NBT BANCORP INC - Quarter Report: 2019 September (Form 10-Q)

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.

☐	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, there were 43,791,695 shares outstanding of the Registrant’s common stock, $0.01 par value per share.

NBT BANCORP INC.

FORM 10-Q-Quarter Ended September 30, 2019

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1	Financial Statements

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

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

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

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

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

	Notes to Unaudited Interim Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4	Controls and Procedures	50

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	51
Item 1A	Risk Factors	51
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3	Defaults Upon Senior Securities	51
Item 4	Mine Safety Disclosures	51
Item 5	Other Information	51
Item 6	Exhibits	52

SIGNATURES		53

Table of Contents

Item 1 – FINANCIAL STATEMENTS

NBT Bancorp Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)

	September 30,			December 31,
	2019			2018
(In thousands, except share and per share data)
Assets
Cash and due from banks	$	217,639		$	175,550
Short-term interest bearing accounts		56,457			5,405
Equity securities, at fair value		26,818			23,053
Securities available for sale, at fair value		932,173			998,496
Securities held to maturity (fair value $691,189 and $778,675, respectively)		678,435			783,599
Federal Reserve and Federal Home Loan Bank stock		37,490			53,229
Loans held for sale		17,986			6,943
Loans		7,013,809			6,887,709
Less allowance for loan losses		72,365			72,505
Net loans	$	6,941,444		$	6,815,204
Premises and equipment, net		75,708			78,970
Goodwill		274,769			274,769
Intangible assets, net		12,864			15,599
Bank owned life insurance		180,513			177,479
Other assets		209,090			148,067
Total assets	$	9,661,386		$	9,556,363
Liabilities
Demand (noninterest bearing)	$	2,477,657		$	2,361,099
Savings, NOW and money market		4,405,218			4,076,434
Time		860,291			930,678
Total deposits	$	7,743,166		$	7,368,211
Short-term borrowings		443,266			871,696
Long-term debt		84,239			73,724
Junior subordinated debt		101,196			101,196
Other liabilities		190,918			123,627
Total liabilities	$	8,562,785		$	8,538,454
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
Additional paid-in-capital		576,146			575,466
Retained earnings		679,090			621,203
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	)
Total stockholders’ equity	$	1,098,601		$	1,017,909
Total liabilities and stockholders’ equity	$	9,661,386		$	9,556,363

See accompanying notes to unaudited interim consolidated financial statements.

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NBT Bancorp Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
(In thousands, except per share data)
Interest, fee and dividend income
Interest and fees on loans	$	81,082		$	77,249	$	241,674	$	221,864
Securities available for sale		5,711			6,659		17,664		20,588
Securities held to maturity		4,586			3,462		14,892		8,898
Other		1,002			834		2,728		2,381
Total interest, fee and dividend income	$	92,381		$	88,204	$	276,958	$	253,731
Interest expense
Deposits	$	10,745		$	6,157	$	29,805	$	15,167
Short-term borrowings		1,989			3,000		7,986		7,421
Long-term debt		498			431		1,391		1,359
Junior subordinated debt		1,095			1,089		3,404		3,030
Total interest expense	$	14,327		$	10,677	$	42,586	$	26,977
Net interest income	$	78,054		$	77,527	$	234,372	$	226,754
Provision for loan losses		6,324			6,026		19,408		22,300
Net interest income after provision for loan losses	$	71,730		$	71,501	$	214,964	$	204,454
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
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
Noninterest expense
Salaries and employee benefits	$	39,352		$	38,394	$	117,275	$	112,687
Occupancy		5,335			5,380		17,053		17,034
Data processing and communications		4,492			4,434		13,599		13,221
Professional fees and outside services		3,535			3,580		10,562		10,408
Equipment		4,487			4,319		13,762		12,508
Office supplies and postage		1,667			1,563		4,835		4,640
FDIC (credit) expense		(20	)		1,223		1,946		3,516
Advertising		677			739		1,821		1,776
Amortization of intangible assets		874			1,054		2,735		3,064
Loan collection and other real estate owned, net		976			1,234		2,722		3,479
Other		8,374			4,577		18,130		13,324
Total noninterest expense	$	69,749		$	66,497	$	204,440	$	195,657
Income before income tax expense	$	41,701		$	38,385	$	118,306	$	107,613
Income tax expense		9,322			8,578		26,245		23,699
Net income	$	32,379		$	29,807	$	92,061	$	83,914
Earnings per share
Basic	$	0.74		$	0.68	$	2.10	$	1.92
Diluted	$	0.73		$	0.68	$	2.09	$	1.91

