the $8.8 million allowance for non-PCD loans recognized through the provision for loan losses. The increase in the allowance for credit losses from September 30, 2022 to September 30, 2023 was primarily due to the Salisbury acquisition and organic loan growth.
The provision for loan losses was $12.6 million for three months ended September 30, 2023, compared to $3.6 million in the prior quarter and $4.5 million for the same period in the prior year. Included in the provision expense for the three months ended September 30, 2023 was $8.8 million of acquisition-related provision for loan losses due to the Salisbury acquisition. Net charge-offs totaled $4.2 million during the three months ended September 30, 2023, compared to net charge-offs of $3.5 million during the second quarter of 2023 and $1.3 million in the third quarter of 2022. Net charge-offs to average loans was 18 bps for the three months ended September 30, 2023, compared to 17 bps for the second quarter of 2023 and 7 bps for the three months ended September 30, 2022.
The provision for loan losses was $20.1 million for the nine months ended September 30, 2023, compared to $9.5 million for the nine months ended September 30, 2022. Provision expense increased from the same period in the prior year due primarily to the $8.8 million of acquisition-related provision for loan losses due to the Salisbury acquisition and an increase in net charge-offs during the nine months ended September 30, 2023. Net charge-offs totaled $11.5 million during the nine months ended September 30, 2023, compared to net charge-offs of $4.7 million during the nine months ended September 30, 2022. Net charge-offs to average loans was 18 bps for the nine months ended September 30, 2023, compared to 8 bps for the nine months ended September 30, 2022. The increase in net charge-offs was due to an increase in charge-offs in the Company’s other consumer portfolio, which is in a run-off status.
As of September 30, 2023, the unfunded commitment reserve totaled $4.8 million, which included $0.8 million of acquisition-related provision for unfunded commitment due to the Salisbury acquisition, compared to $4.4 million as of June 30, 2023 and $5.3 million as of September 30, 2022.
Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, troubled loans modifications, other real estate owned (“OREO”) and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. The threshold for evaluating classified and nonperforming loans specifically evaluated for individual credit loss is $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.
| | | September 30, 2023 | | | December 31, 2022 | |
| (Dollars in thousands) | | Amount | | | % | | | Amount | | | % | |
| Nonaccrual loans: | | | | | | | | | | | | |
| Commercial | | $ | 8,413 | | | | 41 | % | | $ | 7,664 | | | | 44 | % |
| Residential | | | 9,514 | | | | 46 | % | | | 4,835 | | | | 28 | % |
| Consumer | | | 2,427 | | | | 12 | % | | | 1,667 | | | | 10 | % |
Troubled loan modifications(1) | | | 382 | | | | 1 | % | | | 3,067 | | | | 18 | % |
| Total nonaccrual loans | | $ | 20,736 | | | | 100 | % | | $ | 17,233 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Loans over 90 days past due and still accruing: | | | | | | | | | | | | | | | | |
| Commercial | | $ | - | | | | - | | | $ | 4 | | | | - | |
| Residential | | | 1,012 | | | | 29 | % | | | 771 | | | | 20 | % |
| Consumer | | | 2,516 | | | | 71 | % | | | 3,048 | | | | 80 | % |
| Total loans over 90 days past due and still accruing | | $ | 3,528 | | | | 100 | % | | $ | 3,823 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Total nonperforming loans | | $ | 24,264 | | | | | | | $ | 21,056 | | | | | |
| OREO | | | - | | | | | | | | 105 | | | | | |
| Total nonperforming assets | | $ | 24,264 | | | | | | | $ | 21,161 | | | | | |
| | | | | | | | | | | | | | | | | |
| Total nonaccrual loans to total loans | | | 0.21 | % | | | | | | | 0.21 | % | | | | |
| Total nonperforming loans to total loans | | | 0.25 | % | | | | | | | 0.26 | % | | | | |
| Total nonperforming assets to total assets | | | 0.18 | % | | | | | | | 0.18 | % | | | | |
| Total allowance for loan losses to total nonperforming loans | | | 472.31 | % | | | | | | | 478.72 | % | | | | |
| Total allowance for loan losses to nonaccrual loans | | | 552.67 | % | | | | | | | 584.92 | % | | | | |
| (1) | TDRs prior to adoption of ASU 2022-02. |
Total nonperforming assets were $24.3 million at September 30, 2023, compared to $21.2 million at December 31, 2022 and $21.8 million at September 30, 2022. Nonperforming loans at September 30, 2023 were $24.3 million, or 0.25% of total loans, compared with $21.1 million, or 0.26% of total loans at December 31, 2022 and $21.8 million, or 0.28% of total loans at September 30, 2022. The increase in nonperforming loans from September 30, 2022 primarily resulted from an increase in residential nonaccrual loans driven by the Salisbury acquisition partially offset by a decrease in commercial nonaccrual loans. Total nonaccrual loans were $20.7 million or 0.21% of total loans at September 30, 2023, compared to $17.2 million or 0.21% of total loans at December 31, 2022 and compared to $19.1 million or 0.24% of total loans at September 30, 2022. Past due loans as a percentage of total loans was 0.49% at September 30, 2023, up from 0.33% at December 31, 2022 and up from 0.30% at September 30, 2022.
