NBT BANCORP INC - FORM 10-Q - November 9, 2018

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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, 2018.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
 
COMMISSION FILE NUMBER 0-14703
 
NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)
 
DELAWARE
 
16-1268674
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
52 SOUTH BROAD STREET, NORWICH, NEW YORK 13815
(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (607) 337-2265
 
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
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, 2018, there were 43,667,380 shares outstanding of the Registrant’s common stock, $0.01 par value per share.


NBT BANCORP INC.
FORM 10-Q - Quarter Ended September 30, 2018

TABLE OF CONTENTS

 PART I
FINANCIAL INFORMATION

Item 1
Financial Statements
  
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
9
     
Item 2
 35
     
Item 3
 48
     
Item 4
 48
     
PART II
OTHER INFORMATION
  
     
Item 1
 49
Item 1A
 49
Item 2
 49
Item 3
 49
Item 4
 49
Item 5
 49
Item 6
 50
 
51


Item 1 – FINANCIAL STATEMENTS

NBT Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)

 
  
September 30,
    
December 31,
  
   
2018
    
2017
  
(In thousands, except share and per share data)
            
Assets
            
Cash and due from banks
  
$
171,525
    
$
156,852
  
Short-term interest bearing accounts
    
3,108
      
2,812
  
Equity securities, at fair value
    
24,722
      
-
  
Securities available for sale, at fair value
    
1,101,074
      
1,255,925
  
Securities held to maturity (fair value $645,732 and $481,871, respectively)
    
659,949
      
484,073
  
Trading securities
    
-
      
11,467
  
Federal Reserve and Federal Home Loan Bank stock
    
52,421
      
46,706
  
Loans held for sale
    
5,035
      
1,134
  
Loans
    
6,887,262
      
6,583,639
  
Less allowance for loan losses
    
72,805
      
69,500
  
Net loans
  
$
6,814,457
    
$
6,514,139
  
Premises and equipment, net
    
78,284
      
81,305
  
Goodwill
    
274,769
      
268,043
  
Intangible assets, net
    
16,576
      
13,420
  
Bank owned life insurance
    
176,240
      
172,388
  
Other assets
    
169,124
      
128,548
  
Total assets
  
$
9,547,284
    
$
9,136,812
  
Liabilities
                
Demand (noninterest bearing)
  
$
2,373,027
    
$
2,286,892
  
Savings, NOW and money market
    
4,199,694
      
4,076,978
  
Time
    
868,569
      
806,766
  
Total deposits
  
$
7,441,290
    
$
7,170,636
  
Short-term borrowings
    
811,709
      
719,123
  
Long-term debt
    
73,751
      
88,869
  
Junior subordinated debt
    
101,196
      
101,196
  
Other liabilities
    
125,183
      
98,811
  
Total liabilities
  
$
8,553,129
    
$
8,178,635
  
Stockholders’ equity
                
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at September 30, 2018 and December 31, 2017
  
$
-
    
$
-
  
Common stock, $0.01 par value. Authorized 100,000,000 shares at September 30, 2018 and December 31, 2017; issued 49,651,493 at September 30, 2018 and December 31, 2017
    
497
      
497
  
Additional paid-in-capital
    
575,155
      
574,209
  
Retained earnings
    
603,921
      
543,713
  
Accumulated other comprehensive loss
    
(49,112
)
    
(22,077
)
Common stock in treasury, at cost, 5,990,174 and 6,108,684 shares at September 30, 2018 and December 31, 2017, respectively
    
(136,306
)
    
(138,165
)
Total stockholders’ equity
  
$
994,155
    
$
958,177
  
Total liabilities and stockholders’ equity
  
$
9,547,284
    
$
9,136,812
  
 
See accompanying notes to unaudited interim consolidated financial statements.
 

NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)

   
Three months ended
September 30,
    
Nine months ended
September 30,
  
   
2018
    
2017
    
2018
    
2017
  
(In thousands, except per share data)
                        
