NBT BANCORP INC 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations. Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s Asset Liability Committee (“ALCO”) meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In 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 the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (e.g., no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk. In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors. In the rising rate scenarios, net interest income is projected to experience an increase from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, money market deposit accounts and time accounts. Net interest income for the next twelve months in the +200/+100/-200 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% reduction in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the December 31, 2022 balance sheet position: Interest Rate Sensitivity Analysis Change in interest rates (in bps points) Percent change in net interest income +200 2.83 % +100 1.60 % -200 (3.99 %) The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of short to mid-term interest rates which are heavily driven by inflationary pressures and FOMC monetary policy. In response to the economic impact of the pandemic, the federal funds rate was reduced to near zero in March 2020, term interest rates fell sharply across the yield curve and the Company reduced deposit rates. Post-pandemic, inflationary pressures have resulted in a higher overall yield curve, Fed Funds increases of 425 bps in 2022 and expectations for continued increases to short-term interest rates in 2023. With deposit rates coming off their historic lows, the Company will focus on managing deposit expense in a rising rate environment while allowing assets to reprice upward. 44 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors NBT Bancorp Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of NBT Bancorp Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 45 Table of Contents Allowance for credit losses – loans evaluated on a collective basis As discussed in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for credit losses on loans evaluated on a collective basis (the collective ACL on loans) was $100.8 million of a total allowance for credit losses of $100.8 million as of December 31, 2022. The collective ACL on loans includes the measure of expected credit losses on a collective (pooled) basis for class segments of loans that share similar risk characteristics. The Company uses a discounted cash flow methodology where the respective quantitative allowance for each segment is measured by comparing the amortized cost to the present value of expected principal, interest and recovery cash flows projected using an econometric, probability of default (PD) and loss given default (LGD) modeling methodology. The Company uses PD regression models to develop the PD, and LGD models to develop the LGD, using historical credit loss experience for both the Company and segment-specific selected peers. The application of these models incorporates multiple weighted external economic forecasts for the economic variables over the reasonable and supportable forecast period. After the reasonable and supportable forecast period, the Company reverts to long-term average economic variables over a reversion period on a straight-line basis. Contractual cash flows over the contractual life of the loans are the basis for expected principal, interest and recovery cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective interest rate. After quantitative considerations, the Company applies additional qualitative adjustments, giving consideration to the effects of limitations inherent in the quantitative model, so that the collective ACL is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. We identified the assessment of the collective ACL on loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL on loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL on loans methodology, including the methods and models used to estimate (1) the PD and LGD and their significant assumptions including portfolio segmentation, the external economic forecasts and economic variables, and the related weighting of the forecasts, the reasonable and supportable forecast periods, the composition of the peer group and the period from which historical Company and peer experience was used, (2) the expected prepayments assumption, and (3) the qualitative adjustments and the significant assumptions, including the effects of limitations inherent in the quantitative model. The assessment also included an evaluation of the conceptual soundness and performance of the PD regression and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL on loans estimate, including controls over the: ● development of the collective ACL on loans methodology ● development of the PD regression models ● continued use and appropriateness of changes made to PD regression and LGD models ● performance monitoring of the PD regression and LGD models ● identification and determination of the expected prepayments assumption and the significant assumptions used in the PD regression and LGD models ● development of the qualitative methodology, including the significant assumptions used in the measurement of select qualitative adjustments ● analysis of the collective ACL on loans results, trends, and ratios. We evaluated the Company’s process to develop the collective ACL on loans estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in: ● evaluating the Company’s collective ACL on loans methodology for compliance with U.S. generally accepted accounting principles ● evaluating judgments made by the Company relative to the development and performance monitoring of the PD regression and LGD models, by comparing them to relevant Company-specific metrics and trends and the applicable industry practices ● assessing the conceptual soundness and performance testing of the PD regression and LGD models, by inspecting the model documentation to determine whether the models are suitable for their intended use ● evaluating the expected prepayments assumption by comparing to relevant Company-specific metrics and trends and current economic considerations ● evaluating the selection of economic forecast scenarios, including weighting of the scenarios, and underlying economic variables, by comparing to the Company’s business environment and relevant industry practices ● evaluating the length of the period from which historical Company and peer experience was used and the reasonable and supportable forecast period by comparing them to specific portfolio risk characteristics and trends ● assessing the composition of the peer group by comparing to Company and specific portfolio risk characteristics ● determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment, loan portfolio categories and sub-categories and relevant industry practices ● evaluating the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective ACL on loans by comparing to relevant credit risk factors, the current economic environment and consistency with credit trends and identified limitations of the underlying quantitative models. We also assessed the sufficiency of the audit evidence obtained related to the collective ACL on loans estimate by evaluating the: ● cumulative results of the audit procedures ● qualitative aspects of the Company’s accounting practices ● potential bias in the accounting estimate. /s/ KPMG LLP We have served as the Company’s auditor since 1987. Albany, New York March 1, 2023 46 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Balance Sheets As of December 31, 2022 2021 (In thousands except share and per share data) Assets Cash and due from banks $ 166,488 $ 157,775 Short-term interest-bearing accounts 30,862 1,111,296 Equity securities, at fair value 30,784 33,550 Securities available for sale, at fair value 1,527,225 1,687,361 Securities held to maturity (fair value $ 812,647 and $ 735,260 , respectively) 919,517 733,210 Federal Reserve and Federal Home Loan Bank stock 44,713 25,098 Loans held for sale 562 830 Loans 8,150,147 7,498,459 Less allowance for loan losses 100,800 92,000 Net loans $ 8,049,347 $ 7,406,459 Premises and equipment, net 69,047 72,093 Goodwill 281,204 280,541 Intangible assets, net 7,341 8,927 Bank owned life insurance 232,409 228,238 Other assets 379,797 266,733 Total assets $ 11,739,296 $ 12,012,111 Liabilities Demand (noninterest bearing) $ 3,617,324 $ 3,689,556 Savings, NOW and money market 5,444,837 6,043,441 Time 433,772 501,472 Total deposits $ 9,495,933 $ 10,234,469 Short-term borrowings 585,012 97,795 Long-term debt 4,815 13,995 Subordinated debt, net 96,927 98,490 Junior subordinated debt 101,196 101,196 Other liabilities 281,859 215,713 Total liabilities $ 10,565,742 $ 10,761,658 Stockholders’ equity Preferred stock, $ 0.01 par value. Authorized 2,500,000 shares at December 31, 2022 and 2021 $ - $ - Common stock, $ 0.01 par value. Authorized 100,000,000 shares at December 31, 2022 and 2021 , issued 49,651,493 at December 31, 2022 and 2021 497 497 Additional paid-in-capital 577,853 576,976 Retained earnings 958,433 856,203 Accumulated other comprehensive loss ( 190,034 ) ( 23,344 ) Common stock in treasury, at cost, 6,793,670 and 6,483,481 shares at December 31, 2022 and 2021 , respectively ( 173,195 ) ( 159,879 ) Total stockholders’ equity $ 1,173,554 $ 1,250,453 Total liabilities and stockholders’ equity $ 11,739,296 $ 12,012,111 See accompanying notes to consolidated financial statements. 47 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2022 2021 2020 (In thousands, except per share data) Interest, fee and dividend income Interest and fees on loans $ 332,768 $ 302,175 $ 307,859 Securities available for sale 29,653 23,305 22,434 Securities held to maturity 17,582 12,551 15,283 Other 4,067 1,845 2,706 Total interest, fee and dividend income $ 384,070 $ 339,876 $ 348,282 Interest expense Deposits $ 9,923 $ 10,714 $ 22,070 Short-term borrowings 2,623 158 3,408 Long-term debt 161 389 1,553 Subordinated debt 5,424 5,437 2,842 Junior subordinated debt 3,749 2,090 2,731 Total interest expense $ 21,880 $ 18,788 $ 32,604 Net interest income $ 362,190 $ 321,088 $ 315,678 Provision for loan losses 17,147 ( 8,257 ) 51,134 Net interest income after provision for loan losses $ 345,043 $ 329,345 $ 264,544 Noninterest income Service charges on deposit accounts $ 14,630 $ 13,348 $ 13,201 Card services income 29,058 34,682 28,611 Retirement plan administration fees 48,112 42,188 35,851 Wealth management 33,311 33,718 29,247 Insurance services 14,696 14,083 14,757 Bank owned life insurance income 6,044 6,217 5,743 Net securities (losses) gains ( 1,131 ) 566 ( 388 ) Other 10,858 12,992 19,254 Total noninterest income $ 155,578 $ 157,794 $ 146,276 Noninterest expense Salaries and employee benefits $ 187,830 $ 172,580 $ 161,934 Technology and data services 35,712 34,717 32,294 Occupancy 26,282 26,048 25,756 Professional fees and outside services 16,810 16,306 15,082 Office supplies and postage 6,140 6,006 6,138 FDIC expenses 3,197 3,041 2,688 Advertising 2,822 2,521 2,288 Amortization of intangible assets 2,263 2,808 3,395 Loan collection and other real estate owned, net 2,647 2,915 3,295 Merger expenses 967 - - Other 19,795 20,339 24,863 Total noninterest expense $ 304,465 $ 287,281 $ 277,733 Income before income tax expense $ 196,156 $ 199,858 $ 133,087 Income tax expense 44,161 44,973 28,699 Net income $ 151,995 $ 154,885 $ 104,388 Earnings per share Basic $ 3.54 $ 3.57 $ 2.39 Diluted $ 3.52 $ 3.54 $ 2.37 See accompanying notes to consolidated financial statements. 48 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, 2022 2021 2020 (In thousands) Net income $ 151,995 $ 154,885 $ 104,388 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized net holding (losses) gains arising during the period, gross $ ( 209,212 ) $ ( 37,432 ) $ 23,204 Tax effect 52,303 9,358 ( 5,800 ) Unrealized net holding (losses) gains arising during the period, net $ ( 156,909 ) $ ( 28,074 ) $ 17,404 Reclassification adjustment for net (gains) in net income, gross $ - $ - $ ( 3 ) Tax effect - - 1 Reclassification adjustment for net (gains) in net income, net $ - $ - $ ( 2 ) Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross $ 513 $ 577 $ 644 Tax effect ( 128 ) ( 145 ) ( 161 ) Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net $ 385 $ 432 $ 483 Total securities available for sale, net $ ( 156,524 ) $ ( 27,642 ) $ 17,885 Cash flow hedges: Unrealized losses on derivatives (cash flow hedges), gross $ - $ - $ ( 275 ) Tax effect - - 69 Unrealized losses on derivatives (cash flow hedges), net $ - $ - $ ( 206 ) Reclassification of net unrealized losses on cash flow hedges to interest expense, gross $ - $ 21 $ 296 Tax effect - ( 5 ) ( 74 ) Reclassification of net unrealized losses on cash flow hedges to interest expense, net $ - $ 16 $ 222 Total cash flow hedges, net $ - $ 16 $ 16 Pension and other benefits: Amortization of prior service cost and actuarial losses, gross $ 737 $ 1,373 $ 1,627 Tax effect ( 184 ) ( 343 ) ( 407 ) Amortization of prior service cost and actuarial losses, net $ 553 $ 1,030 $ 1,220 (Increase) decrease in unrecognized actuarial loss, gross $ ( 14,292 ) $ 3,780 $ 429 Tax effect 3,573 ( 945 ) ( 107 ) (Increase) decrease in unrecognized actuarial loss, net $ ( 10,719 ) $ 2,835 $ 322 Total pension and other benefits, net $ ( 10,166 ) $ 3,865 $ 1,542 Total other comprehensive (loss) income $ ( 166,690 ) $ ( 23,761 ) $ 19,443 Comprehensive (loss) income $ ( 14,695 ) $ 131,124 $ 123,831 See accompanying notes to consolidated financial statements. 49 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity Common Stock Additional Paid-in- Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Common Stock in Treasury Total (In thousands, except share and per share data) Balance at December 31, 2019 $ 497 $ 576,708 $ 696,214 $ ( 19,026 ) $ ( 133,996 ) $ 1,120,397 Cumulative effect adjustment for ASU 2016-13 implementation as of January 1, 2020 - - ( 4,339 ) - - ( 4,339 ) Net income - - 104,388 - - 104,388 Cash dividends - $ 1.08 per share - - ( 47,207 ) - - ( 47,207 ) Purchase of 263,507 treasury shares - - - - ( 7,980 ) ( 7,980 ) Net issuance of 95,990 shares to employee and other stock plans - ( 3,207 ) - - 1,542 ( 1,665 ) Stock-based compensation - 4,581 - - - 4,581 Other comprehensive income - - - 19,443 - 19,443 Balance at December 31, 2020 $ 497 $ 578,082 $ 749,056 $ 417 $ ( 140,434 ) $ 1,187,618 Net income - - 154,885 - - 154,885 Cash dividends - $ 1.10 per share - - ( 47,738 ) - - ( 47,738 ) Purchase of 604,637 treasury shares - - - - ( 21,714 ) ( 21,714 ) Net issuance of 143,555 shares to employee and other stock plans - ( 5,520 ) - - 2,269 ( 3,251 ) Stock-based compensation - 4,414 - - - 4,414 Other comprehensive (loss) - - - ( 23,761 ) - ( 23,761 ) Balance at December 31, 2021 $ 497 $ 576,976 $ 856,203 $ ( 23,344 ) $ ( 159,879 ) $ 1,250,453 Net income - - 151,995 - - 151,995 Cash dividends - $ 1.16 per share - - ( 49,765 ) - - ( 49,765 ) Purchase of 400,000 treasury shares - - - - ( 14,713 ) ( 14,713 ) Net issuance of 89,811 shares to employee and other stock plans - ( 3,653 ) - - 1,397 ( 2,256 ) Stock-based compensation - 4,530 - - - 4,530 Other comprehensive (loss) - - - ( 166,690 ) - ( 166,690 ) Balance at December 31, 2022 $ 497 $ 577,853 $ 958,433 $ ( 190,034 ) $ ( 173,195 ) $ 1,173,554 See accompanying notes to consolidated financial statements. 