In addition to nonperforming loans discussed above, the Company has also identified approximately $92.4 million in potential problem loans at September 30, 2023 as compared to $52.0 million at December 31, 2022 and $58.4 million at September 30, 2022. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” The increase in potential problem loans from December 31, 2022 and September 30, 2022 is primarily due to the migration of commercial loan balances of $40.3 million and $32.8 million, respectively, to substandard, the bulk of which is adequately secured by real estate collateral. Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become over 90 days past due, be placed on nonaccrual, become troubled loans modifications or require increased allowance coverage and provision for loan losses. To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.
Deposits
Total deposits were $11.40 billion at September 30, 2023, up $1.91 billion, or 20.1%, from December 31, 2022, which included $1.31 billion in deposits acquired from Salisbury. Excluding deposits acquired from Salisbury, deposits increased $596.5 million since December 31, 2022. As of September 30, 2023 there were $296.6 million of brokered time deposits, up from $19.4 million as of December 31, 2022. The Company continues to experience the migration from no interest and low interest checking and savings accounts into higher cost money market and time deposit instruments. Total average deposits decreased $0.3 million, or 3.3%, from the same period last year. The decrease was driven primarily by a decrease of $270.5 million, or 7.3%, in demand deposits, combined with a decrease in interest-bearing deposits of $61.9 million, or 1.0%, primarily due to decreases in money market accounts and savings accounts partially offset by an increase in time accounts. The decrease in average balances was due primarily to larger commercial customers taking advantage of higher yielding investment opportunities in both the Company’s wealth management solutions as well as other offerings in the market. As of September 30, 2023 and December 31, 2022 the estimated amounts of uninsured deposits based on the methodologies and assumptions used for the bank regulatory reporting were $4.3 billion and $3.6 billion, respectively.
Borrowed Funds
The Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $490.2 million at September 30, 2023 compared to $585.0 million at December 31, 2022. Long-term debt was $29.8 million at September 30, 2023 compared to $4.8 million at December 31, 2022.
For more information about the Company’s borrowing capacity and liquidity position, see “Liquidity Risk” below.
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 of $2.2 million is being amortized on a straight-line basis into interest expense over five years.
Subordinated debt assumed with the Salisbury acquisition included $25.0 million of 3.50% fixed-to-floating rate subordinated notes due 2031. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 3.50%, payable quarterly in arrears commencing on June 30, 2021, and a floating rate of interest equivalent to the three-month SOFR plus a spread of 2.80%, payable quarterly in arrears commencing on June 30, 2026. As of the acquisition date, the fair value discount was $3.0 million for the acquired subordinated debt.
As of September 30, 2023 and December 31, 2022 the subordinated debt net of unamortized issuance costs was $119.4 million and $96.9 million, respectively.
Capital Resources
Stockholders’ equity of $1.36 billion represented 9.86% of total assets at September 30, 2023 compared with $1.17 billion, or 10.00% of total assets, as of December 31, 2022. Stockholders’ equity increased $189.3 million from December 31, 2022 driven by the Salisbury acquisition adding $161.7 million of capital and net income generation of $88.3 million for the nine months ended September 30, 2023, partially offset by dividends declared of $40.8 million, the repurchase of common stock of $4.9 million and a $17.5 million decrease in accumulated other comprehensive income due primarily to the change in market value of securities available for sale.
The Company purchased 68,500 shares of its common stock during the third quarter of 2023 at an average price of $31.61 per share under its previously announced share repurchase program. The Company may repurchase shares of its common stock from time to time to mitigate the potential dilutive effects of stock-based incentive plans and other potential uses of common stock for corporate purposes. As of September 30, 2023, there were 1,444,500 shares available for repurchase under this plan authorized on December 20, 2021 and set to expire on December 31, 2023.
As the capital ratios in the following table indicate, the Company remained “well capitalized” at September 30, 2023 under applicable bank regulatory requirements. Capital measurements are well in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based capital ratios must be 5%, 6.5%, 8% and 10%, respectively.
| Capital Measurements | | September 30, 2023 | | | December 31, 2022 | |
| Tier 1 leverage ratio | | | 10.23 | % | | | 10.32 | % |
| Common equity tier 1 capital ratio | | | 11.31 | % | | | 12.12 | % |
| Tier 1 capital ratio | | | 12.23 | % | | | 13.19 | % |
| Total risk-based capital ratio | | | 14.45 | % | | | 15.38 | % |
| Cash dividends as a percentage of net income | | | 46.20 | % | | | 32.74 | % |
| Per common share: | | | | | | | | |
| Book value | | $ | 28.94 | | | $ | 27.38 | |
Tangible book value(1) | | $ | 20.39 | | | $ | 20.65 | |
Tangible equity ratio(2) | | | 7.15 | % | | | 7.73 | % |
| (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. |
In March 2020, the Office of Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses (after-tax) was deferred and was phased into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, the Company was allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020 and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020 and December 31, 2021, was also phased into regulatory capital at 25% per year commencing January 1, 2022. The Company adopted the capital transition relief over the permissible five-year period.