Interest, fee and dividend income
                        
Interest and fees on loans
  
$
77,249
    
$
68,086
    
$
221,864
    
$
197,399
  
Securities available for sale
    
6,659
      
7,278
      
20,588
      
21,505
  
Securities held to maturity
    
3,462
      
2,746
      
8,898
      
8,263
  
Other
    
834
      
737
      
2,381
      
2,010
  
Total interest, fee and dividend income
  
$
88,204
    
$
78,847
    
$
253,731
    
$
229,177
  
Interest expense
                                
Deposits
  
$
6,157
    
$
3,648
    
$
15,167
    
$
10,658
  
Short-term borrowings
    
3,000
      
1,870
      
7,421
      
4,375
  
Long-term debt
    
431
      
589
      
1,359
      
1,794
  
Junior subordinated debt
    
1,089
      
810
      
3,030
      
2,308
  
Total interest expense
  
$
10,677
    
$
6,917
    
$
26,977
    
$
19,135
  
Net interest income
  
$
77,527
    
$
71,930
    
$
226,754
    
$
210,042
  
Provision for loan losses
    
6,026
      
7,889
      
22,300
      
22,835
  
Net interest income after provision for loan losses
  
$
71,501
    
$
64,041
    
$
204,454
    
$
187,207
  
Noninterest income
                                
Insurance and other financial services revenue
  
$
6,172
    
$
5,536
    
$
18,502
    
$
17,927
  
Service charges on deposit accounts
    
4,503
      
4,261
      
12,721
      
12,399
  
ATM and debit card fees
    
5,906
      
5,557
      
16,995
      
16,025
  
Retirement plan administration fees
    
7,244
      
5,272
      
19,879
      
14,881
  
Trust
    
4,808
      
4,927
      
14,951
      
14,620
  
Bank owned life insurance
    
1,288
      
1,284
      
3,852
      
3,913
  
Net securities gains (losses)
    
412
      
(4
)
    
575
      
(2
)
Other
    
3,048
      
3,945
      
11,341
      
10,069
  
Total noninterest income
  
$
33,381
    
$
30,778
    
$
98,816
    
$
89,832
  
Noninterest expense
                                
Salaries and employee benefits
  
$
38,394
    
$
33,674
    
$
112,687
    
$
101,410
  
Occupancy
    
5,380
      
5,174
      
17,034
      
16,528
  
Data processing and communications
    
4,434
      
4,399
      
13,221
      
12,826
  
Professional fees and outside services
    
3,580
      
3,107
      
10,408
      
9,748
  
Equipment
    
4,319
      
3,733
      
12,508
      
11,224
  
Office supplies and postage
    
1,563
      
1,432
      
4,640
      
4,680
  
FDIC expenses
    
1,223
      
1,257
      
3,516
      
3,571
  
Advertising
    
739
      
665
      
1,776
      
1,711
  
Amortization of intangible assets
    
1,054
      
993
      
3,064
      
2,999
  
Loan collection and other real estate owned, net
    
1,234
      
1,684
      
3,479
      
3,627
  
Other
    
4,577
      
4,483
      
13,324
      
13,880
  
Total noninterest expense
  
$
66,497
    
$
60,601
    
$
195,657
    
$
182,204
  
Income before income tax expense
  
$
38,385
    
$
34,218
    
$
107,613
    
$
94,835
  
Income tax expense
    
8,578
      
11,342
      
23,699
      
30,321
  
Net income
  
$
29,807
    
$
22,876
    
$
83,914
    
$
64,514
  
Earnings per share
                                
Basic
  
$
0.68
    
$
0.52
    
$
1.92
    
$
1.48
  
Diluted
  
$
0.68
    
$
0.52
    
$
1.91
    
$
1.47
  

See accompanying notes to unaudited interim consolidated financial statements.


NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)

   
Three months ended
September 30,
    
Nine months ended
September 30,
  
   
2018
    
2017
    
2018
    
2017
  
(In thousands)
                        
Net income
  
$
29,807
    
$
22,876
    
$
83,914
    
$
64,514
  
Other comprehensive (loss) income, net of tax:
                                
                                 
Securities available for sale:
                                
Unrealized net holding (losses) gains arising during the period, gross
  
$
(5,798
)
  
$
1,355
    
$
(26,605
)
  
$
4,719
  
Tax effect
    
1,449
      
(518
)
    
6,651
      
(1,823
)
Unrealized net holding (losses) gains arising during the period, net
  
$
(4,349
)
  
$
837
    
$
(19,954
)
  
$
2,896
  
                                 
Reclassification adjustment for net losses in net income, gross
  
$
-
    
$
4
    
$
-
    
$
2
  
Tax effect
    
-
      
(2
)
    
-
      
(1
)
Reclassification adjustment for net losses in net income, net
  
$
-
    
$
2
    
$
-
    
$
1
  
                                 
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross
  
$
168
    
$
212
    
$
533
    
$
675
  
Tax effect
    
(42
)
    
(81
)
    
(133
)
    