50 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2022 2021 2020 (In thousands) Operating activities Net income $ 151,995 $ 154,885 $ 104,388 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 17,147 ( 8,257 ) 51,134 Depreciation and amortization of premises and equipment 10,155 9,896 9,772 Net amortization on securities 3,460 5,832 4,369 Amortization of intangible assets 2,263 2,808 3,395 Amortization of operating lease right-of-use assets 6,643 7,176 7,382 Excess tax benefit on stock-based compensation ( 288 ) ( 385 ) ( 181 ) Stock-based compensation expense 4,530 4,414 4,581 Bank owned life insurance income ( 6,044 ) ( 6,217 ) ( 5,743 ) Amortization of subordinated debt issuance costs 437 438 230 Discount on repurchase of subordinated debt ( 106 ) - - Proceeds from sale of loans held for sale 5,674 55,065 168,707 Originations of loans held for sale ( 5,475 ) ( 54,608 ) ( 158,279 ) Net gains on sales of loans held for sale ( 122 ) ( 361 ) ( 1,989 ) Net security losses (gains) 1,131 ( 566 ) 388 Net (gains) losses on sale of other real estate owned ( 259 ) 182 ( 96 ) Lease termination losses - - 4,284 Net change in other assets and other liabilities ( 7,918 ) ( 11,117 ) ( 47,069 ) Net cash provided by operating activities $ 183,223 $ 159,185 $ 145,273 Investing activities Net cash used in acquisitions $ ( 2,616 ) $ ( 1,550 ) $ ( 6,760 ) Securities available for sale : Proceeds from maturities, calls and principal paydowns 213,722 395,386 336,410 Purchases ( 264,569 ) ( 775,963 ) ( 689,932 ) Securities held to maturity: Proceeds from maturities, calls and principal paydowns 177,554 181,620 243,136 Proceeds from sales - - 996 Purchases ( 365,033 ) ( 299,014 ) ( 230,951 ) Equity securities: Proceeds from calls - 1,000 2,000 Purchases ( 1,000 ) - - Other: Net increase in loans ( 659,949 ) ( 9,305 ) ( 378,765 ) Proceeds from Federal Home Loan Bank stock redemption 36,125 2,422 63,305 Purchases of Federal Reserve Bank and Federal Home Loan Bank stock ( 55,740 ) ( 167 ) ( 46,038 ) Proceeds from settlement of bank owned life insurance 1,873 4,413 1,057 Purchase of bank owned life insurance - ( 40,000 ) - Purchases of premises and equipment, net ( 7,009 ) ( 7,740 ) ( 8,157 ) Proceeds from sales of other real estate owned 426 1,290 1,113 Net cash used in investing activities $ ( 926,216 ) $ ( 547,608 ) $ ( 712,586 ) Financing activities Net (decrease) increase in deposits $ ( 738,536 ) $ 1,152,777 $ 1,493,872 Net increase (decrease) in short-term borrowings 487,217 ( 70,592 ) ( 486,889 ) Proceeds from issuance of subordinated debt - - 100,000 Payment of subordinated debt issuance costs - - ( 2,178 ) Repurchase of subordinated debt ( 2,000 ) - - Proceeds from issuance of long-term debt 1,519 - - Repayments of long-term debt ( 10,699 ) ( 25,101 ) ( 25,114 ) Proceeds from the issuance of shares to employee and other stock plans - 112 184 Cash paid by employer for tax-withholding on stock issuance ( 1,751 ) ( 2,931 ) ( 1,537 ) Purchase of treasury stock ( 14,713 ) ( 21,714 ) ( 7,980 ) Cash dividends ( 49,765 ) ( 47,738 ) ( 47,207 ) Net cash (used in) provided by financing activities $ ( 328,728 ) $ 984,813 $ 1,023,151 Net (decrease) increase in cash and cash equivalents $ ( 1,071,721 ) $ 596,390 $ 455,838 Cash and cash equivalents at beginning of year 1,269,071 672,681 216,843 Cash and cash equivalents at end of year $ 197,350 $ 1,269,071 $ 672,681 51 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued) Years Ended December 31, 2022 2021 2020 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest expense $ 20,608 $ 20,285 $ 31,692 Income taxes paid, net of refund 62,795 46,097 45,790 Noncash investing activities: Loans transferred to other real estate owned $ 105 $ 181 $ 1,017 Acquisitions: Fair value of assets acquired $ 705 $ - $ 3,328 See accompanying notes to consolidated financial statements. 52 Table of Contents NBT Bancorp Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 1. Summary of Significant Accounting Policies The accounting and reporting policies of NBT Bancorp Inc. (“NBT Bancorp”) and its subsidiaries, NBT Bank, National Association (“NBT Bank” or the “Bank”), NBT Financial Services, Inc. and NBT Holdings, Inc. , conform, in all material respects, with generally accepted accounting principles in the United States of America (“GAAP”) and to general practices within the banking industry. Collectively, NBT Bancorp and its subsidiaries are referred to herein as (“the Company”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates and such differences could be material to the financial statements. Estimates associated with the allowance for credit losses, pension accounting, provision for income taxes, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term. The following is a description of significant policies and practices: Consolidation The accompanying consolidated financial statements include the accounts of NBT Bancorp and its wholly-owned subsidiaries mentioned above. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to the current year’s presentation. The Company combined ATM and debit card fees with card related income previously reported in Other noninterest income which is now disclosed as Card services income. The Company reclassified Data processing and communications expense into Technology and data services expense. The Company reclassified Equipment expense into Occupancy expense and Technology and data services expense. In the “Parent Company Financial Information,” the investment in subsidiaries is recorded using the equity method of accounting. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The Company’s wholly-owned subsidiaries CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements. Segment Reporting The Company’s operations are primarily in the community banking industry and include the provision of traditional banking services. The Company also provides other services through its subsidiaries such as insurance, retirement plan administration and trust administration. The Company operates in the geographical regions of central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central Connecticut. The Company has no reportable operating segments. Cash Equivalents The Company considers amounts due from correspondent banks, cash items in process of collection and institutional money market mutual funds to be cash equivalents for purposes of the consolidated statements of cash flows. 53 Table of Contents Securities The Company classifies its securities at date of purchase as either held to maturity (“HTM”), available for sale (“AFS”) or equity. HTM debt securities are those that the Company has the ability and intent to hold until maturity. AFS debt securities are securities that are not classified as HTM. AFS securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on AFS securities are excluded from earnings and are reported in the consolidated statements of changes in stockholders’ equity and the consolidated statements of comprehensive income as a component of accumulated other comprehensive income or loss (“AOCI”). HTM securities are recorded at amortized cost. Equity securities are recorded at fair value, with net unrealized gains and losses recognized in income. Transfers of securities between categories are recorded at fair value at the date of transfer. Non-marketable equity securities are carried at cost. Equity securities without readily determinable fair values are carried at cost. The Company performs a qualitative assessment on equity securities to determine whether the investments are impaired and downward or upward adjustments are recognized through the income statement. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses on securities sold are derived using the specific identification method for determining the cost of securities sold. Allowance for Credit Losses –HTM Debt Securities With respect to its HTM debt securities, the Company is required to utilize the Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) approach to estimate expected credit losses. Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as (as applicable): internal or external (third-party) credit score or credit ratings, risk ratings or classification, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry of the borrower, vintage, historical or expected credit loss patterns, and reasonable and supportable forecast periods. Management classifies the HTM portfolio into the following major security types: U.S. government agency or U.S. government-sponsored mortgage-backed and collateralized mortgage obligations securities, and state and municipal debt securities. The mortgage-backed and collateralized mortgage obligations HTM securities are issued by U.S. government entities and agencies. These securities are either explicitly and/or implicitly guaranteed by the U.S. government as to timely repayment of principal and interest, are highly rated by major rating agencies, and have a long history of zero credit losses. Therefore, the Company did not record an allowance for credit loss for these securities. State and municipal bonds generally carry a Moody’s rating of A to AAA. In addition, the Company has a limited amount of New York state local municipal bonds that are not rated. The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual bond over its contractual life and considers historical credit loss information, current conditions and reasonable and supportable forecasts. Given the rarity of municipal defaults and losses, the Company utilized Moody’s Municipal Loss Forecast Model as the sole source of municipal default and loss rates which provides decades of data across all municipal sectors and geographies. As with the loan portfolio, cash flows are forecast over a 6-quarter period under various weighted economic conditions, with a reversion to long-term average economic conditions over a 4-quarter period on a straight-line basis. Management may exercise discretion to make adjustments based on environmental factors. The Company determined that the expected credit loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit losses was recorded. Allowance for Credit Losses –AFS Debt Securities The impairment model for AFS debt securities differs from the CECL approach utilized for HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. The cash flows should be estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Investments in Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock are required for membership in those organizations and are carried at cost since there is no market value available. The FHLB New York continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of Federal Reserve Bank and FHLB stock. 54 Table of Contents Loan Held for Sale and Loan Servicing Loans held for sale are recorded at the lower of cost or fair value on an individual basis. Loan sales are recorded when the sales are funded. Gains and losses on sales of loans held for sale are included in other noninterest income in the Consolidated Statements of Income. Mortgage loans held for sale are generally sold with servicing rights retained. Mortgage servicing rights are recorded at fair value upon sale of the loan, and are amortized in proportion to and over the period of estimated net servicing income. Loans Loans are recorded at their current unpaid principal balance, net of unearned income and unamortized loan fees and expenses, which are amortized under the effective interest method over the estimated lives of the loans. Interest income on loans is accrued based on the principal amount outstanding. 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 over 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 credit 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 loan classes, management uses specific guidance and thresholds from the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy. A loan is considered to be a troubled debt restructuring (“TDR”) when the Company grants a concession to the borrower because of the borrower’s financial condition that the Company would not otherwise consider. Such concessions 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; a temporary reduction in the interest rate; or a change in scheduled payment amount. TDR loans are nonaccrual loans; however, they can be returned to accrual status after a period of performance, generally evidenced by six months of compliance with their modified terms. Allowance for Credit Losses - Loans The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience is used. Adjustments to historical loss information is made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term as well as changes in environmental conditions, such as changes in unemployment rates, production metrics, property values, or other relevant factors. Company historical loss experience is supplemented with peer information when there is insufficient loss data for the Company. Peer selection is based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. Significant management judgment is required at various points in the measurement process. Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled. 55 Table of Contents The following table illustrates the portfolio and class segments for the Company’s loan portfolio: Portfolio Segment Class Commercial Loans Commercial & Industrial Paycheck Protection Program Commercial Real Estate Consumer Loans Auto Other Consumer Residential Loans 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 and are typically collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. To reduce these risks, management also attempts to obtain personal guarantees of the owners or to obtain government loan guarantees to provide further support. Paycheck Protection Program (“PPP”) – Section 1102 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) created the Paycheck Protection Program, a program administered by the Small Business Administration (the “SBA”) to provide loans to small businesses for payroll and other basic expenses during the coronavirus (“COVID-19”) pandemic. The Company has been a participant in the PPP as a lender. Loans made under the PPP are fully guaranteed by the SBA, whose guarantee is backed by the full faith and credit of the United States government. PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders receive pre-determined fees for processing and servicing PPP loans. In addition, PPP loans are risk-weighted at zero percent under the generally applicable Standardized Approach used to calculate risk-weighted assets for regulatory capital purposes. The Company processed approximately 6,100 loans totaling $ 835 million in relief. As of December 31, 2022 total forgiveness and paydown is equal to 99 % of the original balance. Commercial Real Estate (“CRE”) – The Company offers CRE loans to finance real estate purchases, refinancing’s, expansions and improvements to commercial and agricultural properties. CRE loans are loans that are secured by liens on real estate, which may include both owner-occupied and nonowner-occupied properties, such as apartments, commercial structures, health care facilities and other facilities. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 80 % of the appraised value of the property. Government loan guarantees may be obtained to provide further support for agricultural property. Consumer Loans The Company offers a variety of Consumer loan products including Auto and Other Consumer loans. Auto – The Company provides both direct and indirect financing of automobiles (“Auto”). The Company maintains relationships with many dealers primarily in the communities that we serve. Through these relationships, the Company primarily finances the purchases of automobiles indirectly through dealer relationships. 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. Other Consumer – The Other Consumer loan segment consists primarily of unsecured consumer loans, residential solar loans and direct consumer loans. 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 business line are subject to the Company’s underwriting standards including criteria such as FICO score and debt to income thresholds. In 2017, the Company partnered with Sungage Financial, Inc. to offer financing to consumers for solar ownership with the program tailored for delivery through solar installers. Advances of credit through this business line are to prime borrowers and are subject to the Company’s underwriting standards. Typically, the Company collects origination fees that are deferred and recognized into interest income over the estimated life of the loan. The Company offers a variety of direct consumer installment loans to finance various personal expenditures. In addition to installment loans, the Company also offers personal lines of credit, overdraft protection, debt consolidation, education and other uses. Direct consumer installment loans carry a fixed rate of interest with principal repayment terms typically ranging from one to fifteen years , based upon the nature of the collateral and the size of the loan. Consumer installment loans are often secured with collateral consisting of a perfected lien on the asset being purchased or a perfected lien on a consumer’s 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. 56 Table of Contents Residential Residential loans consist primarily of loans secured by a first or second mortgage on primary residences, home equity loans and lines of credit in first and second lien positions and residential construction loans. We originate adjustable-rate and fixed rate, one-to-four-family residential loans for the construction or purchase of a residential property or the refinancing of a mortgage. These loans are collateralized by properties located in the Company’s market area. Loans on one-to-four-family residential 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. 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. Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate (“PD”) curves through the use of segment-specific loss given default (“LGD”) risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each asset class, primarily due to the nature of the underlying collateral. These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when the relationship between the Company’s historical default and loss severity deviate from that of the wider industry. The historical PD curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle. Using the historical relationship between economic conditions and loan performance, management’s expectation of future loan performance is incorporated using externally developed economic forecasts which are probabilistically weighted to reflect potential forecast inaccuracy and model limitations. These forecasts are applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology. The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level stated interest rate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit losses is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; changes in value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss experience across one or more components of the portfolio; the experience, ability and depth of lending management and staff; the Company’s credit review system; and the effect of external factors; such as competition, legal and regulatory requirements. Loans that do not share risk characteristics and meet materiality criteria are evaluated on an individual basis and are excluded from the pooled evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate. Generally, individually assessed loans are collateral dependent. A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring. If the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral, then 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, a write-down would be recorded . 