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,
	2019			2018			2019			2018
(In thousands)
Net income	$	32,379		$	29,807		$	92,061		$	83,914
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	)
Tax effect		(590	)		1,449			(6,697	)		6,651
Unrealized net holding gains (losses) arising during the period, net	$	1,770		$	(4,349	)	$	20,090		$	(19,954	)

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

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

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

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

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

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

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

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

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

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
(In thousands, except share and per share data)
Balance at June 30, 2019	$	497	$	575,794		$	658,107		$	(25,036	)	$	(134,539	)	$	1,074,823
Net income		-		-			32,379			-			-			32,379
Cash dividends - $0.26 per share		-		-			(11,396	)		-			-			(11,396	)
Net issuance of 17,234 shares to employee and other stock plans		-		(104	)		-			-			331			227
Stock-based compensation		-		456			-			-			-			456
Other comprehensive income		-		-			-			2,112			-			2,112
Balance at September 30, 2019	$	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
(In thousands, except share and per share data)
Balance at December 31, 2018	$	497	$	575,466		$	621,203		$	(43,174	)	$	(136,083	)	$	1,017,909
Net income		-		-			92,061			-			-			92,061
Cash dividends - $0.78 per share		-		-			(34,174	)		-			-			(34,174	)
Net issuance of 113,679 shares to employee and other stock plans		-		(2,916	)		-			-			1,875			(1,041	)
Stock-based compensation		-		3,596			-			-			-			3,596
Other comprehensive income		-		-			-			20,250			-			20,250
Balance at September 30, 2019	$	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,
	2019			2018
(In thousands)
Operating activities
Net income	$	92,061		$	83,914
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		19,408			22,300
Depreciation and amortization of premises and equipment		7,106			6,957
Net amortization on securities		2,495			3,108
Amortization of intangible assets		2,735			3,064
Amortization of operating lease right-of-use assets		5,396			-
Excess tax benefit on stock-based compensation		(371	)		(507	)
Stock-based compensation expense		3,596			3,457
Bank owned life insurance income		(4,119	)		(3,852	)
Proceeds from sale of loans held for sale		109,661			73,239
Originations of loans held for sale		(119,753	)		(76,959	)
Net gains on sale of loans held for sale		(475	)		(181	)
Net security (gains)		(4,024	)		(575	)
Net (gains) losses on sale of other real estate owned		(178	)		130
Net change in other assets and other liabilities		(9,579	)		(14,313	)
Net cash provided by operating activities	$	103,959		$	99,782
Investing activities
Net cash used in acquisitions	$	-		$	(7,884	)
Securities available for sale:
Proceeds from maturities, calls and principal paydowns		226,070			213,732
Proceeds from sales		26,203			-
Purchases		(160,781	)		(102,004	)
Securities held to maturity:
Proceeds from maturities, calls and principal paydowns		165,997			73,217
Purchases		(61,150	)		(249,300	)
Equity securities:
Proceeds from sales		3,966			3,318
Purchases		(93	)		(2	)
Other:
Net increase in loans		(146,778	)		(323,614	)
Proceeds from Federal Home Loan Bank stock redemption		147,200			186,869
Purchases of Federal Reserve and Federal Home Loan Bank stock		(131,461	)		(192,584	)
Proceeds from settlement of bank owned life insurance		1,085			-
Purchases of premises and equipment, net		(4,018	)		(4,256	)
Proceeds from sales of other real estate owned		1,129			2,124
Net cash provided by (used in) investing activities	$	67,369		$	(400,384	)
Financing activities
Net increase in deposits	$	374,955		$	270,654
Net (decrease) increase in short-term borrowings		(428,430	)		92,585
Proceeds from issuance of long-term debt		10,598			25,000
Repayments of long-term debt		(83	)		(40,117	)
Proceeds from the issuance of shares to employee and other stock plans		543			1,140
Cash paid by employer for tax-withholdings on stock issuance		(1,596	)		(1,792	)
Cash dividends		(34,174	)		(31,899	)
Net cash (used in) provided by financing activities	$	(78,187	)	$	315,571
Net increase in cash and cash equivalents	$	93,141		$	14,969
Cash and cash equivalents at beginning of period		180,955			159,664
Cash and cash equivalents at end of period	$	274,096		$	174,633

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

See accompanying notes to unaudited interim consolidated financial statements.

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NBT Bancorp Inc. and Subsidiaries

Notes to Unaudited Interim Consolidated Financial Statements

September 30, 2019

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 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. 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 of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of the Registrant and its wholly-owned subsidiaries, the Bank, NBT Financial and NBT Holdings. Collectively, the Registrant and its subsidiaries are referred to herein as “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 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. The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified.