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.
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 managing the Company’s asset/liability position, the Board and management aim to regulate the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on 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 the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk.
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 repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors. In the rising rate scenarios, net interest income is projected to experience an increase from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, money market deposit accounts and time accounts. Net interest income for the next twelve months in the +200/+100/-200 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% reduction in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the September 30, 2023 balance sheet position:
Interest Rate Sensitivity Analysis Change in interest rates (in bps) |
|
| Percent change in net interest income | |
| | +200 |
|
|
| 1.17 | % |
| | +100 |
|
|
| 0.86 | % |
| | -200 |
|
|
| (1.60 | %) |
The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of short to mid-term interest rates which are heavily driven by inflationary pressures and Federal Open Market Committee monetary policy. In response to the economic impact of the pandemic, the federal funds rate was reduced to near zero in March 2020, term interest rates fell sharply across the yield curve and the Company reduced deposit rates. Post-pandemic, inflationary pressures have resulted in a higher overall yield curve with Federal Funds increases of 425 bps in 2022 and an additional 100 bps in 2023. Current expectations are for short-term interest rates to normalize at current levels in the near-term as inflation levels have moderated. While deposit rates have increased meaningfully in 2023 in conjunction with the increase to short term interest rates, the Company continues to focus on managing deposit expense and overall deposit levels in an environment with elevated demand for liquidity.
Liquidity Risk
Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources. The objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit 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, along with regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. 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. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. Management continually monitors marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.
The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. 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, 2023, the Company’s Basic Surplus measurement was 12.1% of total assets, or $1.67 billion, as compared to the December 31, 2022 Basic Surplus of 13.2%, or $1.55 billion, and was above the Company’s minimum of 5% (calculated at $691.4 million and $587.0 million of period end total assets as September 30, 2023 and December 31, 2022, respectively) set forth in its liquidity policies.
At September 30, 2023 and December 31, 2022, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $429.7 million and $443.8 million, respectively. At September 30, 2023 and December 31, 2022, the Bank had $71.0 million and $8.0 million, respectively, of collateral encumbered by municipal letters of credit. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.04 billion at September 30, 2023 and $1.17 billion at December 31, 2022. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $536.8 million and $898.1 million at September 30, 2023 and December 31, 2022, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $1.96 billion at September 30, 2023 and $1.92 billion at December 31, 2022. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile and residential solar loans as collateral. At September 30, 2023 and December 31, 2022, the Bank had the capacity to borrow $982.3 million and $622.7 million, respectively, from this program. The Company’s internal policy authorizes borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $2.94 billion at September 30, 2023 and $2.41 billion at December 31, 2022.
This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considers its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2023. Continued increases to interest rates could result in deposit declines as depositors have alternative opportunities for yield on their excess funds. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Note, enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the coronavirus pandemic including increasing the frequency of monitoring and adding additional sources of liquidity. While, the pandemic has come to an end, this enhanced monitoring continues as rising interest rates and the recent bank failures have led to a deposit decline in the banking system and increased volatility to liquidity risk.
At September 30, 2023, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is reduced, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.
The Company’s primary source of funds is the Bank. Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends. The approval of the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations. At September 30, 2023, approximately $95.0 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.
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 management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the 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, 2023, the Company’s disclosure controls and procedures were effective.
PART II OTHER INFORMATION
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.
There are no material changes to the risk factors as previously discussed in Part II, Item 1A. of our March 31, 2023 Quarterly Report on Form 10-Q and in Part I, Item 1A. of our 2022 Annual Report on Form 10-K.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The table below sets forth the information with respect to purchases made by the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a) (3) under the Securities Exchange Act of 1934) of our common stock during the quarter ended September 30, 2023:
| | Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | | Maximum Number of Shares That May Yet be Purchased Under the Plans(1) | |
| | 7/1/23 - 7/31/23 | | | 68,500 | | | $ | - | | | | 68,500 | | | | 1,444,500 | |
| | 8/1/23 - 8/31/23 | | | - | | | | - | | | | - | | | | 1,444,500 | |
| | 9/1/23 - 9/30/23 | | | - | | | | - | | | | - | | | | 1,444,500 | |
| | Total | | | 68,500 | | | $ | 31.61 | | | | 68,500 | | | | 1,444,500 | |
| (1) | The Company purchased 68,500 shares of its common stock during the third quarter of 2023 at an average price of $31.61 per share under its previously announced share repurchase program. The Company may repurchase shares of its common stock from time to time to mitigate the potential dilutive effects of stock-based incentive plans and other potential uses of common stock for corporate purposes. As of September 30, 2023, there were 1,444,500 shares available for repurchase under this plan announced on December 20, 2021, and set to expire on December 31, 2023. |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
ITEM 4. | MINE SAFETY DISCLOSURES |
None