57 Table of Contents Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Estimating credit losses on unfunded commitments requires the Bank to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit, and standby letters of credit. Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount. The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate a reserve on unfunded commitments. Accrued Interest Receivable Accrued interest receivable balances are presented separately within other assets balance sheet line item. The Company has excluded interest receivable that is included in amortized cost of financing receivables from related disclosures requirements and accrued interest receivable is written off by reversing interest income. For loans, write off typically occurs upon becoming over 90 to 120 days past due and therefore the amount of such write offs are immaterial. Historically, the Company has not experienced uncollectible accrued interest receivable on investment securities. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation of premises and equipment is determined using the straight-line method over the estimated useful lives of the respective assets. Expenditures for maintenance, repairs and minor replacements are charged to expense as incurred. Leases The Company determines if a lease is present at the inception of an agreement. Right-of-use (“ROU”) assets and 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 and operating lease liabilities, are included in other assets and other liabilities, respectively, on the consolidated balance sheets . Leases with original terms of 12 months or less are recognized in profit or loss on a straight-line basis over the lease term. 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 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 consolidated statements of income . 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. Other Real Estate Owned Other real estate owned (“OREO”) consists of properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are recorded at the lower of fair value of the asset acquired less estimated costs to sell or “cost” (defined as the fair value at initial foreclosure). At the time of foreclosure, or when foreclosure occurs in-substance, the excess, if any, of the loan over the fair market value of the assets received, less estimated selling costs, is charged to the allowance for loan losses and any subsequent valuation write-downs are charged to other expense. In connection with the determination of the allowance for loan losses and the valuation of OREO, management obtains appraisals for properties. Operating costs associated with the properties are charged to expense as incurred. Gains on the sale of OREO are included in income when title has passed and the sale has met the minimum down payment requirements prescribed by GAAP. The balance of OREO is recorded in other assets on the consolidated balance sheets. 58 Table of Contents Goodwill and Other Intangible Assets Goodwill represents the cost of acquired business in excess of the fair value of the related net assets acquired. Goodwill is not amortized but tested at the reporting unit level for impairment on an annual basis and on an interim basis or when events or circumstances dictate. The Company has elected June 30 as the annual impairment testing date for the insurance and retirement services reporting units and December 31 for the Bank reporting unit. The Company has the option to first assess qualitative factors, by performing a qualitative analysis, to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the impairment test is not required. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test. In the quantitative impairment test, the estimated fair value of a reporting unit is compared to the carrying amount in order to determine if impairment is indicated. If the estimated fair value exceeds the carrying amount, the reporting unit is not deemed to be impaired. If the estimated fair value is below the carrying value of the reporting unit, the difference is the amount of impairment. Intangible assets that have indefinite useful lives are not amortized, but are tested at least annually for impairment. Intangible assets that have finite useful lives are amortized over their useful lives. Core deposit intangibles and trust intangibles at the Company are amortized using the sum-of-the-years’-digits method. Covenants not to compete are amortized on a straight-line basis. Customer lists are amortized using an accelerated method. When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the asset carrying value, using estimates of undiscounted future cash flows over the remaining asset life. Any impairment loss is measured by the excess of carrying value over fair value. Determining the fair value of a reporting unit under the goodwill impairment tests and determining the fair value of other intangible assets are judgmental and often involve the use of significant estimates and assumptions. Estimates of fair value are primarily determined using the discounted cash flows method, which uses significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return and projected growth rates. Future events may impact such estimates and assumptions and could cause the Company to conclude that our goodwill or intangible assets have become impaired, which would result in recording an impairment loss. Bank-Owned Life Insurance The Bank has purchased life insurance policies on certain employees, key executives and directors. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Treasury Stock Treasury stock acquisitions are recorded at cost. Subsequent sales of treasury stock are recorded on an average cost basis. Gains on the sale of treasury stock are credited to additional paid-in-capital. Losses on the sale of treasury stock are charged to additional paid-in-capital to the extent of previous gains, otherwise charged to retained earnings. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense. Tax positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Pension Costs The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all of its employees, as well as supplemental employee retirement plans to certain current and former executives and a defined benefit postretirement healthcare plan that covers certain employees. Costs associated with these plans, based on actuarial computations of current and future benefits for employees, are charged to current operating expenses. 59 Table of Contents Stock-Based Compensation The Company maintains various long-term incentive stock benefit plans under which restricted stock units are granted to certain directors and key employees. Compensation expense is recognized in the consolidated statements of income over the requisite service period, based on the grant-date fair value of the award. For restricted stock units, compensation expense is recognized ratably over the vesting period for the fair value of the award, measured at the grant date. 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). Comprehensive Income (Loss) At the Company, comprehensive income (loss) represents net income plus OCI, which consists primarily of the net change in unrealized gains (losses) on AFS debt securities for the period, changes in the funded status of employee benefit plans and unrealized gains (losses) on derivatives designated as hedging instruments. AOCI represents the net unrealized gains (losses) on AFS debt securities, the previously unrecognized portion of the funded status of employee benefit plans and the fair value of instruments designated as hedging instruments, net of income taxes, as of the consolidated balance sheet dates. Derivative Instruments and Hedging Activities The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in the consolidated statements of income. When the Company purchases or sells a portion of a commercial loan that has an existing interest rate swap, it may enter into a risk participation agreement to 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 . Any fee paid to the Company under a risk participation agreement is in consideration of the credit risk of the counterparties and is recognized in the income statement. Credit risk on the risk participation agreements is determined after considering the risk rating, probability of default and loss given default of the counterparties. Fair Value Measurements 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; and 60 Table of Contents 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 price for such instruments. The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or quote from 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 in pricing the securities. 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. Other Financial Instruments The Company is a party to certain instruments with off-balance-sheet risk such as commitments to extend credit, unused lines of credit, standby letter of credit and certain agricultural real estate loans sold to investors with recourse. The Company’s policy is to record such instruments when funded. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers. Under the standby letters of credit, the Company is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary. Standby letters of credit typically have one year expirations with an option to renew upon annual review. The Company typically receives a fee for these transactions. The fair value of standby letters of credit is recorded upon inception. Repurchase Agreements Repurchase agreements are accounted for as secured financing transactions since the Company maintains effective control over the transferred securities and the transfer meets the other criteria for such accounting. Obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheets. The securities underlying the agreements are delivered to a custodial account for the benefit of the counterparties with whom each transaction is executed. The counterparties, who may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, agree to resell to the Company the same securities at the maturities of the agreements. Revenue from Contracts with Customers Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification (“ASC”) Topic 606) (“ASC 606” and “ASU 2014-09”), and all subsequent ASUs that modified ASC 606. The implementation of ASC 606 did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. ASC 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities and certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives and certain credit card fees are also not in scope. ASC 606 is applicable to noninterest revenue streams such as retirement plan administration fees, trust and asset management income, deposit related fees and annuity and insurance commissions; however, the recognition of these revenue streams did not change significantly upon adoption of ASC 606. 61 Table of Contents Service Charges on Deposit Accounts Service charges on deposit accounts consist of overdraft fees, monthly service fees, check orders and other deposit account related fees. Overdraft, monthly service, check orders and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. Card Services Income ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks. The Company’s performance obligations for these revenue streams are satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Retirement Plan Administration Fees Retirement plan administration fees are primarily generated for services related to the recordkeeping, administration and plan design solutions of defined benefit, defined contribution and revenue sharing plans. Revenue is recognized in arrears for services already provided in accordance with fees established in contracts with customers or based on rates agreed to with investment trade platforms based on ending investment balances held. The Company’s performance obligation is satisfied, and related revenue recognized based on services completed or ending investment balances, for which receivables are recorded at the time of revenue recognition. Wealth Management Wealth Management revenue primarily is comprised of trust and other financial services revenue. Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts, pensions and other customer assets. The Company’s performance obligation is generally satisfied with the resulting fees recognized monthly, based upon services completed or the month-end market value of the assets under management and the applicable fee rate. Payment is generally received shortly after services are rendered or a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Financial services revenue primarily consists of commissions received on brokered investment product sales. For other financial services revenue, the Company’s performance obligation is generally satisfied upon the issuance of the annuity policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company does not earn a significant amount of trailing commission fees on brokered investment product sales. The majority of the trailing commission fees are calculated based on a percentage of market value of a period end and revenue is recognized when an investment product’s market value can be determined. Insurance Revenue Insurance and other financial services revenue primarily consists of commissions received on insurance. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation related to insurance sales for both property and casualty insurance and employee benefit plans is generally satisfied upon the later of the issuance or effective date of the policy. The Company earns performance based incentives, commonly known as contingency payments, which usually are based on certain criteria established by the insurance carrier such as premium volume, growth and insured loss ratios. Contingent payments are accrued for based upon management’s expectations for the year. Commission expense associated with sales of insurance products is expensed as incurred. The Company does not earn a significant amount of trailing commission fees on insurance product sales. The majority of the trailing commission fees are calculated based on a percentage of market value of a period end and revenue is recognized when an investment product’s market value can be determined. Other Other noninterest income consists of other recurring revenue streams such as account and loan fees, interest rate swap fees, safe deposit box rental fees and other miscellaneous revenue streams. These revenue streams are primarily transactional based and payment is received immediately or in the following month, and therefore, the Company’s performance obligation is satisfied, and the related revenue is recognized, at a point in time. 62 Table of Contents The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of ASC 606: Years Ended December 31, (In thousands) 2022 2021 2020 Noninterest income In-Scope of ASC 606: Service charges on deposit accounts $ 14,630 $ 13,348 $ 13,201 Card services income 29,058 34,682 28,611 Retirement plan administration fees 48,112 42,188 35,851 Wealth management 33,311 33,718 29,247 Insurance services 14,696 14,083 14,757 Other 10,858 12,992 19,254 Total noninterest income in-scope of ASC 606 $ 150,665 $ 151,011 $ 140,921 Total noninterest income out-of-scope of ASC 606 $ 4,913 $ 6,783 $ 5,355 Total noninterest income $ 155,578 $ 157,794 $ 146,276 Contract Balances A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration or before payment is due, which would result in contract receivables or assets, respectively. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment or for which payment is due from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. Contract Acquisition Costs ASC 606 requires the capitalization, and subsequently amortization into expense, of certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company elected the practical expedient, which allows immediate expensing of contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less, and did not capitalize any contract acquisition costs upon adoption of ASC 606 as of or during the year ended December 31, 2022, 2021 and 2020. Trust Operations Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the accompanying consolidated balance sheets, since such assets are not assets of the Company. Subsequent Events The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified. 