3.	Securities

The amortized cost, estimated fair value and unrealized gains (losses) of available for sale (“AFS”) securities are as follows:

(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

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The components of net realized gains (losses) on AFS securities are 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 no 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 no 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, 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 principal 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 no 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 no 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 no 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.

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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 a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three segments, each with different risk characteristics and methodologies for assessing risk. Those segments 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. The following table illustrates the portfolio and class segments for the Company’s loan portfolio:

Portfolio	Class
Commercial Loans	Commercial and Industrial
	Commercial Real Estate
	Business Banking
Consumer Loans	Dealer Finance
	Specialty Lending
	Direct
Residential Real Estate

Commercial Loans

The Company offers a variety of 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 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 obtain government loan guarantees to provide further support.

Commercial Real Estate (“CRE”) – The Company offers CRE loans to finance real estate purchases, refinancings, expansions and improvements to commercial and agricultural properties. These CRE loans are secured by liens on the real estate, which may include both owner occupied and non-owner-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.

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 and Direct loans.

Dealer Finance – 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 – The Company offers unsecured 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 consumer installment loans to finance vehicle purchases, mobile home purchases and 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 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 deposit account. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Residential Real Estate

Residential real estate loans consist primarily of loans secured by a first or second mortgage on primary residences. We originate adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or 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 purposes of evaluating the adequacy of the allowance, the Company considers a number of significant factors that affect the collectability of the portfolio. For individually impaired loans, these include estimates of impairment, if any, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans, estimates of the Company’s exposure to credit loss reflect a current assessment of a number of factors, which could affect collectability. These factors include: past loss experience, size, trend, composition and nature of loans; changes in lending policies and procedures, including underwriting standards and collection, charge-offs and recoveries; 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; the 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 make loan grade changes as well as recognize additions to the allowance based on their examinations.

After a thorough consideration of the factors discussed above, any required additions or reductions 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 recognize losses on loans, additions and reductions of the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content or changes in management’s assessment of any or all of the determining factors discussed above.

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The following tables illustrate 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

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, 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 no allowance for loan losses for the acquired loan portfolio as of September 30, 2019 and December 31, 2018. There were no 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.

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The following tables illustrate the allowance for loan losses and 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

For all loan classes within the Company’s loan portfolio, loans are placed on nonaccrual status when timely collection 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 secured 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.

If ultimate repayment of a nonaccrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment 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 the Company’s loan portfolio, nonaccrual loans are returned to accrual status when they become current as to principal and interest and demonstrate a period of performance under 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.

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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 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

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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 were no material commitments to extend further credit to borrowers with nonperforming loans as of September 30, 2019 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.

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

	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

There were no acquired impaired loans specifically evaluated for impairment as of September 30, 2019 or December 31, 2018.

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

	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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	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

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 management with an early warning system, enabling recognition and response to problem loans and potential problem loans.

Commercial Grading System

For C&I and CRE loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This would include comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass.

●

Doubtful

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

●

Substandard

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

●

Special Mention

Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage, 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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● 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 loans are graded as either Classified or Non-classified:

●

Classified

Classified loans are inadequately protected by the current worth and paying capacity 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.

Consumer and Residential Real Estate Grading System

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

●

Nonperforming

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

●

Performing

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

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

(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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(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
Performing	$	145,779	$	145,779
Nonperforming		1,498		1,498
Total	$	147,277	$	147,277

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Troubled Debt Restructured Loans

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 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 in a troubled debt restructuring, management measures for impairment, if any, 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.

The following tables illustrate 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
(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:
Dealer Finance		-	$	-	$	-		8	$	90	$	89
Direct		1		30		37		-		-		-
Total Consumer Loans		1	$	30	$	37		8	$	90	$	89
Residential Real Estate		2	$	186	$	203		-	$	-	$	-
Total Troubled Debt Restructurings		3	$	216	$	240		8	$	90	$	89

	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

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The following tables illustrate 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

	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

Operating leases in which we 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 recognized on a straight-line basis 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.

The Company has lease agreements with lease 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 are not included in the measurement of the lease liability since they are generally able to be segregated.

Our leases relate primarily to office space and bank branches, and some contain options 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.

The following table shows the future minimum rental payments related to non-cancelable operating leases with original terms of one year or more as of December 31, 2018.

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

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6. Defined Benefit Post-Retirement Plans

The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at September 30, 2019. 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.”

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.”

The Company made no voluntary contributions to the pension and other benefits plans during the three and nine months ended September 30, 2019 and 2018.

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

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

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

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

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7. Earnings Per Share

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

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

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

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

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

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

There were 1,500 stock options for the quarters 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.