(258
)
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net
  
$
126
    
$
131
    
$
400
    
$
417
  
                                 
Reclassification adjustment for an impairment write-down of equity security, gross
  
$
-
    
$
-
    
$
-
    
$
1,312
  
Tax effect
    
-
      
-
      
-
      
(501
)
Reclassification adjustment for an impairment write-down of equity security, net
  
$
-
    
$
-
    
$
-
    
$
811
  
                                 
Total securities available for sale, net
  
$
(4,223
)
  
$
970
    
$
(19,554
)
  
$
4,125
  
                                 
Cash flow hedges:
                                
Unrealized gains (losses) on derivatives (cash flow hedges), gross
  
$
175
    
$
91
    
$
1,647
    
$
(71
)
Tax effect
    
(44
)
    
(35
)
    
(412
)
    
27
  
Unrealized gains (losses) on derivatives (cash flow hedges), net
  
$
131
    
$
56
    
$
1,235
    
$
(44
)
                                 
Reclassification of net unrealized (gains) on cash flow hedges to interest (income) expense, gross
  
$
(638
)
  
$
(155
)
  
$
(1,537
)
  
$
(96
)
Tax effect
    
159
      
59
      
384
      
37
  
Reclassification of net unrealized (gains) on cash flow hedges to interest (income) expense, net
  
$
(479
)
  
$
(96
)
  
$
(1,153
)
  
$
(59
)
                                 
Total cash flow hedges, net
  
$
(348
)
  
$
(40
)
  
$
82
    
$
(103
)
                                 
Pension and other benefits:
                                
Amortization of prior service cost and actuarial gains, gross
  
$
286
    
$
480
    
$
876
    
$
1,350
  
Tax effect
    
(71
)
    
(183
)
    
(219
)
    
(516
)
Amortization of prior service cost and actuarial gains, net
  
$
215
    
$
297
    
$
657
    
$
834
  
                                 
Total pension and other benefits, net
  
$
215
    
$
297
    
$
657
    
$
834
  
                                 
Total other comprehensive (loss) income
  
$
(4,356
)
  
$
1,227
    
$
(18,815
)
  
$
4,856
  
Comprehensive income
  
$
25,451
    
$
24,103
    
$
65,099
    
$
69,370
  

See accompanying notes to unaudited interim consolidated financial statements.
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 December 31, 2016
  
$
497
    
$
575,078
    
$
501,761
    
$
(21,520
)
  
$
(142,500
)
  
$
913,316
  
Net income
    
-
      
-
      
64,514
      
-
      
-
      
64,514
  
Cash dividends - $0.69 per share
    
-
      
-
      
(30,073
)
    
-
      
-
      
(30,073
)
Net issuance of 271,148 shares to employee and other stock plans
    
-
      
(4,596
)
    
-
      
-
      
4,026
      
(570
)
Stock-based compensation
    
-
      
3,290
      
(95
)
    
-
      
-
      
3,195
  
Other comprehensive income
    
-
      
-
      
-
      
4,856
      
-
      
4,856
  
Balance at September 30, 2017
  
$
497
    
$
573,772
    
$
536,107
    
$
(16,664
)
  
$
(138,474
)
  
$
955,238
  
 
                                                
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.

NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

   
Nine months ended September 30,
  
   
2018
    
2017
  
(In thousands)
            
Operating activities
            
Net income
  
$
83,914
    
$
64,514
  
Adjustments to reconcile net income to net cash provided by operating activities
                
Provision for loan losses
    
22,300
      
22,835
  
Depreciation and amortization of premises and equipment
    
6,957
      
6,759
  
Net amortization on securities
    
3,108
      
3,628
  
Amortization of intangible assets
    
3,064
      
2,999
  
Excess tax (benefit) on stock-based compensation
    
(507
)
    
(1,697
)
Stock-based compensation expense
    
3,457
      
3,195
  
Bank owned life insurance income
    
(3,852
)
    
(3,913
)
Trading security purchases
    
-
      
(1,470
)
Net unrealized losses on trading securities
    
-
      
(154
)
Proceeds from sales of loans held for sale
    
73,239
      
87,095
  
Originations and purchases of loans held for sale
    
(76,959
)
    
(87,246
)
Net gains on sales of loans held for sale
    
(181
)
    
(292
)
Net security (gains) losses
    
(575
)
    
2
  
Net losses (gains) on sales and write-down of other real estate owned
    
130
      
(189
)
Impairment write-down of equity security
    
-
      
1,312
  
Net change in other assets and other liabilities
    
(14,313
)
    