2. Recent Accounting Pronouncements Recently Adopted Accounting Standards In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . On January 7, 2021, the FASB issued ASU 2021-01, which refines the scope of Topic 848 and clarifies some of its guidance. ASU 2020-04 and related amendments provide temporary optional expedients and exceptions to the existing guidance for applying GAAP to affected contract modifications and hedge accounting relationships in the transition away from the London Interbank Offered Rate (“LIBOR”) or other interbank offered rates on financial reporting. The guidance also allows a one-time election to sell and/or reclassify to AFS or trading HTM debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective March 12, 2020 through December 31, 2022 and permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity. In December 2020, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 . The ASU extends the period of time companies can utilize the reference rate reform relief guidance provided by ASU 2020-04 and ASU 2021-01. The guidance which was effective upon issuance, defers the sunset date from December 31, 2022 to December 31, 2024, after which companies will no longer be permitted to apply the relief guidance in Topic 848. The adoption did not have a material impact on the consolidated financial statements and related disclosures. 63 Table of Contents Accounting Standards Issued Not Yet Adopted In March 2022, the FASB issued ASU 2022-02, Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The ASU eliminates the guidance on Troubled Debt Restructurings (“TDRs”) and requires an evaluation on all loan modifications to determine if they result in a new loan or a continuation of the existing loan. The ASU also requires that entities disclose current-period gross charge-offs by year of origination. The elimination of the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously modified, resulting in a cumulative effect adjustment to retained earnings in the period of adoption for changes in the allowance for credit losses. The amendments in this ASU are effective for the Company on January 1, 2023, with early adoption permitted. The adoption is not expected to have a material impact on the consolidated financial statements and related disclosures. 3. Acquisitions In 2020, the Company acquired Alliance Benefit Group of Illinois, Inc. for a total consideration of $ 9.1 million. As part of the acquisition, the Company recorded goodwill of $ 5.8 million and $ 5.1 million of contingent consideration recorded in other liabilities on the consolidated balance sheet as of December 31, 2020. The operating results of acquired companies are included in the consolidated results after the dates of acquisition. Pending Acquisition of Salisbury Bancorp, Inc. On December 5, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Salisbury Bancorp, Inc. (“Salisbury”), Salisbury Bank and Trust Company (“Salisbury Bank”), Salisbury’s subsidiary bank, and NBT Bank, the Company’s subsidiary bank, pursuant to which the Company will acquire Salisbury. Salisbury, with assets of approximately $ 1.54 billion at December 31, 2022, is headquartered in Lakeville, Connecticut. Its primary subsidiary, Salisbury Bank, is a Connecticut chartered commercial bank with 14 banking locations in northwestern Connecticut, the Hudson Valley region of New York and southwestern Massachusetts. Subject to the terms and conditions of the Merger Agreement, which has been approved by the boards of directors of each party, Salisbury will merge with and into the Company, with the Company as the surviving entity, and immediately thereafter, Salisbury Bank will merge with and into NBT Bank, with NBT Bank as the surviving bank (the “Merger”). Under the terms of the Merger Agreement, each outstanding share of Salisbury common stock will be converted into the right to receive 0.7450 shares of the Company’s common stock. The Merger is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the stockholders of Salisbury, and is expected to close in the second quarter of 2023. 4. Securities The amortized cost, estimated fair value and unrealized gains (losses) of AFS securities are as follows: (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value As of December 31, 2022 U.S. treasury $ 132,891 $ - $ ( 11,233 ) $ 121,658 Federal agency 248,419 - ( 42,000 ) 206,419 State & municipal 97,036 5 ( 14,190 ) 82,851 Mortgage-backed: Government-sponsored enterprises 454,177 9 ( 54,675 ) 399,511 U.S. government agency securities 81,844 15 ( 7,676 ) 74,183 Collateralized mortgage obligations: Government-sponsored enterprises 498,021 9 ( 59,473 ) 438,557 U.S. government agency securities 171,090 - ( 21,284 ) 149,806 Corporate 60,404 - ( 6,164 ) 54,240 Total AFS securities $ 1,743,882 $ 38 $ ( 216,695 ) $ 1,527,225 As of December 31, 2021 U.S. treasury $ 73,016 $ 59 $ ( 6 ) $ 73,069 Federal agency 248,454 - ( 8,523 ) 239,931 State & municipal 95,531 116 ( 1,559 ) 94,088 Mortgage-backed: Government-sponsored enterprises 538,036 8,036 ( 5,589 ) 540,483 U.S. government securities 65,339 1,108 ( 255 ) 66,192 Collateralized mortgage obligations: Government-sponsored enterprises 484,550 2,723 ( 5,113 ) 482,160 U.S. government securities 139,380 939 ( 884 ) 139,435 Corporate 50,500 1,516 ( 13 ) 52,003 Total AFS securities $ 1,694,806 $ 14,497 $ ( 21,942 ) $ 1,687,361 There was no allowance for credit losses on AFS securities as of December 31, 2022 and 2021. 64 Table of Contents The components of net realized gains (losses) on AFS securities are as follows. Years Ended December 31, (In thousands) 2022 2021 2020 Gross realized gains $ - $ - $ 3 Gross realized (losses) - - - N et AFS realized gains (losses) $ - $ - $ 3 The Company had no net realized gains (losses) on AFS securities for the years ended December 31, 2022 and 2021. Included in net realized gains (losses) on AFS securities, the Company recorded gains from calls of approximately $ 3 thousand for the year ended December 31, 2020, which were reclassified out of AOCI and into earnings . The amortized cost, estimated fair value and unrealized gains (losses) of HTM securities are as follows: (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value As of December 31, 2022 Federal agency $ 100,000 $ - $ ( 20,678 ) $ 79,322 Mortgage-backed: Government-sponsored enterprises 249,511 - ( 36,819 ) 212,692 U.S. government agency securities 18,396 4 ( 619 ) 17,781 Collateralized mortgage obligations: Government-sponsored enterprises 207,738 200 ( 14,876 ) 193,062 U.S. government agency securities 66,628 - ( 9,842 ) 56,786 State & municipal 277,244 5 ( 24,245 ) 253,004 Total HTM securities $ 919,517 $ 209 $ ( 107,079 ) $ 812,647 As of December 31, 2021 Federal agency $ 100,000 $ - $ ( 4,365 ) $ 95,635 Mortgage-backed: Government-sponsored enterprises 161,462 2,232 ( 1,319 ) 162,375 U.S. government agency securities 9,112 514 - 9,626 Collateralized mortgage obligations: Government-sponsored enterprises 94,342 1,932 ( 129 ) 96,145 U.S. government agency securities 44,473 336 ( 674 ) 44,135 State & municipal 323,821 5,026 ( 1,503 ) 327,344 Total HTM securities $ 733,210 $ 10,040 $ ( 7,990 ) $ 735,260 At December 31, 2022 and 2021, all of the mortgaged-backed HTM securities were comprised of U.S. government agency and government-sponsored enterprises securities. There was no allowance for credit losses on HTM securities as of December 31, 2022 and 2021 because the expectation of nonrepayment of the amortized cost is zero, except for state & municipal securities, which such expected losses from nonrepayment are immaterial. Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $ 4 thousand for the year ended December 31, 2022, approximately $ 29 thousand for the year ended December 31, 2021 and approximately $ 24 thousand for the year ended D ecember 31, 2020 . During the year ended December 31, 2020, the Company sold HTM securities with an amortized cost of $ 1.0 million and resulted in a realized loss of $ 1 thousand. Due to significant deterioration in the creditworthiness of the issuer of the HTM securities, the circumstances caused the Company to change its intent to hold the HTM securities sold to maturity, which did not affect the Company’s intent to hold the remainder of the HTM portfolio to maturity. There were no sales of HTM securities in the years ended December 31, 2022 and 2021. 65 Table of Contents AFS and HTM securities with amortized costs totaling $ 1.73 billion at December 31, 2022 and $ 1.63 billion at D ecember 31, 2021 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at D ecember 31, 2022 and 2021, AFS and HTM securities with an amortized cost of $ 149.5 million and $ 162.1 million, respectively, were pledged as collateral for securities sold under repurchase agreements. The following table set forth information with regard to gains and (losses) on equity securities: Years Ended December 31, (In thousands) 2022 2021 Net (losses) and gains recognized on equity securities $ ( 1,135 ) $ 537 Less: Net (losses) and gains recognized on equity securities sold during the period - - Unrealized (losses) and gains recognized on equity securities still held $ ( 1,135 ) $ 537 As of December 31, 2022 and 2021 the carrying value of equity securities without readily determinable fair values was $ 1.0 million. The Company performed a qualitative assessment to determine whether the investments were impaired and identified no areas of concern as of December 31, 2022 and 2021. There were no impairments, downward or upward adjustments recognized for equity securities without readily determinable fair values during the years ended December 31, 2022 and 2021. The following table set forth information with regard to contractual maturities of debt securities at December 31, 2022: (In thousands) Amortized Cost Estimated Fair Value AFS debt securities: Within one year $ 682 $ 675 From one to five years 402,807 361,295 From five to ten years 582,736 506,036 After ten years 757,657 659,219 Total AFS debt securities $ 1,743,882 $ 1,527,225 HTM debt securities: Within one year $ 49,986 $ 49,979 From one to five years 92,443 89,979 From five to ten years 278,664 241,294 After ten years 498,424 431,395 Total HTM debt securities $ 919,517 $ 812,647 Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Except for U.S. government securities and government-sponsored enterprises securities, there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at December 31, 2022, 2021 and 2020. 66 Table of Contents The following table sets forth information with regard to investment securities with unrealized losses, for which an allowance for credit losses has not been recorded, 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 December 31, 2022 AFS securities: U.S. treasury $ 55,616 $ ( 3,864 ) 5 $ 66,042 $ ( 7,369 ) 3 $ 121,658 $ ( 11,233 ) 8 Federal agency - - - 206,419 ( 42,000 ) 16 206,419 ( 42,000 ) 16 State & municipal 3,679 ( 341 ) 2 78,395 ( 13,849 ) 64 82,074 ( 14,190 ) 66 Mortgage-backed 204,447 ( 15,048 ) 149 267,926 ( 47,303 ) 32 472,373 ( 62,351 ) 181 Collateralized mortgage obligations 211,612 ( 14,458 ) 77 374,376 ( 66,299 ) 49 585,988 ( 80,757 ) 126 Corporate 34,434 ( 2,970 ) 12 19,806 ( 3,194 ) 6 54,240 ( 6,164 ) 18 Total securities with unrealized losses $ 509,788 $ ( 36,681 ) 245 $ 1,012,964 $ ( 180,014 ) 170 $ 1,522,752 $ ( 216,695 ) 415 HTM securities: Federal agency $ - $ - - $ 79,322 $ ( 20,678 ) 4 $ 79,322 $ ( 20,678 ) 4 Mortgage-backed 91,417 ( 9,096 ) 21 138,936 ( 28,342 ) 13 230,353 ( 37,438 ) 34 Collateralized mortgage obligations 191,644 ( 13,863 ) 47 48,289 ( 10,855 ) 8 239,933 ( 24,718 ) 55 State & municipal 110,727 ( 4,930 ) 149 82,949 ( 19,315 ) 76 193,676 ( 24,245 ) 225 Total securities with unrealized losses $ 393,788 $ ( 27,889 ) 217 $ 349,496 $ ( 79,190 ) 101 $ 743,284 $ ( 107,079 ) 318 As of December 31, 2021 AFS securities: U.S. treasury $ 49,105 $ ( 6 ) 2 $ - $ - - $ 49,105 $ ( 6 ) 2 Federal agency 41,618 ( 1,846 ) 4 198,313 ( 6,677 ) 12 239,931 ( 8,523 ) 16 State & municipal 87,515 ( 1,559 ) 61 - - - 87,515 ( 1,559 ) 61 Mortgage-backed 281,217 ( 4,319 ) 24 39,491 ( 1,525 ) 6 320,708 ( 5,844 ) 30 Collateralized mortgage obligations 341,673 ( 5,495 ) 34 15,774 ( 502 ) 4 357,447 ( 5,997 ) 38 Corporate 9,987 ( 13 ) 2 - - - 9,987 ( 13 ) 2 Total securities with unrealized losses $ 811,115 $ ( 13,238 ) 127 $ 253,578 $ ( 8,704 ) 22 $ 1,064,693 $ ( 21,942 ) 149 HTM securities: Federal agency $ - $ - - $ 95,635 $ ( 4,365 ) 4 $ 95,635 $ ( 4,365 ) 4 Mortgage-backed 103,789 ( 1,319 ) 10 - - - 103,789 ( 1,319 ) 10 Collateralized mortgage obligations 54,612 ( 803 ) 6 - - - 54,612 ( 803 ) 6 State & municipal 52,783 ( 1,189 ) 40 8,950 ( 314 ) 10 61,733 ( 1,503 ) 50 Total securities with unrealized losses $ 211,184 $ ( 3,311 ) 56 $ 104,585 $ ( 4,679 ) 14 $ 315,769 $ ( 7,990 ) 70 The Company does not believe the AFS securities that were in an unrealized loss position as of December 31, 2022 and 2021, which consisted of 415 and 149 individual securities, respectively, represented a credit loss impairment. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. As of December 31, 2022 and 2021, the majority of the AFS securities in an unrealized loss position consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises that carry the explicit and/or implicit guarantee of the U.S. government, which are widely recognized as “risk-free” and have a long history of zero credit losses. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities. AIR on AFS debt securities totaled $ 4.2 million at December 31, 2022 and $ 3.9 million at December 31, 2021 and is excluded from the estimate of credit losses and reported in the other assets financial statement line. None of the bank’s HTM debt securities were past due or on nonaccrual status as of December 31, 2022 and 2021. There was no accrued interest reversed against interest income for the years ended December 31, 2022 and 2021 as all securities remained on accrual status. In addition, there were no collateral-dependent HTM debt securities as of December 31, 2022 and 2021. As of December 31, 2022 and 2021, 70 % and 56 %, respectively, of the Company’s HTM debt securities were issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Therefore, the Company did not record an allowance for credit losses for these securities as of December 31, 2022 and 2021. The remaining HTM debt securities at December 31, 2022 and 2021 were comprised of state and municipal obligations generally with bond ratings of A to AAA. Utilizing the CECL approach, the Company determined that the expected credit loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit loss was recorded as of December 31, 2022 and 2021. AIR on HTM debt securities totaled $ 3.8 million at December 31, 2022 and $ 2.7 million at December 31, 2021 and is excluded from the estimate of credit losses and reported in the other assets financial statement line. 67 Table of Contents 5. Loans A summary of loans, net of deferred fees and origination costs, by category is as follows: At December 31, (In thousands) 2022 2021 Commercial & industrial $ 1,265,082 $ 1,155,240 Commercial real estate 2,807,941 2,655,367 Paycheck protection program 949 101,222 Residential real estate 1,649,870 1,571,232 Indirect auto 989,587 859,454 Residential solar 856,798 440,016 Home equity 314,124 330,357 Other consumer 265,796 385,571 Total loans $ 8,150,147 $ 7,498,459 Included in the above loans are net deferred loan origination (fees) costs totaling $( 109.1 ) million and $( 23.7 ) million at December 31, 2022 and 2021, respectively. The Company had $ 0.6 million and $ 0.8 million of residential loans held for sale as of December 31, 2022 and 2021, respectively. The total amount of loans serviced by the Company for unrelated third parties was $ 576.0 million and $ 575.9 million at December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, the Company had $ 0.6 million and $ 1.0 million, respectively, of mortgage servicing rights. In addition, as of December 31, 2022 and 2021, the Company serviced Springstone consumer loans of $ 6.2 million and $ 11.4 million, respectively. At December 31, 2022 and 2021, the Company serviced $ 31.0 million and $ 25.6 million, respectively, of agricultural loans sold with recourse. Due to sufficient collateral on these loans and government guarantees, no reserve is considered necessary at December 31, 2022 and 2021. FHLB advances are collateralized by a blanket lien on the Company’s residential real estate mortgages. In the ordinary course of business, the Company has made loans at prevailing rates and terms to directors, officers and other related parties. Such loans, in management’s opinion, do not present more than the normal risk of collectability or incorporate other unfavorable features. The aggregate amount of loans outstanding to qualifying related parties and changes during the years are summarized as follows: (In thousands) 2022 2021 Balance at January 1 $ 3,292 $ 5,936 New loans 576 182 Adjustment due to change in composition of related parties ( 37 ) ( 683 ) Repayments ( 1,315 ) ( 2,143 ) Balance at December 31 $ 2,516 $ 3,292 6. Allowance for Credit Losses and Credit Quality of Loans The allowance for credit losses totaled $ 100.8 million at December 31, 2022 , compared to $ 92.0 million at December 31, 2021 . The allowance for credit losses as a percentage of loans was 1.24 % at December 31, 2022 , compared to 1.23 % at December 31, 2021 . The January 1, 2020 (“Day 1”) increase in the allowance for credit loss on loans relating to the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments was $ 3.0 million, which decreased retained earnings by $ 2.3 million and increased the deferred tax asset by $ 0.7 million. 