There were 1,500 stock options for the 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)

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

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

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

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

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

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

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

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

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

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9. Derivative Instruments and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company 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 the Company had ten 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 to $81 thousand and $116 thousand, respectively as of September 30, 2019. As of December 31, 2018 the Company had nine risk participation agreements, with the fair values included in other assets and other liabilities on the consolidated balance sheet of $36 thousand and $17 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,
(In thousands)	2019		2018
Derivatives Not Designated as Hedging Instruments:
Fair value adjustment included in other assets and other liabilities
Interest rate derivatives	$	52,925	$	17,572
Notional amount:
Interest rate derivatives		793,805		653,369
Risk participation agreements		72,496		70,785
Derivatives Designated as Hedging Instruments:
Fair value adjustment included in other assets
Interest rate derivatives		142		2,428
Fair value adjustment included in other liabilities
Interest rate derivatives		61		-
Notional amount:
Interest rate derivatives		100,000		225,000

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 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 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,
(In thousands)	2019			2018			2019			2018
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	)

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,
(In thousands)	2019			2018			2019		2018
Derivatives Not Designated as Hedging Instruments:
(Decrease) increase in other income	$	(10	)	$	(13	)	$	96	$	110

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10. 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 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 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 no transfers of assets between the levels of the fair value hierarchy. For the year ended December 31, 2018, the Company made no 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
Assets:
AFS securities:
Federal agency	$	-	$	29,831	$	-	$	29,831
State & municipal		-		9		-		9
Mortgage-backed		-		483,510		-		483,510
Collateralized mortgage obligations		-		418,823		-		418,823
Total AFS securities	$	-	$	932,173	$	-	$	932,173
Equity securities		22,818		4,000		-		26,818
Derivatives		-		53,148		-		53,148
Total	$	22,818	$	989,321	$	-	$	1,012,139

Liabilities:
Derivatives	$	-	$	53,102	$	-	$	53,102
Total	$	-	$	53,102	$	-	$	53,102

(In thousands)	Level 1		Level 2		Level 3		December 31, 2018
Assets:
AFS securities:
Federal agency	$	-	$	84,299	$	-	$	84,299
State & municipal		-		29,915		-		29,915
Mortgage-backed		-		512,295		-		512,295
Collateralized mortgage obligations		-		371,987		-		371,987
Total AFS securities	$	-	$	998,496	$	-	$	998,496
Equity securities		19,053		4,000		-		23,053
Derivatives		-		20,000		-		20,000
Total	$	19,053	$	1,022,496	$	-	$	1,041,549

Liabilities:
Derivatives	$	-	$	17,572	$	-	$	17,572
Total	$	-	$	17,572	$	-	$	17,572

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 and the year ended December 31, 2018 were related to impaired loans and write-downs of other real estate owned. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the specific reserves for 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%. Based on the valuation techniques used, the fair value measurements for collateral dependent impaired loans are classified as Level 3.

As of September 30, 2019 the Company had no collateral dependent loans. As of December 31, 2018, the Company had collateral dependent loans with a carrying value $0.2 million, which had specific reserves included in the allowance for loan losses of $25 thousand.

During the three months ended September 30, 2019, the Company recorded a $1.0 million write-down of a branch location to fair value of $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
(In thousands)	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
Net loans		3		6,959,430		6,917,768		6,822,147		6,754,460
Financial liabilities:
Time deposits		2	$	860,291	$	857,455	$	930,678	$	920,534
Long-term debt		2		84,239		84,609		73,724		73,927
Junior subordinated debt		2		101,196		104,311		101,196		100,114

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 operation that contributes net fee income annually. The trust and investment management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value.

HTM Securities

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

Net Loans

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.

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

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 billion at September 30, 2019 and $1.7 billion at December 31, 2018.

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

The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third parties. These standby letters of credit are frequently issued in support of third party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. Standby letters of credit totaled $30.7 million at September 30, 2019 and $41.2 million at December 31, 2018. As of September 30, 2019 and December 31, 2018, 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 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, 2018 for an understanding of the following discussion and analysis. Operating results for the three and nine month periods ending September 30, 2019 are not necessarily indicative of the results of the full year ending December 31, 2019 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"); (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; (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; and (20) 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 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.

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 losses, pension accounting and provision for income taxes.

Management of the Company considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio and the material effect that such judgments can have on the results of operations. While management’s current evaluation of the allowance for loan losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provision for loan losses would be required 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.

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.

The Company’s policies on 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 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 Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported.