(810
)
Net cash provided by operating activities
  
$
99,782
    
$
96,568
  
Investing activities
                
Net cash used in acquisitions
  
$
(7,884
)
  
$
(4,000
)
Securities available for sale:
                
Proceeds from maturities, calls and principal paydowns
    
213,732
      
205,327
  
Proceeds from sales
    
-
      
9,997
  
Purchases
    
(102,004
)
    
(232,850
)
Securities held to maturity:
                
Proceeds from maturities, calls and principal paydowns
    
73,217
      
86,055
  
Proceeds from sales
    
-
      
764
  
Purchases
    
(249,300
)
    
(53,212
)
Equity securities:
                
Proceeds from sales
    
3,318
      
-
  
Purchases
    
(2
)
    
-
  
Other:
                
Net increase in loans
    
(323,614
)
    
(293,346
)
Proceeds from Federal Home Loan Bank stock redemption
    
186,869
      
177,803
  
Purchases of Federal Reserve and Federal Home Loan Bank stock
    
(192,584
)
    
(175,840
)
Proceeds from settlement of bank owned life insurance
    
-
      
800
  
Purchases of premises and equipment, net
    
(4,256
)
    
(4,177
)
Proceeds from the sales of other real estate owned
    
2,124
      
6,767
  
Net cash (used in) investing activities
  
$
(400,384
)
  
$
(275,912
)
Financing activities
                
Net increase in deposits
  
$
270,654
    
$
257,548
  
Net increase in short-term borrowings
    
92,585
      
248
  
Proceeds from issuance of long-term debt
    
25,000
      
-
  
Repayments of long-term debt
    
(40,117
)
    
(15,174
)
Proceeds from the issuance of shares to employee and other stock plans
    
1,140
      
3,012
  
Cash paid by employer for tax-withholdings on stock issuance
    
(1,792
)
    
(3,582
)
Cash dividends
    
(31,899
)
    
(30,073
)
Net cash provided by financing activities
  
$
315,571
    
$
211,979
  
Net increase in cash and cash equivalents
  
$
14,969
    
$
32,635
  
Cash and cash equivalents at beginning of period
    
159,664
      
149,181
  
Cash and cash equivalents at end of period
  
$
174,633
    
$
181,816
  



   
Nine months ended September 30,
  
   
2018
    
2017
  
Supplemental disclosure of cash flow information
            
Cash paid during the period for:
            
Interest expense
  
$
26,002
    
$
19,771
  
Income taxes paid, net of refund
    
31,077
      
22,230
  
Noncash investing activities:
                
Loans transferred to other real estate owned
  
$
996
    
$
5,227
  
Acquisitions:
                
Fair value of assets acquired
  
$
6,274
    
$
3,096
  

See accompanying notes to unaudited interim consolidated financial statements.


NBT Bancorp Inc. and Subsidiaries
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2018
 
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”), Hathaway Agency, Inc. and 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 but also through its other subsidiaries, 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 area of Maine. 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 2017 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 intercompany transactions have been eliminated in consolidation. Amounts in the prior period financial statements are reclassified whenever necessary to conform to current period presentation. The Company has evaluated subsequent events for potential recognition and/or disclosure. Refer to footnote 12, Subsequent Events, for more information.

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
  
September 30, 2018
                        
Federal agency
  
$
84,974
    
$
-
    
$
1,712
    
$
83,262
  
State & municipal
    
36,841
      
13
      
387
      
36,467
  
Mortgage-backed:
                                
Government-sponsored enterprises
    
479,852
      
207
      
16,171
      
463,888
  
U.S. government agency securities
    
29,422
      
204
      
1,106
      
28,520
  
Collateralized mortgage obligations:
                                
Government-sponsored enterprises
    
461,148
      
222
      
19,860
      
441,510
  
U.S. government agency securities
    
49,208
      
115
      
1,896
      
47,427
  
Total AFS securities
  
$
1,141,445
    
$
761
    
$
41,132
    
$
1,101,074
  
December 31, 2017
                                
Federal agency
  
$
109,862
    
$
-
    
$
963
    
$
108,899
  
State & municipal
    
42,171
      
62
      
277
      
41,956
  
Mortgage-backed:
                                
Government-sponsored enterprises
    
530,392
      
1,406
      
3,345
      
528,453
  
U.S. government agency securities
    
26,363
      
334
      
223
      
26,474
  
Collateralized mortgage obligations:
                                