68 Table of Contents The allowance for credit losses calculation incorporated a 6-quarter forecast period to account for forecast economic conditions under each scenario utilized in the measurement. For periods beyond the 6-quarter forecast, the model reverts to long-term economic conditions over a 4-quarter reversion period on a straight-line basis. The Company considers a baseline, upside and downside economic forecast in measuring the allowance. The quantitative model as of December 31, 2022 incorporates a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment initially around pre-COVID-19 levels at 3.9% that increases slightly during the forecast period to 4.0%. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the first quarter of 2023 at approximately 3.9% and hovering around 4.6% by the end of the forecast period. Other utilized economic variables have generally deteriorated in their respective forecasts, with retail sales and housing starts forecasts declining from the prior year. Key assumptions in the baseline economic outlook included a full employment economy being realized in the near future, continued tapering of the Federal Reserve balance sheet, an increasing yield on ten-year treasury securities, and a gradual decline in global oil prices. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 3.9% in the fourth quarter of 2022 to a peak of 6.9% in the first quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2022. Additional adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation, and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth, and policy exceptions was also conducted. All these factors were considered through separate quantitative processes and incorporated when applicable into the estimate of current expected credit losses at December 31, 2022. The quantitative model as of December 31, 2021 incorporates a baseline economic outlook along with alternative upside and downside scenarios sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment initially above pre-COVID-19 levels at 4.8% but falling below pre-COVID-19 levels by the end of the forecast period to 3.5%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2022 at approximately 9% and hover around 5% by the middle and end of the forecast period. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rose from 5.7% in the fourth quarter of 2021 to a peak of 8% in the first quarter of 2023, remaining around or above 7% for the entire forecast period. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with a swift return to full employment by the second quarter of 2022 and with northeast unemployment moving down to 3.1% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2021. At December 31, 2021, the weightings were 60%, 10% and 30% for the baseline, upside and downside economic forecasts, respectively. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in the second and third quarters of 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government sponsored loan programs. The Company also continued to monitor the level of criticized and classified loans in the fourth quarter of 2021 compared to the level contemplated by the model during similar, historical economic conditions, and an adjustment was made to estimate potential additional losses above modeled losses. Additionally, qualitative adjustments were made for Moody’s baseline economic forecast to include impacts of the Build Back Better Act not passing by December 31, 2021 and to address potential economic deterioration due to Omicron, as well as isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates in historical periods. These factors were considered through separate quantitative processes and incorporated into the estimate of current expected credit losses at December 31, 2021. The quantitative model as of December 31, 2020 incorporated a baseline economic outlook, along with alternative upside and downside scenarios sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment above pre-COVID-19 levels for the entire forecast period, though steadily improving, before returning to low single digits by the end of 2023. Northeast GDP’s annual growth (on a quarterly basis) was expected to start 2021 in the low to mid-single digits, with a peak growth rate of 8% in the fourth quarter of 2021 and steadily falling back down to normalized levels through 2023 and 2024. Other utilized economic variables show improvement in their respective forecasts, namely business output. Key assumptions in the baseline economic outlook included an additional stimulus package passed at the same timing and a comparable level to that of the actual $900 billion COVID-19 relief package passed in December 2020 along with no significant secondary surge in COVID-19 cases or pandemic-related business closures. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. In the same way, the alternative upside scenario assumed a faster economic recovery and more effective management of the COVID-19 virus from the baseline outlook. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2020. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government-sponsored loan programs. The commercial & industrial and consumer segment models were based upon percent change in unemployment with modeled values as of December 31, 2020 well outside the observed historical experience. Therefore, adjustments were required to produce outputs more aligned with default expectations given the forecast economic environment. Additionally, the Company identified a slightly higher level of criticized and classified loans during 2020 than those contemplated by the model during similar economic conditions in the past for which an adjustment was made for estimated expected additional losses above modeled output. These factors were considered through a separate quantitative process and incorporated into the estimate for allowance for credit losses at December 31, 2020. 69 Table of Contents There were no loans purchased with credit deterioration during the years ended December 31, 2022 and 2021. During 2022, the Company purchased $ 11.5 million of residential loans at a 1.53 % premium and $ 50.1 million in consumer loans at par. The allowance for credit losses recorded for these loans on the purchase date was $ 3.2 million. During 2021, the Company purchased $ 58.9 million of residential loans at premiums ranging from 2 % to 5 % and $ 92.5 million of consumer loans at a par. The allowance for credit losses recorded for these loans on the purchase date was $ 6.8 million. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $ 25.0 million at December 31, 2022 and $ 19.5 million at December 31, 2021 and there was no estimated allowance for credit losses related to AIR at December 31, 2022 and 2021. The following tables present the activity in the allowance for credit losses by our portfolio segment: (In thousands) Commercial Loans Consumer Loans Residential Total Balance as of December 31, 2021 $ 28,941 $ 44,253 $ 18,806 $ 92,000 Charge-offs ( 1,870 ) ( 16,140 ) ( 633 ) ( 18,643 ) Recoveries 2,430 7,014 852 10,296 Provision 5,221 15,824 ( 3,898 ) 17,147 E nding Balance as of December 31, 2022 $ 34,722 $ 50,951 $ 15,127 $ 100,800 Balance as of December 31, 2020 $ 50,942 $ 37,803 $ 21,255 $ 110,000 Charge-offs ( 4,638 ) ( 14,489 ) ( 979 ) ( 20,106 ) Recoveries 723 8,571 1,069 10,363 Provision ( 18,086 ) 12,368 ( 2,539 ) ( 8,257 ) Ending Balance as of De cember 31, 2021 $ 28,941 $ 44,253 $ 18,806 $ 92,000 Balance as of January 1, 2020 (after adoption of ASC 326) $ 27,156 $ 32,122 $ 16,721 $ 75,999 Charge-offs ( 4,005 ) ( 21,938 ) ( 1,135 ) ( 27,078 ) Recoveries 786 8,541 618 9,945 Provision 27,005 19,078 5,051 51,134 Ending Balance as of December 31, 2020 $ 50,942 $ 37,803 $ 21,255 $ 110,000 The increase in the allowance for credit losses from December 31, 2021 to December 31, 2022 was primarily due to an increase in loan balances and a modest deterioration in the economic forecast. The decrease in the allowance for credit losses from December 31, 2020 to December 31, 2021 was primarily due to the improvement in the economic forecast, partly offset by providing for the increase in loan balances. The increase in the allowance for credit losses from Day 1 to December 31, 2020 was primarily due to the deterioration of macroeconomic factors surrounding the COVID-19 pandemic. Individually Evaluated Loans As of December 31, 2022, there were two relationships identified to be evaluated for loss on an individual basis which, in aggregate, had an amortized cost basis of $ 2.4 million, with no allowance for credit loss. As of December 31, 2021, there were five relationships identified to be evaluated for loss on an individual basis with an aggregate amortized cost basis of $ 10.2 million and no allowance for credit loss. The decrease in the amortized cost basis on an individual basis from December 31, 2021 to December 31, 2022 was primarily due to principal payments and resolution of one relationship in which the cost basis was substantially collected and the related $ 0.8 million allowance for credit losses was reversed. 70 Table of Contents The following table sets forth information with regard to past due and nonperforming loans by loan segment: (In thousands) 31-60 Days Past Due Accruing 61-90 Days Past Due Accruing Greater Than 90 Days Past Due Accruing Total Past Due Accruing Nonaccrual Current Recorded Total Loans As of December 31, 2022 Commercial loans: C&I $ 342 $ 88 $ 4 $ 434 $ 2,244 $ 1,237,530 $ 1,240,208 CRE 336 96 - 432 5,780 2,689,196 2,695,408 PPP - 11 - 11 - 938 949 Total commercial loans $ 678 $ 195 $ 4 $ 877 $ 8,024 $ 3,927,664 $ 3,936,565 Consumer loans: Auto $ 8,640 $ 1,393 $ 785 $ 10,818 $ 1,494 $ 950,389 $ 962,701 Other consumer 6,341 2,569 2,263 11,173 173 1,125,040 1,136,386 Total consumer loans $ 14,981 $ 3,962 $ 3,048 $ 21,991 $ 1,667 $ 2,075,429 $ 2,099,087 Residential $ 2,496 $ 555 $ 771 $ 3,822 $ 7,542 $ 2,103,131 $ 2,114,495 Total loans $ 18,155 $ 4,712 $ 3,823 $ 26,690 $ 17,233 $ 8,106,224 $ 8,150,147 (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, 2021 Commercial loans: C&I $ 622 $ - $ - $ 622 $ 3,618 $ 1,126,430 $ 1,130,670 CRE 1,219 132 - 1,351 12,726 2,550,910 2,564,987 PPP - - - - - 101,222 101,222 Total commercial loans $ 1,841 $ 132 $ - $ 1,973 $ 16,344 $ 3,778,562 $ 3,796,879 Consumer loans: Auto $ 6,911 $ 1,547 $ 545 $ 9,003 $ 1,295 $ 816,210 $ 826,508 Other consumer 3,789 1,816 1,105 6,710 233 832,447 839,390 Total consumer loans $ 10,700 $ 3,363 $ 1,650 $ 15,713 $ 1,528 $ 1,648,657 $ 1,665,898 Residential $ 2,481 $ 420 $ 808 $ 3,709 $ 12,413 $ 2,019,560 $ 2,035,682 Total loans $ 15,022 $ 3,915 $ 2,458 $ 21,395 $ 30,285 $ 7,446,779 $ 7,498,459 As of December 31, 2022 and 2021, there were $ 1.1 million and $ 8.8 million, respectively, of loans in nonaccrual that were specifically evaluated for individual expected credit loss without an allowance for credit losses. 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 provide management with an early warning system, which facilitates recognition and response to problem loans and potential problem loans. Commercial Grading System For Commercial and Industrial (“C&I”), Paycheck Protection Program (“PPP”) and Commercial Real Estate (“CRE”) loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass. 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. 71 Table of Contents 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 and/or 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. 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. Pass loans also include any portion of a government guaranteed loan, including PPP loans. Consumer and Residential Grading System Consumer and Residential 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 the above criteria are considered Performing. 72 Table of Contents The following tables illustrate the Company’s credit quality by loan class by year of origination (vintage) : (In thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of December 31, 2022 C&I By internally assigned grade: Pass $ 296,562 $ 251,531 $ 164,976 $ 91,497 $ 39,394 $ 32,413 $ 327,166 $ 3,133 $ 1,206,672 Special mention 1,044 524 4,531 194 1,108 417 5,234 - 13,052 Substandard 76 459 231 3,098 91 3,969 12,348 163 20,435 Doubtful - 20 - 28 - 1 - - 49 Total C&I $ 297,682 $ 252,534 $ 169,738 $ 94,817 $ 40,593 $ 36,800 $ 344,748 $ 3,296 $ 1,240,208 CRE By internally assigned grade: Pass $ 374,313 $ 465,990 $ 439,012 $ 333,568 $ 217,141 $ 566,783 $ 201,563 $ 24,735 $ 2,623,105 Special mention 605 764 868 2,641 4,649 24,023 850 - 34,400 Substandard 309 - 2,316 3,937 1,822 23,819 713 4,987 37,903 Total CRE $ 375,227 $ 466,754 $ 442,196 $ 340,146 $ 223,612 $ 614,625 $ 203,126 $ 29,722 $ 2,695,408 PPP By internally assigned grade: Pass $ - $ 949 $ - $ - $ - $ - $ - $ - $ 949 Total PPP $ - $ 949 $ - $ - $ - $ - $ - $ - $ 949 Auto By payment activity: Performing $ 488,776 $ 239,090 $ 75,853 $ 99,615 $ 44,061 $ 13,027 $ - $ - $ 960,422 Nonperforming 590 655 404 385 216 29 - - 2,279 Total auto $ 489,366 $ 239,745 $ 76,257 $ 100,000 $ 44,277 $ 13,056 $ - $ - $ 962,701 Other consumer By payment activity: Performing $ 538,488 $ 304,595 $ 110,944 $ 82,045 $ 51,655 $ 26,755 $ 19,218 $ 250 $ 1,133,950 Nonperforming 557 936 445 272 73 130 8 15 2,436 Total other consumer $ 539,045 $ 305,531 $ 111,389 $ 82,317 $ 51,728 $ 26,885 $ 19,226 $ 265 $ 1,136,386 Residential By payment activity: Performing $ 251,012 $ 349,498 $ 212,161 $ 156,957 $ 157,755 $ 717,621 $ 233,056 $ 28,122 $ 2,106,182 Nonperforming 267 384 408 555 1,028 5,651 - 20 8,313 Total residential $ 251,279 $ 349,882 $ 212,569 $ 157,512 $ 158,783 $ 723,272 $ 233,056 $ 28,142 $ 2,114,495 Total loans $ 1,952,599 $ 1,615,395 $ 1,012,149 $ 774,792 $ 518,993 $ 1,414,638 $ 800,156 $ 61,425 $ 8,150,147 73 Table of Contents (In thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of December 31, 2021 C&I By internally assigned grade: Pass $ 335,685 $ 219,931 $ 114,617 $ 64,310 $ 20,137 $ 32,146 $ 280,476 $ 15,731 $ 1,083,033 Special mention 148 5,255 4,641 2,430 2,699 1,111 11,835 522 28,641 Substandard 1,482 874 7,010 187 2,582 3,272 3,512 34 18,953 Doubtful - - - 1 42 - - - 43 Total C&I $ 337,315 $ 226,060 $ 126,268 $ 66,928 $ 25,460 $ 36,529 $ 295,823 $ 16,287 $ 1,130,670 CRE By internally assigned grade: Pass $ 489,300 $ 434,866 $ 370,377 $ 236,274 $ 251,082 $ 441,310 $ 141,367 $ 43,942 $ 2,408,518 Special mention 789 826 11,235 3,544 15,379 53,372 780 420 86,345 Substandard - 77 4,539 12,934 12,424 34,563 744 - 65,281 Doubtful - - - - - 4,843 - - 4,843 Total CRE $ 490,089 $ 435,769 $ 386,151 $ 252,752 $ 278,885 $ 534,088 $ 142,891 $ 44,362 $ 2,564,987 PPP By internally assigned grade: Pass $ 92,884 $ 8,338 $ - $ - $ - $ - $ - $ - $ 101,222 Total PPP $ 92,884 $ 8,338 $ - $ - $ - $ - $ - $ - $ 101,222 Auto By payment activity: Performing $ 351,778 $ 129,419 $ 183,959 $ 101,441 $ 46,007 $ 12,064 $ - $ - $ 824,668 Nonperforming 305 319 457 411 266 82 - - 1,840 Total auto $ 352,083 $ 129,738 $ 184,416 $ 101,852 $ 46,273 $ 12,146 $ - $ - $ 826,508 Other consumer By payment activity: Performing $ 427,401 $ 151,300 $ 116,451 $ 78,523 $ 29,705 $ 15,660 $ 19,011 $ 1 $ 838,052 Nonperforming 216 429 249 134 238 33 18 21 1,338 Total other consumer $ 427,617 $ 151,729 $ 116,700 $ 78,657 $ 29,943 $ 15,693 $ 19,029 $ 22 $ 839,390 Residential By payment activity: Performing $ 345,338 $ 226,723 $ 179,087 $ 179,575 $ 146,611 $ 687,863 $ 246,103 $ 11,161 $ 2,022,461 Nonperforming - 1,411 643 1,072 1,534 8,522 - 39 13,221 Total residential $ 345,338 $ 228,134 $ 179,730 $ 180,647 $ 148,145 $ 696,385 $ 246,103 $ 11,200 $ 2,035,682 Total loans $ 2,045,326 $ 1,179,768 $ 993,265 $ 680,836 $ 528,706 $ 1,294,841 $ 703,846 $ 71,871 $ 7,498,459 74 Table of Contents Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The allowance for losses on unfunded commitments totaled $ 5.1 million as of December 31, 2022 and 2021 . Troubled Debt Restructuring When the Company modifies a loan in a troubled debt restructuring (“TDR”), 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 and Consumer TDRs occurring during 2022 and 2021 were due to reductions in the interest rate and/or extension of the term. On August 3, 2020, the Federal Financial Institutions Examination Council issued a joint statement on additional loan accommodations related to COVID-19. The joint statement clarifies that for loan modifications in which Section 4013 of the CARES Act (“Section 4013”) is being applied, subsequent modifications could also be eligible under Section 4013. Accordingly, the Company offered modifications made in response to COVID-19 to borrowers who were current and otherwise not past due in accordance with the criteria stated in Section 4013. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment. The Company evaluated the modification programs provided to its borrowers and has concluded the modifications were generally made in accordance with the CARES Act guidance to borrowers who were in good standing prior to the COVID-19 pandemic and are not required to be designated as TDRs. The following tables illustrate the recorded investment and number of modifications designated as TDRs, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring: Year Ended December 31, 2022 Year Ended December 31, 2021 (Dollars in thousands) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Consumer loans: Auto - $ - $ - 2 $ 38 $ 38 Total consumer loans - $ - $ - 2 $ 38 $ 38 Residential 10 $ 829 $ 928 10 $ 1,121 $ 1,236 Total TDRs 10 $ 829 $ 928 12 $ 1,159 $ 1,274 The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the year: Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 (Dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment Commercial loans: C&I 1 $ 320 - $ - 1 $ 387 CRE - - - - 1 168 Total commercial loans 1 $ 320 - $ - 2 $ 555 Consumer loans: Auto 2 $ 20 3 $ 36 1 $ 6 Total consumer loans 2 $ 20 3 $ 36 1 $ 6 Residential 50 $ 3,387 49 $ 2,830 61 $ 3,213 Total TDRs 53 $ 3,727 52 $ 2,866 64 $ 3,774 75 Table of Contents 7. Premises, Equipment and Leases A summary of premises and equipment follows: December 31, (In thousands) 2022 2021 Land, buildings and improvements $ 123,574 $ 125,320 Furniture and equipment 66,235 59,041 Premises and equipment before accumulated depreciation $ 189,809 $ 184,361 Accumulated depreciation 120,762 112,268 Total premises and equipment $ 69,047 $ 72,093 Buildings and improvements are depreciated based on useful lives of five to twenty years . Furniture and equipment is depreciated based on useful lives of three to ten years . Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, included in other assets and other liabilities , respectively, on the consolidated balance sheets. The Company does not have any significant finance leases in which we are the lessee as of December 31, 2022 and December 31, 2021. 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 consolidated statements of income. The Company 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 December 31, 2022, operating lease ROU assets and liabilities were $ 23.9 million and $ 25.6 million, respectively. As of December 31, 2021, operating lease ROU assets and liabilities were $ 23.3 million and $ 27.6 million, respectively. The table below summarizes net lease cost: December 31, (In thousands) 2022 2021 Operating lease cost $ 6,643 $ 7,176 Variable lease cost 2,041 2,090 Short-term lease cost 297 369 Sublease income ( 266 ) ( 466 ) Total premises and equipment $ 8,715 $ 9,169 The table below shows future minimum rental commitments related to non-cancelable operating leases for the next five years and thereafter as of December 31, 2022. (In thousands) 2023 $ 6,446 2024 5,427 2025 4,195 2026 3,298 2027 2,681 Thereafter 6,327 Total lease payments $ 28,374 Less: interest ( 2,822 ) Present value of lease liabilities $ 25,552 76 Table of Contents The following table shows the weighted average remaining operating lease term, the weighted average discount rate and supplemental information on the consolidated statements of cash flows for operating leases: December 31, (In thousands except for percent and period data) 2022 2021 Weighted average remaining lease term, in years 6.42 6.91 Weighted average discount rate 3.10 % 2.97 % Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 8,371 $ 7,373 ROU assets obtained in exchange for lease liabilities 7,377 1,843 As of December 31, 2022 there are no new significant leases that have not yet commenced. Rental expense included in occupancy expense amounted to $ 7.2 million in 2022, $ 7.2 million in 2021 and $ 8.0 million in 2020. 8. Goodwill and Other Intangible Assets A summary of goodwill is as follows: (In thousands) January 1, 2022 $ 280,541 Goodwill acquired 663 December 31, 2022 $ 281,204 January 1, 2021 $ 280,541 Goodwill acquired - December 31, 2021 $ 280,541 The Company has intangible assets with definite useful lives capitalized on its consolidated balance sheet in the form of core deposit and other identified intangible assets. These intangible assets are amortized over their estimated useful lives, which range primarily from one to twenty years . There was no impairment of goodwill recorded during the years ended December 31, 2022 and 2021. A summary of core deposit and other intangible assets follows: December 31, (In thousands) 2022 2021 Core deposit intangibles: Gross carrying amount $ 6,161 $ 7,435 Less: accumulated amortization 6,133 7,258 Net carrying amount $ 28 $ 177 Identified intangible assets: Gross carrying amount $ 25,179 $ 25,025 Less: accumulated amortization 17,866 16,275 Net carrying amount $ 7,313 $ 8,750 Total intangibles: Gross carrying amount $ 31,340 $ 32,460 Less: accumulated amortization 23,999 23,533 Net carrying amount $ 7,341 $ 8,927 Amortization expense on intangible assets with definite useful lives totaled $ 2.3 million for 2022, $ 2.8 million for 2021 and $ 3.4 million for 2020. Amortization expense on intangible assets with definite useful lives is expected to total $ 1.9 million for 2023, $ 1.6 million for 2024, $ 1.2 million for 2025, $ 1.0 million for 2026, $ 0.7 million for 2027 and $ 1.0 million thereafter. Other identified intangible assets include customer lists and non-compete agreements. During the years ended December 31, 2022, 2021 and 2020, there was no impairment of intangible assets. 77 Table of Contents 9. Deposits The following table sets forth the maturity distribution of time deposits: (In thousands) December 31, 2022 Within one year $ 280,996 After one but within two years 92,492 After two but within three years 24,033 After three but within four years 21,483 After four but within five years 14,332 After five years 436 Total $ 433,772 Time deposits of $250,000 or more aggregated $ 48.4 million and $ 72.3 million December 31, 2022 and 2021, respectively. 10. Borrowings Short-Term Borrowings In addition to the liquidity provided by balance sheet cash flows, liquidity must also be supplemented with additional sources such as credit lines from correspondent banks as well as borrowings from the FHLB and the Federal Reserve Bank. Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements and brokered certificate of deposit (“CD”) accounts. Short-term borrowings totaled $ 585.0 million and $ 97.8 million at December 31, 2022 and 2021, respectively, and consist of Federal funds purchased and securities sold under repurchase agreements, which generally represent overnight borrowing transactions and other short-term borrowings, primarily FHLB advances, with original maturities of one year or less. The Company has unused lines of credit with the FHLB and access to brokered deposits available for short-term financing. Those sources totaled approximately $ 2.90 billion and $ 3.45 billion at December 31, 2022 and 2021, respectively. Borrowings on the FHLB lines are secured by FHLB stock, certain securities and one-to-four family first lien mortgage loans. Securities collateralizing repurchase agreements are held in safekeeping by nonaffiliated financial institutions and are under the Company’s control. Information related to short-term borrowings is summarized as follows: December 31, (Dollars in thousands) 2022 2021 2020 Federal funds purchased: Balance at year-end $ 60,000 $ - $ - Average during the year 14,644 17 14,727 Maximum month end balance 80,000 - 40,000 Weighted average rate during the year 4.02 % 0.11 % 2.05 % Weighted average rate at year-end 4.28 % - - Securities sold under repurchase agreements: Balance at year-end $ 86,012 $ 97,795 $ 143,386 Average during the year 69,561 100,519 154,383 Maximum month end balance 88,637 135,623 176,840 Weighted average rate during the year 0.10 % 0.13 % 0.17 % Weighted average rate at year-end 0.11 % 0.11 % 0.20 % Other short-term borrowings: Balance at year-end $ 439,000 $ - $ 25,000 Average during the year 46,371 1,302 183,699 Maximum month end balance 439,000 - 366,500 Weighted average rate during the year 4.24 % 2.02 % 1.55 % Weighted average rate at year-end 4.45 % - 1.99 % See Note 4 for additional information regarding securities pledged as collateral for securities sold under the repurchase agreements. 78 Table of Contents Long-Term Debt Long-term debt consists of obligations having an original maturity at issuance of more than one year. A majority of the Company’s long-term debt is comprised of FHLB advances collateralized by the FHLB stock owned by the Company, and a blanket lien on its residential real estate mortgage loans. As of December 31, 2022 the Company had no callable long-term debt. A summary is as follows: (Dollars in thousands) December 31, 2022 December 31, 2021 Maturity Amount Weighted Average Rate Amount Weighted Average Rate 2022 $ - - $ 10,598 2.53 % 2025 1,519 4.39 % - - 2031 3,296 2.45 % 3,397 2.45 % Total $ 4,815 $ 13,995 Subordinated Debt On June 23, 2020, the Company issued $ 100.0 million aggregate principal amount of 5.00 % fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00 %, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85 %, payable quarterly in arrears commencing on October 1, 2025. The subordinated notes issuance costs of $ 2.2 million are being amortized on a straight-line basis into interest expense over five years . The Company may redeem the subordinated notes (1) in whole or in part beginning with the interest payment date of July 1, 2025, and on any interest payment date thereafter or (2) in whole but not in part upon the occurrence of a “Tax Event”, a “Tier 2 Capital Event” or in the event the Company is required to register as an investment company pursuant to the Investment Company Act of 1940, as amended. The redemption price for any redemption is 100 % of the principal amount of the subordinated notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any redemption of the subordinated notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations. The Company repurchased $ 2.0 million of the subordinated notes during the year ended December 31, 2022 at a discount of $ 0.1 million . The following table summarizes the Company’s subordinated debt: (Dollars in thousands) December 31, 2022 December 31, 2021 Subordinated notes issued June 2020 – fixed interest rate of 5.00 % through June 2025 and a variable interest rate equivalent to three-month SOFR plus 4.85 % thereafter, maturing July 1, 2030 $ 98,000 $ 100,000 Unamortized debt issuance costs ( 1,073 ) ( 1,510 ) Total subordinated debt, net $ 96,927 $ 98,490 Junior Subordinated Debt The Company sponsors five business trusts, 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 junior subordinated debentures include amounts related to the Company’s NBT Statutory Trust I and II as well as junior subordinated debentures associated with one statutory trust affiliate that was acquired from our merger with CNB Financial Corp. and two statutory trusts that were acquired from our acquisition of Alliance Financial Corporation (“Alliance”). The Trusts were formed for the purpose of issuing company-obligated mandatorily redeemable trust preferred securities to third-party investors and investing in the proceeds from the sale of such preferred securities solely in junior subordinated debt securities of the Company for general corporate purposes. The Company guarantees, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities. The Trusts are VIEs for which the Company is not the primary beneficiary, as defined by GAAP. In accordance with GAAP, the accounts of the Trusts are not included in the Company’s consolidated financial statements. See Note 1 for additional information about the Company’s consolidation policy. The debentures held by each trust are the sole assets of that trust. The Trusts hold, as their sole assets, junior subordinated debentures of the Company with face amounts totaling $ 98.0 million at December 31, 2022. The Company owns all of the common securities of the Trusts and has accordingly recorded $ 3.2 million in equity method investments classified as other assets in our consolidated balance sheets at December 31, 2022. The Company owns all of the common stock of the Trusts, which have issued trust preferred securities in conjunction with the Company issuing trust preferred debentures to the Trusts. The terms of the trust preferred debentures are substantially the same as the terms of the trust preferred securities. 79 Table of Contents As of December 31, 2022, the Trusts had the following trust preferred securities outstanding and held the following junior subordinated debentures of the Company (dollars in thousands): Description Issuance Date Trust Preferred Securities Outstanding Interest Rate Trust Preferred Debt Owed To Trust Final Maturity Date CNBF Capital Trust I August 1999 $ 18,000 3-month LIBOR plus 2.75 % $ 18,720 August 2029 NBT Statutory Trust I November 2005 5,000 3-month LIBOR plus 1.40 % 5,155 December 2035 NBT Statutory Trust II February 2006 50,000 3-month LIBOR plus 1.40 % 51,547 March 2036 Alliance Financial Capital Trust I December 2003 10,000 3-month LIBOR plus 2.85 % 10,310 January 2034 Alliance Financial Capital Trust II September 2006 15,000 3-month LIBOR plus 1.65 % 15,464 September 2036 The Company’s junior subordinated debentures are redeemable prior to the maturity date at our option upon each trust’s stated option repurchase dates and from time to time thereafter. These debentures are also redeemable in whole at any time upon the occurrence of specific events defined within the trust indenture. Our obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the issuers’ obligations under the trust preferred securities. The Company owns all of the common stock of the Trusts, which have issued trust preferred securities in conjunction with the Company issuing trust preferred debentures to the Trusts. The terms of the trust preferred debentures are substantially the same as the terms of the trust preferred securities. With respect to the Trusts, the Company has the right to defer payments of interest on the debentures issued to the Trusts at any time or from time to time for a period of up to ten consecutive semi-annual periods with respect to each deferral period. Under the terms of the debentures, if in certain circumstances there is an event of default under the debentures or the Company elects to defer interest on the debentures, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock. Despite the fact that the Trusts are not included in the Company’s consolidated financial statements, $ 97 million of the $ 101 million in trust preferred securities issued by these subsidiary trusts is included in the Tier 1 capital of the Company for regulatory capital purposes as allowed by the Federal Reserve Board (NBT Bank owns $ 1.0 million of CNBF Trust I securities). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires bank holding companies with assets greater than $ 500 million to be subject to the same capital requirements as insured depository institutions, meaning, for instance, that such bank holding companies will not be able to count trust preferred securities issued after May 19, 2010 as Tier 1 capital. The aforementioned Trusts are grandfathered with respect to this enactment based on their date of issuance. 11. Income Taxes The significant components of income tax expense attributable to operations are as follows: Years Ended December 31, (In thousands) 2022 2021 2020 Current Federal $ 51,077 $ 35,483 $ 36,358 State 12,934 8,626 9,768 Total Current $ 64,011 $ 44,109 $ 46,126 Deferred Federal $ ( 15,862 ) $ 507 $ ( 14,021 ) State ( 3,988 ) 357 ( 3,406 ) Total Deferred $ ( 19,850 ) $ 864 $ ( 17,427 ) Total income tax expense $ 44,161 $ 44,973 $ 28,699 80 Table of Contents The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: December 31, (In thousands) 2022 2021 Deferred tax assets: Allowance for loan losses $ 24,792 $ 22,479 Lease liability 6,273 6,744 Deferred compensation 9,181 9,584 Loan fees 33,389 12,936 Stock-based compensation expense 2,822 2,679 Unrealized losses on securities 53,663 1,482 Other 6,027 7,109 Total deferred tax assets $ 136,147 $ 63,013 Deferred tax liabilities: Pension benefits $ 13,103 $ 16,137 Lease right-of-use asset 5,877 5,681 Amortization of intangible assets 14,112 13,187 Premises and equipment, primarily due to accelerated depreciation 4,889 4,962 Other 846 1,008 Total deferred tax liabilities $ 38,827 $ 40,975 Net deferred tax asset at year-end $ 97,320 $ 22,038 Net deferred tax asset at beginning of year 22,038 15,117 Increase in net deferred tax asset $ 75,282 $ 6,921 Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Based on available evidence, gross deferred tax assets will ultimately be realized and a valuation allowance was not deemed necessary at December 31, 2022 and 2021. The following is a reconciliation of the provision for income taxes to the amount computed by applying the applicable Federal statutory rate to income before taxes: Years Ended December 31, (In thousands) 2022 2021 2020 Federal income tax at statutory rate $ 41,193 $ 41,971 $ 27,948 Tax exempt income ( 984 ) ( 1,014 ) ( 981 ) Net increase in cash surrender value of life insurance ( 1,215 ) ( 1,230 ) ( 1,135 ) Federal tax credits ( 2,417 ) ( 1,884 ) ( 1,705 ) State taxes, net of federal tax benefit 7,067 7,097 5,026 Other, net 517 33 ( 454 ) Income tax expense $ 44,161 $ 44,973 $ 28,699 A reconciliation of the beginning and ending balance of Federal and State gross unrecognized tax benefits (“UTBs”) is as follows: (In thousands) 2022 2021 Balance at January 1 $ 1,545 $ 1,178 Additions for tax positions of prior years 3 80 Current period tax positions 394 287 Balance at December 31 $ 1,942 $ 1,545 Amount that would affect the effective tax rate if recognized, gross of tax $ 1,535 $ 1,221 The Company recognizes interest and penalties on the income tax expense line in the accompanying consolidated statements of income. The Company monitors changes in tax statutes and regulations to determine if significant changes will occur over the next 12 months. As of December 31, 2022, no significant changes to UTBs are projected; however, tax audit examinations are possible, but it is not reasonably possible to estimate when examinations in subsequent years will be completed . The Company recognized an insignificant amount of interest expense related to UTBs in the consolidated statement of income for the year ended December 31, 2022. As of December 31, 2022, the Company is no longer subject to U.S. Federal tax examination by tax authorities for years prior to 2019. The tax years 2015 to 2019 are currently being audited by New York State. 