Refer to Note 12 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, 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 the third quarter of 2018⁽¹⁾

·	The Company's Board of Directors authorized a stock repurchase program

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

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Results of Operations

Net income for the three months ended September 30, 2019 was $32.4 million, up 6.0% from $30.6 million for the second quarter of 2019 and up 8.6% from $29.8 million for the third quarter of 2018. Diluted earnings per share for the three months ended September 30, 2019 was $0.73, as compared with $0.69 for the prior quarter, an increase of 5.8%, and $0.68 for the third quarter of 2018, an increase of 7.4%. Return on average assets (annualized) was 1.34% for the three months ended September 30, 2019 as compared to 1.28% for the prior quarter and 1.25% for the same period last year. Return on average equity (annualized) was 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. Return on average tangible common equity (annualized) was 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.

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

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,
(In thousands)	2019		2018		2019		2018
Net income	$	32,379	$	29,807	$	92,061	$	83,914
Amortization of intangible assets (net of tax)		656		791		2,051		2,298
Net income, excluding intangible amortization	$	33,035	$	30,598	$	94,112	$	86,212

Average stockholders' equity	$	1,085,961	$	988,551	$	1,055,375	$	972,316
Less: average goodwill and other intangibles		288,077		291,814		288,967		287,403
Average tangible common equity	$	797,884	$	696,737	$	766,408	$	684,913

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 million for the third quarter of 2019, down $0.6 million, or 0.7%, from the previous quarter. The FTE net interest margin was 3.57% for the three months ended September 30, 2019, down 4 bps from the previous quarter and interest income decreased $0.9 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%, as the yield on average interest-earning assets increased 17 bps from the same period in 2018, and average interest-earning assets increased $42.3 million, or 0.5%, primarily due to a $147.9 million increase in average loans. Interest expense increased $3.7 million, as the cost of interest-bearing liabilities increased 25 bps, driven by interest-bearing deposit costs increasing 33 bps.

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Net interest income for the first nine months of 2019 was $234.4 million, up $7.6 million, or 3.4%, from the same period in 2018. FTE net interest margin of 3.61% for the nine months ended September 30, 2019, was up from 3.57% for the same period in 2018. Average interest-earning assets were up $187.7 million, or 2.2%, for the nine months ended September 30, 2019, 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 bps, driven by interest-bearing deposit costs increasing 36 bps combined with a 40 bp increase in short-term borrowing costs. The Federal Reserve reduced its target fed funds rate twice in the third quarter of 2019 by a total 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.

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
(Dollars in thousands)	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	%
Securities available for sale (1) (3)		940,256		5,711		2.41	%		1,197,910		6,697		2.22	%
Securities held to maturity (1) (3)		698,617		4,879		2.77	%		591,220		3,843		2.58	%
Federal Reserve Bank and FHLB stock		40,525		719		7.04	%		50,107		783		6.20	%
Loans (2) (3)		6,987,476		81,163		4.61	%		6,839,565		77,359		4.49	%
Total interest-earning assets	$	8,724,404	$	92,755		4.22	%	$	8,682,130	$	88,733		4.05	%
Other assets	$	852,616						$	776,219
Total assets	$	9,577,020						$	9,458,349

Liabilities and Stockholders' Equity:
Money market deposit accounts	$	2,015,297	$	6,281		1.24	%	$	1,724,853	$	2,526		0.58	%
NOW deposit accounts		1,056,001		340		0.13	%		1,164,513		485		0.17	%
Savings deposits		1,274,793		188		0.06	%		1,279,520		188		0.06	%
Time deposits		893,837		3,936		1.75	%		881,792		2,958		1.33	%
Total interest-bearing deposits	$	5,239,928	$	10,745		0.81	%	$	5,050,678	$	6,157		0.48	%
Short-term borrowings		490,694		1,989		1.61	%		766,372		3,000		1.55	%
Long-term debt		84,250		498		2.35	%		73,762		431		2.32	%
Junior subordinated debt		101,196		1,095		4.29	%		101,196		1,089		4.27	%
Total interest-bearing liabilities	$	5,916,068	$	14,327		0.96	%	$	5,992,008	$	10,677		0.71	%
Demand deposits	$	2,389,617						$	2,356,216
Other liabilities		185,374							121,574
Stockholders' equity		1,085,961							988,551
Total liabilities and stockholders' equity	$	9,577,020						$	9,458,349
Net interest income (FTE)			$	78,428						$	78,056
Interest rate spread						3.26	%						3.34	%
Net interest margin (FTE)						3.57	%						3.57	%
Taxable equivalent adjustment			$	374						$	529
Net interest income			$	78,054						$	77,527

(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
(Dollars in thousands)	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	%
Securities available for sale (1) (3)		968,517		17,695		2.44	%		1,245,672		20,714		2.22	%
Securities held to maturity (1) (3)		750,305		15,921		2.84	%		526,097		9,924		2.52	%
Federal Reserve Bank and FHLB stock		45,254		2,271		6.71	%		48,391		2,248		6.21	%
Loans (2) (3)		6,944,518		241,932		4.66	%		6,728,479		222,184		4.41	%
Total interest-earning assets	$	8,739,564	$	278,276		4.26	%	$	8,551,881	$	255,203		3.99	%
Other assets	$	821,859						$	763,108
Total assets	$	9,561,423						$	9,314,989