Government-sponsored enterprises
    
496,033
      
254
      
10,114
      
486,173
  
U.S. government agency securities
    
50,721
      
165
      
1,065
      
49,821
  
Equity securities
    
10,623
      
3,672
      
146
      
14,149
  
Total AFS securities
  
$
1,266,165
    
$
5,893
    
$
16,133
    
$
1,255,925
  
 
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
  
September 30, 2018
                        
Federal agency
  
$
9,995
    
$
-
    
$
46
    
$
9,949
  
Mortgage-backed:
                                
     Government-sponsored enterprises
    
87,743
      
-
      
4,075
      
83,668
  
     U.S. government agency securities
    
15,241
      
36
      
69
      
15,208
  
Collateralized mortgage obligations:
                                
     Government-sponsored enterprises
    
268,044
      
31
      
7,080
      
260,995
  
     U.S. government agency securities
    
29,401
      
4
      
67
      
29,338
  
State & municipal
    
249,525
      
90
      
3,041
      
246,574
  
Total HTM securities
  
$
659,949
    
$
161
    
$
14,378
    
$
645,732
  
December 31, 2017
                                
Mortgage-backed:
                                
     Government-sponsored enterprises
  
$
96,357
    
$
85
    
$
810
    
$
95,632
  
     U.S. government agency securities
    
418
      
57
      
-
      
475
  
Collateralized mortgage obligations:
                                
     Government-sponsored enterprises
    
186,327
      
224
      
2,577
      
183,974
  
State & municipal
    
200,971
      
1,439
      
620
      
201,790
  
Total HTM securities
  
$
484,073
    
$
1,805
    
$
4,007
    
$
481,871
  

AFS and HTM securities with amortized costs totaling $1.6 billion at September 30, 2018 and $1.5 billion at December 31, 2017 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at September 30, 2018 and December 31, 2017, AFS and HTM securities with an amortized cost of $196.4 million and $256.2 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

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, 2018
                                                      
AFS securities:
                                                      
Federal agency
  
$
39,069
    
$
(916
)
    
4
    
$
44,193
    
$
(796
)
    
4
    
$
83,262
    
$
(1,712
)
    
8
  
State & municipal
    
12,347
      
(115
)
    
22
      
16,165
      
(272
)
    
25
      
28,512
      
(387
)
    
47
  
Mortgage-backed
    
297,802
      
(9,061
)
    
72
      
178,186
      
(8,215
)
    
48
      
475,988
      
(17,276
)
    
120
  
Collateralized mortgage obligations
    
83,566
      
(1,816
)
    
16
      
384,459
      
(19,941
)
    
70
      
468,025
      
(21,757
)
    
86
  
Total securities with unrealized losses
  
$
432,784
    
$
(11,908
)
    
114
    
$
623,003
    
$
(29,224
)
    
147
    
$
1,055,787
    
$
(41,132
)
    
261
  
                                                                         
HTM securities:
                                                                        
Federal agency
  
$
9,949
    
$
(46
)
    
2
    
$
-
    
$
-
      
-
    
$
9,949
    
$
(46
)
    
2
  
Mortgage-backed
    
55,712
      
(1,678
)
    
5
      
42,778
      
(2,466
)
    
4
      
98,490
      
(4,144
)
    
9
  
Collateralized mortgage obligations
    
153,768
      
(2,195
)
    
22
      
97,515
      
(4,952
)
    
16
      
251,283
      
(7,147
)
    
38
  
State & municipal
    
84,258
      
(1,276
)
    
134
      
27,384
      
(1,765
)
    
41
      
111,642
      
(3,041
)
    
175
  
Total securities with unrealized losses
  
$
303,687
    
$
(5,195
)
    
163
    
$
167,677
    
$
(9,183
)
    
61
    
$
471,364
    
$
(14,378
)
    
224
  
                                                                         
As of December 31, 2017
                                                                        
AFS securities:
                                                                        
Federal agency
  
$
64,653
    
$
(242
)
    
5
    
$
44,246
    
$
(721
)
    
4
    
$
108,899
    
$
(963
)
    
9
  
State & municipal
    
23,566
      
(200
)
    
39
      
5,994
      
(77
)
    
8
      
29,560
      
(277
)
    
47
  
Mortgage-backed
    
317,630
      
(2,381
)
    
55
      
58,316
      
(1,187
)
    
24
      
375,946
      
(3,568
)
    
79
  
Collateralized mortgage obligations
    
227,917
      
(2,658
)
    
35
      
275,303
      
(8,521
)
    