Liabilities and Stockholders' Equity:
Money market deposit accounts	$	1,912,572	$	16,255		1.14	%	$	1,693,627	$	5,459		0.43	%
NOW deposit accounts		1,105,919		1,157		0.14	%		1,199,306		1,366		0.15	%
Savings deposits		1,269,723		550		0.06	%		1,272,452		543		0.06	%
Time deposits		929,819		11,843		1.70	%		847,899		7,799		1.23	%
Total interest-bearing deposits	$	5,218,033	$	29,805		0.76	%	$	5,013,284	$	15,167		0.40	%
Short-term borrowings		607,155		7,986		1.76	%		728,627		7,421		1.36	%
Long-term debt		80,162		1,391		2.32	%		82,372		1,359		2.21	%
Junior subordinated debt		101,196		3,404		4.50	%		101,196		3,030		4.00	%
Total interest-bearing liabilities	$	6,006,546	$	42,586		0.95	%	$	5,925,479	$	26,977		0.61	%
Demand deposits	$	2,332,965						$	2,303,751
Other liabilities		166,537							113,443
Stockholders' equity		1,055,375							972,316
Total liabilities and stockholders' equity	$	9,561,423						$	9,314,989
Net interest income (FTE)			$	235,690						$	228,226
Interest rate spread						3.31	%						3.38	%
Net interest margin (FTE)						3.61	%						3.57	%
Taxable equivalent adjustment			$	1,318						$	1,472
Net interest income			$	234,372						$	226,754

(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
(In thousands)	Volume			Rate			Total
Short-term interest bearing accounts	$	460		$	(136	)	$	324
Securities available for sale		(4,923	)		1,904			(3,019	)
Securities held to maturity		4,637			1,360			5,997
Federal Reserve Bank and FHLB stock		(151	)		174			23
Loans		7,279			12,469			19,748
Total interest income (FTE)	$	7,302		$	15,771		$	23,073
Money market deposit accounts	$	790		$	10,006		$	10,796
NOW deposit accounts		(102	)		(107	)		(209	)
Savings deposits		(1	)		8			7
Time deposits		812			3,232			4,044
Short-term borrowings		(1,368	)		1,933			565
Long-term debt		(37	)		69			32
Junior subordinated debt		-			374			374
Total interest expense (FTE)	$	94		$	15,515		$	15,609
Change in net interest income (FTE)	$	7,208		$	256		$	7,464

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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Noninterest income for the three months ended September 30, 2019 was $39.7 million, up $5.5 million, or 16.0%, from the prior quarter and up $6.3 million, or 19.0%, 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. Excluding net securities gains, noninterest income for the three months ended September 30, 2019 would have been $35.7 million, up $1.4 million, or 4.0%, from the prior quarter and up $2.7 million, or 8.2%, from the third quarter of 2018. The increase from the prior quarter was primarily driven by higher insurance and other finance services revenue along with an increase in trust income. The increase from the third quarter of 2018 was primarily due to 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 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 the number of accounts and usage.

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)	2019			2018		2019		2018
Salaries and employee benefits	$	39,352		$	38,394	$	117,275	$	112,687
Occupancy		5,335			5,380		17,053		17,034
Data processing and communications		4,492			4,434		13,599		13,221
Professional fees and outside services		3,535			3,580		10,562		10,408
Equipment		4,487			4,319		13,762		12,508
Office supplies and postage		1,667			1,563		4,835		4,640
FDIC (credit) expense		(20	)		1,223		1,946		3,516
Advertising		677			739		1,821		1,776
Amortization of intangible assets		874			1,054		2,735		3,064
Loan collection and other real estate owned, net		976			1,234		2,722		3,479
Other		8,374			4,577		18,130		13,324
Total noninterest expense	$	69,749		$	66,497	$	204,440	$	195,657

Noninterest expense for the three months ended September 30, 2019 was $69.7 million, up $3.5 million, or 5.3%, from the prior quarter and up $3.3 million, or 4.9%, from the third quarter of 2018. The increase from the prior quarter and the third quarter of 2018 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 and $0.7 million in one-time charges related to efficiency initiatives. FDIC insurance expense decreased from the prior quarter 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.

Noninterest expense for the nine months ended September 30, 2019 was $204.4 million, up $8.8 million, or 4.5%, from the same period in 2018. The increase from the prior year was driven 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 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 due to the $3.1 million in reorganization expenses previously mentioned and an increase in the amortization expense for pension plan actuarial costs.

Income Taxes

Income tax expense for the three months ended September 30, 2019 was $9.3 million, up $0.5 million from the prior quarter and up $0.7 million from the third quarter of 2018. The effective tax rate of 22.4% for the third quarter of 2019 was comparable to the second quarter of 2019 and to the third quarter of 2018. The increase in income tax expense from the prior quarter and from the third quarter of 2018 was primarily due to a higher level of taxable income.

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

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ANALYSIS OF FINANCIAL CONDITION

Securities

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

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
Mortgage-backed securities:
With maturities 15 years or less		26%		26%
With maturities greater than 15 years		10%		10%
Collateral mortgage obligations		46%		40%
Municipal securities		11%		15%
U.S. agency notes		6%		8%
Equity securities		1%		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, 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 unaudited interim consolidated financial statements included in this Form 10-Q for information related to other-than-temporary impairment considerations.

Loans

A summary of loans, net of deferred fees and origination costs, by category for the periods indicated follows:

(In thousands)	September 30, 2019		December 31, 2018
Commercial	$	1,317,649	$	1,291,568
Commercial real estate		2,033,552		1,930,742
Residential real estate		1,416,920		1,380,836
Dealer finance		1,195,783		1,216,144
Specialty lending		528,505		524,928
Home equity		452,535		474,566
Other consumer		68,865		68,925
Total loans	$	7,013,809	$	6,887,709

Total loans increased by $126.1 million, at September 30, 2019 from December 31, 2018. Loan growth in the first nine months of 2019 resulted from growth in the commercial real estate and residential real estate portfolios partly offset by run-off in our consumer portfolios. Total loans represent approximately 72.6% of assets as of September 30, 2019, as compared to 72.1% as of December 31, 2018.

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 losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the consolidated results of operations.

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For purposes of evaluating the adequacy 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 as of 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; the 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 additions to the allowance based on their judgment about information available to them at the time of their examination, which may not be currently available to management.

After a thorough consideration and validation of the factors discussed above, required additions or reductions to the allowance for loan 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 of probable loss in the 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 losses to be appropriate based on evaluation and analysis of the loan portfolio.

The following table reflects changes to the allowance for loan losses for the periods presented.

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	%

Net charge-offs of $6.1 million for the three months ended September 30, 2019 were down as compared to $6.5 million for the prior quarter and up compared to $5.7 million for 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.

Net charge-offs of $19.5 million for the nine months ended September 30, 2019 were up 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 compared with $22.3 million for the same period of 2018. Annualized net charge-offs to average loans for the first nine months of 2019 was 0.38%, comparable to the first nine months of 2018.

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The allowance for loan losses totaled $72.4 million at September 30, 2019, compared to $72.2 million at June 30, 2019 and $72.8 million at September 30, 2018. The allowance for loan losses as a percentage of loans was 1.03% (1.08% excluding acquired loans) at September 30, 2019, compared to 1.04% (1.08% excluding acquired loans) at June 30, 2019 and 1.06% (1.11% excluding acquired loans) at September 30, 2018.

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
(Dollars in thousands)	Amount			%			Amount			%
Nonaccrual loans
Commercial	$	11,624			46	%	$	11,804			46	%
Residential Real Estate		5,558			23	%		6,526			26	%
Consumer		4,098			17	%		4,068			16	%
Troubled debt restructured loans		3,343			14	%		3,089			12	%
Total nonaccrual loans	$	24,623			100	%	$	25,487			100	%

Loans 90 days or more past due and still accruing
Commercial	$	4,906			59	%	$	588			12	%
Residential Real Estate		566			7	%		1,182			23	%
Consumer		2,870			34	%		3,315			65	%
Total loans 90 days or more past due and still accruing	$	8,342			100	%	$	5,085			100	%

Total nonperforming loans	$	32,965					$	30,572
OREO		2,144						2,441
Total nonperforming assets	$	35,109					$	33,013

Total nonperforming loans to total loans		0.47	%					0.44	%
Total nonperforming assets to total assets		0.36	%					0.35	%
Allowance for loan losses to total nonperforming loans		219.52	%					237.16	%

Nonperforming loans to total loans was 0.47% at September 30, 2019, up 8 bps from 0.39% at June 30, 2019 and up 6 bps from 0.41% at September 30, 2018. Past due loans as a percentage of total loans was 0.57% at September 30, 2019, up from 0.52% at June 30, 2019 and up from 0.53% at September 30, 2018. The increase in nonperforming and past due loans to total loans primarily resulted from a commercial real estate relationship migrating to over ninety days past due during the quarter. The loan is still accruing interest and is well secured by underlying collateral.