42
      
503,220
      
(11,179
)
    
77
  
Equity securities
    
-
      
-
      
-
      
2,959
      
(146
)
    
1
      
2,959
      
(146
)
    
1
  
Total securities with unrealized losses
  
$
633,766
    
$
(5,481
)
    
134
    
$
386,818
    
$
(10,652
)
    
79
    
$
1,020,584
    
$
(16,133
)
    
213
  
 
                                                                        
HTM securities:
                                                                        
Mortgage-backed
  
$
15,477
    
$
(140
)
    
2
    
$
33,703
    
$
(670
)
    
2
    
$
49,180
    
$
(810
)
    
4
  
Collateralized mortgage obligations
    
118,476
      
(1,064
)
    
17
      
37,614
      
(1,513
)
    
6
      
156,090
      
(2,577
)
    
23
  
State & municipal
    
22,387
      
(132
)
    
40
      
15,720
      
(488
)
    
24
      
38,107
      
(620
)
    
64
  
Total securities with unrealized losses
  
$
156,340
    
$
(1,336
)
    
59
    
$
87,037
    
$
(2,671
)
    
32
    
$
243,377
    
$
(4,007
)
    
91
  
 
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”). This 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.

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, 2018 and December 31, 2017, 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, 2018 or in the three months ended September 30, 2017. For the nine months ended September 30, 2017, a $1.3 million impairment loss on an equity investment was realized in the Company’s unaudited interim consolidated statements of income.

There were no sales of HTM securities in the three and nine months ended September 30, 2018. During the three and nine months ended September 30, 2017, the Company sold HTM securities with an amortized cost of $0.8 million and an unrealized loss of $2 thousand. Due to significant deterioration in the creditworthiness of the issuers of the HTM securities, the circumstances caused the Company to change its intent to hold the HTM securities sold to maturity, which did not affect the Company’s intent to hold the remainder of the HTM portfolio to maturity.

The following tables set forth information with regard to gains and losses on equity securities at September 30, 2018:

(In thousands)
  
Three months ended
September 30, 2018
    
Nine months ended
September 30, 2018
  
Net gains and losses recognized on equity securities
  
$
412
    
$
575
  
Less: Net gains and losses recognized during the period on equity securities sold during the period
    
511
      
555
  
Unrealized gains and losses recognized on equity securities still held
  
$
(99
)
  
$
20
  
 
As of September 30, 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, 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, 2018.

The following tables set forth information with regard to contractual maturities of debt securities at September 30, 2018:
 
(In thousands)
  
Amortized
Cost
    
Estimated
Fair Value
  
AFS debt securities:
            
Within one year
  
$
46,641
    
$
46,521
  
From one to five years
    
86,348
      
84,188
  
From five to ten years
    
176,260
      
171,240
  
After ten years
    
832,196
      
799,125
  
Total AFS debt securities
  
$
1,141,445
    
$
1,101,074
  
HTM debt securities:
                
Within one year
  
$
89,011
    
$
89,011
  
From one to five years
    
53,217
      
53,177
  
From five to ten years
    
215,931
      
209,974
  
After ten years
    
301,790
      
293,570
  
Total HTM debt securities
  
$
659,949
    
$
645,732
  
 
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, 2018 and December 31, 2017.

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. It is evaluated to ensure that it is sufficient to 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. 

During the first quarter of 2018, the Company made adjustments to the class segments within the portfolios to better align risk characteristics and reflect the monitoring and assessment of risks as the portfolios continue to evolve. Agricultural and Agricultural Real Estate were consolidated with Commercial and Industrial and Commercial Real Estate, respectively. Agricultural loans are a type of Commercial loan with some specific underwriting guidelines; however, as of March 31, 2018, the portfolio had decreased to less than 3% of the Commercial portfolio and separation was no longer warranted. The Indirect class segment was further separated into Dealer Finance and Specialty Lending class segments. The growth in our Specialty Lending portfolio to 21% of Consumer Loans as of March 31, 2018 warranted evaluation of this class separately due to different risk characteristics from Dealer Finance class segments. The Direct and Home Equity class segments were consolidated into Direct to reflect common management, similar underwriting and in-market focus. The change to the class segments in the allowance methodology did not have a significant impact on the allowance for loan losses. The following table illustrates the portfolio and class segments for the loan portfolio in 2018 compared to 2017:

Portfolio
Class - 2018
Class - 2017
Commercial Loans
Commercial and Industrial
Commercial
 
Commercial Real Estate
Commercial Real Estate