For acquired loans that are not deemed to be impaired at acquisition, credit discounts representing the principal losses expected over 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 prior to the acquisitions, or comparable with other institutions. The credit metrics most impacted by our acquisitions were the allowance for loans losses to total loans and total allowance for loan losses to nonperforming loans. As of September 30, 2019, the allowance for loan losses to total originated loans and the total allowance for loan losses to originated nonperforming loans were 1.08% and 231.21%, respectively. As of December 31, 2018, the allowance for loan losses to total originated loans and the total allowance for loan losses to originated nonperforming loans were 1.10% and 254.92%, respectively.

In addition to nonperforming loans discussed above, the Company has also identified approximately $81.5 million in potential problem loans at September 30, 2019 as compared to $90.0 million at December 31, 2018. 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 billion at September 30, 2019, up $375.0 million, or 5.1%, from December 31, 2018. Total average deposits increased $234.0 million, or 3.2%, from the same period last year. The growth was driven primarily by growth in interest bearing deposits of $204.7 million, or 4.1%, due to growth in MMDA and time accounts, combined with a $29.2 million, or a 1.3% increase in demand deposits.

Borrowed Funds

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

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

Capital Resources

Stockholders' equity of $1.1 billion represented 11.37% of total assets at September 30, 2019 compared with $1.0 billion, or 10.65% as of December 31, 2018. The increase in stockholders' equity resulted primarily from net income of $92.1 million for the nine months ending September 30, 2019 and changes in OCI of $20.3 million, partially offset by dividends of $34.2 million during the period .

The Company did not purchase shares of its common stock during the nine months ended September 30, 2019. As of September 30, 2019, there were 1,000,000 shares available for repurchase under a plan authorized on October 23, 2017, which expires on December 31, 2019. On October 28, 2019, the NBT Board of Directors authorized a repurchase program for NBT to repurchase up to an additional 1,000,000 shares of its outstanding common stock. This plan expires on December 31, 2021.

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

As the capital ratios in the following table indicate, the Company remained “well capitalized” at September 30, 2019 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
Tier 1 leverage ratio		10.15	%		9.52	%
Common equity tier 1 capital ratio		11.14	%		10.49	%
Tier 1 capital ratio		12.42	%		11.79	%
Total risk-based capital ratio		13.38	%		12.78	%
Cash dividends as a percentage of net income		37.12	%		38.44	%
Per common share:
Book value	$	25.09		$	23.31
Tangible book value (1)	$	18.52		$	16.66
Tangible equity ratio (2)		8.65	%		7.85	%

(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.

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 additional models are run in which a gradual increase of 200 bps and a gradual decrease of 100 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 into 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 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 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 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 balance sheet position:

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

The Company anticipates that in the current environment, the trajectory of net interest income will depend significantly on the ability to manage deposit pricing in a competitive market. Deposit rates began to rise in 2018 as the federal funds rate increased four times, through December 2018 bringing 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. The Company anticipates that deposit rates may move lower responding to the lower federal funds rate. Competitive pressure may limit the Company’s ability to quickly reduce deposit rates following reductions 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.

Liquidity Risk

Liquidity is 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. 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, the Company’s Basic Surplus measurement was 16.1% of total assets or approximately $1.6 billion as compared to the December 31, 2018 Basic Surplus of 11.2% or $1.1 billion and was above the Company’s minimum of 5% (calculated at $483.1 million and $477.8 million, or period end total assets as September 30, 2019 and December 31, 2018, respectively) set forth in its liquidity policies.

At September 30, 2019 and December 31, 2018, Federal Home Loan Bank ("FHLB") advances outstanding totaled $440.3 million and $795.8 million, respectively. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.3 billion at September 30, 2019 and $0.8 billion at December 31, 2018. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $567.1 million and $630.0 million at September 30, 2019 and December 31, 2018, 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 billion at September 30, 2019 and $1.3 billion at December 31, 2018. In addition, the Bank has a "Borrower-in-Custody" program with the FRB with the addition of the ability to pledge automobile loans. At September 30, 2019 and December 31, 2018, the Bank had the capacity to borrow $822.2 million and $854.7 million, respectively, from this program. The Company's internal policies authorize borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $1.9 billion at September 30, 2019 and $1.5 billion at December 31, 2018.

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 strong. However, certain events may adversely impact the Company’s liquidity position in 2019. Increasing 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. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%.

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”) 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, approximately $159.8 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.

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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 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, 2019, the Company's disclosure controls and procedures were effective.

There were no changes made in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART 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 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 Annual Report on Form 10-K.

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

(a)	Not applicable

(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 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 day of November 2019.

	NBT BANCORP INC.

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