81 Table of Contents 12. Employee Benefit Plans Defined Benefit Post-Retirement Plans The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at December 31, 2022. 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, bonds and mutual funds. Prior to January 1, 2000, the Plan was a traditional defined benefit plan based on final average compensation. On January 1, 2000, the Plan was converted to a cash balance plan with grandfathering provisions for existing participants. Effective March 1, 2013, the Plan was amended. Benefit accruals for participants who, as of January 1, 2000, elected to continue participating in the traditional defined benefit plan design were frozen as of March 1, 2013. In May 2013, the noncontributory, frozen, defined benefit pension plan assumed from Alliance in the acquisition was merged into the Plan. 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 in the Alliance acquisition. 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. The Plan is contributory for participating retirees, requiring participants to absorb certain deductibles and coinsurance amounts with contributions adjusted annually to reflect cost sharing provisions and benefit limitations called for in the Plan. Employees become eligible for these benefits if they reach normal retirement age while working for the Company. For eligible employees described above, the Company funds the cost of post-retirement health care as benefits are paid. The Company elected to recognize the transition obligation on a delayed basis over twenty years . 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.” Accounting standards require an employer to: (1) recognize the overfunded or underfunded status of defined benefit post-retirement plans, which is measured as the difference between plan assets at fair value and the benefit obligation, as an asset or liability in its balance sheet; (2) recognize changes in that funded status in the year in which the changes occur through comprehensive income; and (3) measure the defined benefit plan assets and obligations as of the date of its year-end balance sheet. The components of AOCI, which have not yet been recognized as components of net periodic benefit cost, related to pensions and other post-retirement benefits are summarized below: Pension Benefits Other Benefits (In thousands) 2022 2021 2022 2021 Net actuarial loss (gain) $ 35,971 $ 21,608 $ ( 921 ) $ ( 226 ) Prior service cost (credit) 211 320 ( 14 ) ( 8 ) Total amounts recognized in AOCI (pre-tax) $ 36,182 $ 21,928 $ ( 935 ) $ ( 234 ) A December 31 measurement date is used for the pension, supplemental pension and post-retirement benefit plans. The following table sets forth changes in benefit obligations, changes in plan assets and the funded status of the pension plans and other post-retirement benefits: Pension Benefits Other Benefits (In thousands) 2022 2021 2022 2021 Change in benefit obligation: Benefit obligation at beginning of year $ 88,919 $ 90,194 $ 5,152 $ 5,999 Service cost 2,024 2,069 7 8 Interest cost 2,765 2,717 170 163 Plan participants’ contributions - - 147 160 Actuarial (gain) loss ( 11,158 ) 499 ( 695 ) ( 543 ) Benefits paid ( 6,610 ) ( 6,560 ) ( 598 ) ( 635 ) Projected benefit obligation at end of year $ 75,940 $ 88,919 $ 4,183 $ 5,152 Change in plan assets: Fair value of plan assets at beginning of year $ 135,867 $ 128,563 $ - $ - (Loss) gain on plan assets ( 17,260 ) 12,523 - - Employer contributions 1,319 1,341 451 475 Plan participants’ contributions - - 147 160 Benefits paid ( 6,610 ) ( 6,560 ) ( 598 ) ( 635 ) Fair value of plan assets at end of year $ 113,316 $ 135,867 $ - $ - Funded (unfunded) status at year end $ 37,376 $ 46,948 $ ( 4,183 ) $ ( 5,152 ) 82 Table of Contents An asset is recognized for an overfunded plan and a liability is recognized for an underfunded plan. The accumulated benefit obligation for pension benefits was $ 75.9 million and $ 88.9 million at December 31, 2022 and 2021, respectively. The accumulated benefit obligation for other post-retirement benefits was $ 4.2 million and $ 5.2 million at December 31, 2022 and 2021, respectively. The funded status of the pension and other post-retirement benefit plans has been recognized as follows in the consolidated balance sheets at December 31, 2022 and 2021. Pension Benefits Other Benefits (In thousands) 2022 2021 2022 2021 Other assets $ 53,031 $ 65,638 $ - $ - Other liabilities ( 15,655 ) ( 18,690 ) ( 4,183 ) ( 5,152 ) Funded status $ 37,376 $ 46,948 $ ( 4,183 ) $ ( 5,152 ) The following assumptions were used to determine the benefit obligation and the net periodic pension cost for the years indicated: Years Ended December 31, 2022 2021 2020 Weighted average assumptions: The following assumptions were used to determine benefit obligations: Discount rate 5.54 % - 5.66 % 3.23 % - 3.35 % 3.08 % - 3.25 % Expected long-term return on plan assets 6.70 % 6.70 % 7.00 % Rate of compensation increase 3.00 % 3.00 % 3.00 % Interest rate of credit for cash balance plan 3.99 % 1.94 % 1.62 % The following assumptions were used to determine net periodic pension cost: Discount rate 3.23 % - 3.35 % 3.08 % - 3.25 % 3.69 % - 3.73 % Expected long-term return on plan assets 6.70 % 7.00 % 7.00 % Rate of compensation increase 3.00 % 3.00 % 3.00 % Interest rate of credit for cash balance plan 1.94 % 1.62 % 2.28 % Net periodic benefit cost and other amounts recognized in OCI for the years ended December 31 included the following components: Pension Benefits Other Benefits (In thousands) 2022 2021 2020 2022 2021 2020 Components of net periodic (benefit) cost: Service cost $ 2,024 $ 2,069 $ 1,840 $ 7 $ 8 $ 8 Interest cost 2,765 2,717 3,237 170 163 213 Expected return on plan assets ( 8,884 ) ( 8,786 ) ( 8,410 ) - - - Additional gain due to curtailment - - ( 74 ) - - - Amortization of prior service cost 108 59 41 6 51 51 Amortization of unrecognized net loss 623 1,263 1,535 - - - Net periodic pension (benefit) cost $ ( 3,364 ) $ ( 2,678 ) $ ( 1,831 ) $ 183 $ 222 $ 272 Other changes in plan assets and benefit obligations recognized in OCI (pre-tax): Net loss (gain) $ 14,987 $ ( 3,237 ) $ ( 628 ) $ ( 695 ) $ ( 543 ) $ 192 Additional gain due to curtailment - - 7 - - - Amortization of prior service cost ( 108 ) ( 59 ) ( 41 ) ( 6 ) ( 51 ) ( 51 ) Amortization of unrecognized net loss ( 623 ) ( 1,263 ) ( 1,535 ) - - - Total recognized in OCI $ 14,256 $ ( 4,559 ) $ ( 2,197 ) $ ( 701 ) $ ( 594 ) $ 141 Total recognized in net periodic cost (benefit) and OCI, pre-tax $ 10,892 $ ( 7,237 ) $ ( 4,028 ) $ ( 518 ) $ ( 372 ) $ 413 The service cost component of the net periodic (benefit) cost 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 consolidated statements of income. 83 Table of Contents The following table sets forth estimated future benefit payments for the pension plans and other post-retirement benefit plans as of December 31, 2022: (In thousands) Pension Benefits Other Benefits 2023 $ 6,824 $ 415 2024 7,218 410 2025 7,467 405 2026 7,003 398 2027 7,595 374 2028 - 2032 33,279 1,688 The Company made no voluntary contributions to the pension and other benefit plans during the years ended December 31, 2022 and 2021. For measurement purposes, the annual rates of increase in the per capita cost of covered medical and prescription drug benefits for fiscal year 2022 were assumed to be 4.5 % to 6.5 %. The rates were assumed to decrease gradually to 4.0 % for fiscal year 2075 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on amounts reported for health care plans. Plan Investment Policy The Company’s key investment objectives in managing its defined benefit plan assets are to ensure that present and future benefit obligations to all participants and beneficiaries are met as they become due; to provide a total return that, over the long-term, maximizes the ratio of the plan assets to liabilities, while minimizing the present value of required Company contributions, at the appropriate levels of risk; to meet statutory requirements and regulatory agencies’ requirements; and to satisfy applicable accounting standards. The Company periodically evaluates the asset allocations, funded status, rate of return assumption and contribution strategy for satisfaction of our investment objectives. The target and actual allocations expressed as a percentage of the defined benefit pension plan’s assets are as follows: Target 2022 2022 2021 Cash and cash equivalents 0 - 15 % 3 % 2 % Fixed income securities 30 - 60 % 38 % 37 % Equities 40 - 70 % 59 % 61 % Total 100 % 100 % Only high-quality bonds are to be included in the portfolio. All issues that are rated lower than A by Standard and Poor’s are to be excluded. Equity securities at December 31, 2022 and 2021 do not include any Company common stock. The following table presents the financial instruments recorded at fair value on a recurring basis by the Plan: (In thousands) Level 1 Level 2 December 31, 2022 Cash and cash equivalents $ 3,401 $ - $ 3,401 Foreign equity mutual funds 36,111 - 36,111 Equity mutual funds 30,859 - 30,859 U.S. government bonds - 20 20 Corporate bonds - 42,925 42,925 Total $ 70,371 $ 42,945 $ 113,316 Level 1 Level 2 December 31, 2021 Cash and cash equivalents $ 3,298 $ - $ 3,298 Foreign equity mutual funds 46,385 - 46,385 Equity mutual funds 36,034 - 36,034 U.S. government bonds - 33 33 Corporate bonds - 50,117 50,117 Total $ 85,717 $ 50,150 $ 135,867 The plan had no financial instruments recorded at fair value on a non-recurring basis as of December 31, 2022 and 2021. 84 Table of Contents Determination of Assumed Rate of Return The expected long-term rate-of-return on assets was 6.7 % at December 31, 2022 and 2021, respectively. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the portfolio considering the asset distribution and related historical rates of return. The appropriateness of the assumption is reviewed annually. Employee 401(k) and Employee Stock Ownership Plans The Company maintains a 401(k) and employee stock ownership plan (the “401(k) Plan”). The Company contributes to the 401(k) Plan based on employees’ contributions out of their annual salaries. In addition, the Company may also make discretionary contributions to the 401(k) Plan based on profitability. Participation in the 401(k) Plan is contingent upon certain age and service requirements. The employer contributions associated with the 401(k) Plan were $ 4.0 million in 2022, $ 3.9 million in 2021 and $ 3.6 million in 2020. Other Retirement Benefits Included in other liabilities is $ 1.1 million and $ 1.3 million at December 31, 2022 and 2021, respectively, for supplemental retirement benefits for retired executives from legacy plans assumed in acquisitions. The Company recognized $ 0.2 million in expense for each of the years ended December 31, 2022, 2021 and 2020, related to these plans. 13. Stock-Based Compensation In May 2018, the Company adopted the NBT Bancorp Inc. 2018 Omnibus Incentive Plan (the “Stock Plan”) replacing the 2008 Omnibus Incentive Plan which automatically expired in April 2018. Under the terms of the Stock Plan, equity-based awards are granted to directors and employees to increase their direct proprietary interest in the operations and success of the Company. The Stock Plan assumed all prior equity-based incentive plans and any new equity-based awards are granted under the terms of the Stock Plan. Restricted shares granted under the Plan typically vest after three or five years for employees and three years for non-employee directors. Restricted stock units granted under the Stock Plan may have different terms and conditions. Performance shares and units granted under the Stock Plan for executives may have different terms and conditions. Since 2011, the Company primarily grants restricted stock unit awards. Stock option grants since that time were reloads of existing grants which terminate ten years from the date of the grant. Under terms of the Stock Plan, stock options are granted to purchase shares of the Company’s common stock at a price equal to the fair market value of the common stock on the date of the grant. Shares issued as a result of vesting of restricted stock unit awards and stock option exercises are funded from the Company’s treasury stoc k. The Company has outstanding restricted stock granted from various plans at December 31, 2022. The Company recognized $ 4.5 million, $ 4.4 million and $ 4.6 million in stock-based compensation expense related to these stock awards for the years ended December 31, 2022, 2021 and 2020, respectively. Tax benefits recognized with respect to restricted stock units were $ 1.2 million, $ 1.9 million and $ 1.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. Unrecognized compensation cost related to restricted stock units totaled $ 5.7 million at December 31, 2022 and will be recognized over 1.5 years on a weighted average basis. Shares issued are funded from the Company’s treasury stock. The following table summarizes information for unvested restricted stock units outstanding as of December 31, 2022: Number of Shares Weighted- Average Grant Date Fair Value Unvested at January 1, 2022 494,032 $ 30.89 Forfeited ( 16,893 ) 31.28 Vested ( 114,745 ) 31.96 Granted 169,978 35.59 Unvested at December 31, 2022 532,372 $ 32.15 The following table summarizes information concerning stock options outstanding: (In thousands, except share and per share data) Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value Outstanding at January 1, 2022 9,100 $ 29.89 Exercised - - Expired - - Outstanding at December 31, 2022 9,100 $ 29.89 3.07 $ 123 Exercisable at December 31, 2022 9,100 $ 29.89 3.07 $ 123 85 Table of Contents T here was no stock-based compensation expense for stock option awards for the years ended December 31, 2022, 2021 and 2020. Cash proceeds, tax benefits and intrinsic value related to total stock options exercised is as follows: Years Ended December 31, (In thousands) 2022 2021 2020 Proceeds from stock options exercised $ - $ 112 $ 185 Tax benefits related to stock options exercised - 13 41 Intrinsic value of stock options exercised - 52 165 The Company has 384,182 securities remaining available to be granted as part of the Plan at December 31, 2022. 14. Stockholders’ Equity In accordance with GAAP, unrecognized prior service costs and net actuarial gains or losses associated with the Company’s pension and postretirement benefit plans and unrealized gains on derivatives and on AFS securities are included in AOCI, net of tax. For the years ended December 31, components of AOCI are: (In thousands) 2022 2021 2020 Unrecognized prior service cost and net actuarial (losses) on pension plans $ ( 26,435 ) $ ( 16,269 ) $ ( 20,134 ) Unrealized (losses) on derivatives (cash flow hedges) - - ( 16 ) Unrealized net holding (losses) gains on AFS securities ( 163,599 ) ( 7,075 ) 20,567 AOCI $ ( 190,034 ) $ ( 23,344 ) $ 417 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 the Comptroller of the Currency (“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 December 31, 2022, approximately $ 145.3 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 also is subject to the Bank’s continued 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. The Company purchased 400,000 shares of its common stock during the year ended December 31, 2022, for a total of $ 14.7 million at an average price of $ 36.78 per share under its previously announced share repurchase program. On December 20, 2021, the Board of Directors authorized a repurchase program for the Company to repurchase up to 2,000,000 shares of its outstanding common stock. As of December 31 , 2022 , t here were 1,600,000 shares available for repurchase under this plan which is set to expire on December 31, 2023 . 15. Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of NBT Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 Capital to risk-weighted assets and of Tier 1 capital to average assets. In addition to maintaining minimum capital ratios, the Company is subject to a capital conservation buffer (“Buffer”) of 2.50% above the minimum to avoid restriction on capital distributions and discretionary bonus paychecks to officers. At December 31, 2022 and 2021, the Company and the Bank meet all capital adequacy requirements to which they were subject. 86 Table of Contents Under their prompt corrective action regulations, regulatory authorities are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on an institution’s financial statements. The regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2022 and 2021, the most recent notifications from the Bank’s regulators categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 Capital to Average Asset ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category. In Mar ch 2020, the OCC, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”) announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses (after-tax) has been deferred and will phase into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, the Company is allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020 and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020 and December 31, 2021, will also phase into regulatory capital at 25% per year commencing January 1, 2022. The Company adopted the capital transition relief over the permissible five-year period . The Company and NBT Bank’s actual capital amounts and ratios are presented as follows: Actual Regulatory Ratio Requirements (Dollars in thousands) Amount Ratio Minimum Capital Adequacy Minimum plus Buffer For Classification as Well- Capitalized As of December 31, 2022 Tier I Capital (to average assets) Company $ 1,193,336 10.32 % 4.00 % 5.00 % NBT Bank 1,133,481 9.86 % 4.00 % 5.00 % Common Equity Tier 1 Capital Company 1,096,336 12.12 % 4.50 % 7.00 % 6.50 % NBT Bank 1,133,481 12.63 % 4.50 % 7.00 % 6.50 % Tier I Capital (to risk-weighted assets) Company 1,193,336 13.19 % 6.00 % 8.50 % 8.00 % NBT Bank 1,133,481 12.63 % 6.00 % 8.50 % 8.00 % Total Capital (to risk-weighted assets) Company 1,391,182 15.38 % 8.00 % 10.50 % 10.00 % NBT Bank 1,233,327 13.74 % 8.00 % 10.50 % 10.00 % As of December 31, 2021 Tier I Capital (to average assets) Company $ 1,103,661 9.41 % 4.00 % 5.00 % NBT Bank 1,087,990 9.32 % 4.00 % 5.00 % Common Equity Tier 1 Capital Company 1,006,661 12.25 % 4.50 % 7.00 % 6.50 % NBT Bank 1,087,990 13.36 % 4.50 % 7.00 % 6.50 % Tier I Capital (to risk-weighted assets) Company 1,103,661 13.43 % 6.00 % 8.50 % 8.00 % NBT Bank 1,087,990 13.36 % 6.00 % 8.50 % 8.00 % Total Capital (to risk-weighted assets) Company 1,292,669 15.73 % 8.00 % 10.50 % 10.00 % NBT Bank 1,176,998 14.45 % 8.00 % 10.50 % 10.00 % 16. Earnings Per Share The following is a reconciliation of basic and diluted EPS for the years presented in the consolidated statements of income: Years Ended December 31, 2022 2021 2020 (In thousands except per share data) Net Income Weighted Average Shares Per Share Amount Net Income Weighted Average Shares Per Share Amount Net Income Weighted Average Shares Per Share Amount Basic EPS $ 151,995 42,917 $ 3.54 $ 154,885 43,421 $ 3.57 $ 104,388 43,693 $ 2.39 Effect of dilutive securities: Stock-based compensation 264 298 296 Diluted EPS $ 151,995 43,181 $ 3.52 $ 154,885 43,719 $ 3.54 $ 104,388 43,989 $ 2.37 There was a nominal number of weighted average stock options outstanding for the years ended December 31, 2022, 2021 and 2020, that were not considered in the calculation of diluted EPS since the stock options’ exercise prices were greater than the average market price during these periods. 87 Table of Contents 17. Reclassification Adjustments Out of Other Comprehensive Income (Loss) The following table summarizes the reclassification adjustments out of AOCI: Detail About AOCI Components Amount Reclassified From AOCI Affected Line Item in the Consolidated Statements of Comprehensive Income (Loss) (In thousands) Years Ended December 31, 2022 2021 2020 AFS securities: (Gains) on AFS securities $ - $ - $ ( 3 ) Net securities (gains) losses Amortization of unrealized gains related to securities transfer 513 577 644 Interest income Tax effect $ ( 128 ) $ ( 145 ) $ ( 160 ) Income tax (benefit) Net of tax $ 385 $ 432 $ 481 Cash flow hedges: Net unrealized losses on cash flow hedges reclassified to interest expense $ - $ 21 $ 296 Interest expense Tax effect $ - $ ( 5 ) $ ( 74 ) Income tax (benefit) Net of tax $ - $ 16 $ 222 Pension and other benefits: Amortization of net losses $ 623 $ 1,263 $ 1,535 Other noninterest expense Amortization of prior service costs 114 110 92 Other noninterest expense Tax effect $ ( 184 ) $ ( 343 ) $ ( 407 ) Income tax (benefit) Net of tax $ 553 $ 1,030 $ 1,220 Total reclassifications, net of tax $ 938 $ 1,478 $ 1,923 18. Commitments and Contingent Liabilities The Company’s concentrations of credit risk are reflected in the consolidated balance sheets. The concentrations of credit risk with standby letters of credit, unused lines of credit, commitments to originate new loans and loans sold with recourse generally follow the loan classifications. At December 31, 2022, approximately 59 % of the Company’s loans were secured by real estate located in central and upstate New York, northeastern Pennsylvania, western Massachusetts, southern New Hampshire, Vermont, southern Maine and central Connecticut. Accordingly, the ultimate collectability of a substantial portion of the Company’s portfolio is susceptible to changes in market conditions of those areas. Management is not aware of any material concentrations of credit to any industry or individual borrowers. 88 Table of Contents 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 instruments. 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 creditworthiness. At December 31, (In thousands) 2022 2021 Unused lines of credit $ 384,370 $ 355,852 Commitments to extend credits, primarily variable rate 2,033,549 1,944,615 Standby letters of credit 53,307 55,133 Loans sold with recourse 31,021 25,593 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 generally 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. As of December 31, 2022 and 2021, the fair value of the Company’s standby letters of credit was not significant. In the normal course of business there are various outstanding legal proceedings. If legal costs are deemed material by management, the Company accrues for the estimated loss from a loss contingency if the information available indicates that it is probable that a liability had been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. The Company is required to maintain reserve balances with the Federal Reserve Bank. The required average total reserve for NBT Bank for the 14 -day maintenance period ending December 28, 2022 was $ 86.7 million. 19. 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. Generally, the Company may use derivative financial instruments 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. Currently, the Company 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 statements of income. The Company is subject to over-the-counter derivative clearing requirements, which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company began to clear certain derivative transactions through the Chicago Mercantile Exchange Clearing House (“CME”) in January of 2021. The CME requires the Company to post initial and variation margin payments to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company’s financial statements are not equal and offsetting. 89 Table of Contents As of December 31, 2022 and 2021, the Company had fifteen and eighteen risk participation agreements, respectively, with financial institution counterparties for interest rate swaps related to participated loans. 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 previously entered into interest rate swaps to modify the interest rate characteristics of certain short-term 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 with currently none outstanding. The following table summarizes the derivatives outstanding: (In thousands) Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value As of December 31, 2022 Derivatives not designated as hedging instruments Interest rate derivatives $ 1,275,708 Other assets $ 117,247 $ 1,275,708 Other liabilities $ 117,247 Risk participation agreements 88,963 Other assets 47 18,421 Other liabilities 10 Total derivatives not designated as hedging instruments $ 117,294 $ 117,257 Netting adjustments (1) 24,109 - Net derivatives in the balance sheet $ 93,185 $ 117,257 Derivatives not offset on the balance sheet $ 352 $ 352 Cash collateral (2) - - Net derivative amounts $ 92,833 $ 116,905 As of December 31, 2021 Derivatives not designated as hedging instruments Interest rate derivatives $ 1,342,187 Other assets $ 60,203 $ 1,342,187 Other liabilities $ 60,203 Risk participation agreements 90,938 Other assets 252 37,193 Other liabilities 60 Total derivatives not designated as hedging instruments $ 60,455 $ 60,263 Netting adjustments (1) ( 170 ) 5,482 Net derivatives in the balance sheet $ 60,625 $ 54,781 Derivatives not offset on the balance sheet $ 5,455 $ 5,455 Cash collateral (2) - 43,420 Net derivative amounts $ 55,170 $ 5,906 (1) Netting adjustments represents the amounts recorded to convert derivatives assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance on the settle-to-market rules for cleared derivatives. The CME legally characterizes the variation margin posted between counterparties as settlements of the outstanding derivative contracts instead of cash collateral. Company began to clear certain derivative transactions through the CME in 2021. (2) Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. 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 2021 the Company’s final cash flow hedge of interest rate risk matured and the remaining balance was reclassified from AOCI as a reduction to interest expense. There is no additional amount that will be reclassified from AOCI as a reduction to interest expense. 90 Table of Contents The following table indicates the effect of cash flow hedge accounting on AOCI and on the consolidated statement of income: Years Ended December 31, (In thousands) 2022 2021 2020 Derivatives designated as hedging instruments: Interest rate derivatives - included component Amount of loss recognized in OCI $ - $ - $ ( 275 ) Amount of loss reclassified from AOCI into interest expense - 21 296 The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship: Years Ended December 31, (In thousands) 2022 2021 2020 Derivatives not designated as hedging instruments: (Decrease) increase in other income $ ( 155 ) $ ( 356 ) $ 1 20. Fair Value Measurements and Fair Values 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; and 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 quote from 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 by its third-party providers in pricing the securities. 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. 91 Table of Contents 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 December 31, 2022 Assets: AFS securities U.S. treasury $ 121,658 $ - $ - $ 121,658 Federal agency - 206,419 - 206,419 State & municipal - 82,851 - 82,851 Mortgage-backed - 473,694 - 473,694 Collateralized mortgage obligations - 588,363 - 588,363 Corporate - 54,240 - 54,240 Total AFS securities $ 121,658 $ 1,405,567 $ - $ 1,527,225 Equity securities 29,784 1,000 - 30,784 Derivatives - 93,185 - 93,185 Total $ 151,442 $ 1,499,752 $ - $ 1,651,194 Liabilities: Derivatives $ - $ 117,257 $ - $ 117,257 Total $ - $ 117,257 $ - $ 117,257 (In thousands) Level 1 Level 2 Level 3 December 31, 2021 Assets: AFS securities U.S. treasury $ 73,069 $ - $ - $ 73,069 Federal agency - 239,931 - 239,931 State & municipal - 94,088 - 94,088 Mortgage-backed - 606,675 - 606,675 Collateralized mortgage obligations - 621,595 - 621,595 Corporate - 52,003 - 52,003 Total AFS securities $ 73,069 $ 1,614,292 $ - $ 1,687,361 Equity securities 32,550 1,000 - 33,550 Derivatives - 60,625 - 60,625 Total $ 105,619 $ 1,675,917 $ - $ 1,781,536 Liabilities: Derivatives $ - $ 60,263 $ - $ 60,263 Total $ - $ 60,263 $ - $ 60,263 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 loans individually evaluated for expected credit losses and HTM securities. The non-recurring fair value measurements recorded during the years ended December 31, 2022 and 2021 were related to loans individually evaluated for expected credit losses with fair value of $ 1.1 million and $ 7.4 million as of December 31, 2022 and 2021, respectively. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the allowance for credit losses for individually evaluated collateral dependent loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10 % to 50 %. Based on the valuation techniques used, the fair value measurements for collateral dependent individually evaluated loans are classified as Level 3. 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. December 31, 2022 December 31, 2021 (In thousands) Fair Value Hierarchy Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: HTM securities 2 $ 919,517 $ 812,647 $ 733,210 $ 735,260 Net loans 3 8,049,909 7,840,350 7,407,289 7,530,768 Financial liabilities: Time deposits 2 $ 433,772 $ 413,868 $ 501,472 $ 500,717 Long-term debt 2 4,815 4,539 13,995 14,260 Subordinated debt 1 98,000 92,883 100,000 107,402 Junior subordinated debt 2 101,196 98,372 101,196 107,569 92 Table of Contents 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 wealth operation that contributes net fee income annually. The wealth management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value. HTM Securities The fair value of the Company’s HTM securities is primarily measured using information from a third-party 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 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, and those expected future cash flows also include credit risk, illiquidity risk and other market factors to calculate the exit price fair value in accordance with ASC 820. Time Deposits The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value. Long-Term Debt The fair value of long-term debt was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. Subordinated Debt The fair value of subordinated debt has been measured using the observable market price as of the period reported. Junior Subordinated Debt The fair value of junior subordinated debt has been estimated using a discounted cash flow analysis. 21. Parent Company Financial Information Condensed Balance Sheets December 31, (In thousands) 2022 2021 Assets Cash and cash equivalents $ 116,129 $ 77,182 Equity securities, at estimated fair value 24,499 27,622 Investment in subsidiaries, on equity basis 1,245,459 1,359,613 Other assets 39,339 36,216 Total assets $ 1,425,426 $ 1,500,633 Liabilities and Stockholders’ Equity Total liabilities $ 251,872 $ 250,180 Stockholders’ equity 1,173,554 1,250,453 Total liabilities and stockholders’ equity $ 1,425,426 $ 1,500,633 93 Table of Contents Condensed Statements of Income Years Ended December 31, (In thousands) 2022 2021 2020 Dividends from subsidiaries $ 119,000 $ 118,900 $ 77,000 Management fee from subsidiaries 2,005 2,653 4,151 Net securities (losses) gains ( 618 ) 543 ( 483 ) Interest, dividends and other income 638 564 824 Total revenue $ 121,025 $ 122,660 $ 81,492 Operating expenses 14,035 11,956 11,825 Income before income tax benefit and equity in undistributed income of subsidiaries $ 106,990 $ 110,704 $ 69,667 Income tax benefit ( 3,027 ) ( 2,250 ) ( 2,653 ) Equity in undistributed income of subsidiaries 41,978 41,931 32,068 Net income $ 151,995 $ 154,885 $ 104,388 Condensed Statements of Cash Flows Years Ended December 31, (In thousands) 2022 2021 2020 Operating activities Net income $ 151,995 $ 154,885 $ 104,388 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of premises and equipment 582 1,113 1,739 Excess tax benefit on stock-based compensation ( 288 ) ( 385 ) ( 181 ) Stock-based compensation expense 4,530 4,414 4,581 Net securities losses (gains) 618 ( 543 ) 483 Equity in undistributed income of subsidiaries ( 41,978 ) ( 41,931 ) ( 32,068 ) Bank owned life insurance income ( 238 ) ( 326 ) ( 391 ) Amortization of subordinated debt issuance costs 437 438 230 Discount on repurchase of subordinated debt ( 106 ) - - Net change in other assets and other liabilities ( 8,376 ) ( 7,127 ) ( 3,535 ) Net cash provided by operating activities $ 107,176 $ 110,538 $ 75,246 Investing activities Investment in the Bank $ - $ - $ ( 90,000 ) Proceeds from calls of equity securities - 1,000 2,000 Net cash provided by (used in) investing activities $ - $ 1,000 $ ( 88,000 ) Financing activities Proceeds from issuance of subordinated debt $ - $ - $ 100,000 Payment of subordinated debt issuance costs - - ( 2,178 ) Repurchase of subordinated debt ( 2,000 ) - - Proceeds from the issuance of shares to employee and other stock plans - 112 184 Cash paid by employer for tax-withholding on stock issuance ( 1,751 ) ( 2,931 ) ( 1,537 ) Purchases of treasury shares ( 14,713 ) ( 21,714 ) ( 7,980 ) Cash dividends ( 49,765 ) ( 47,738 ) ( 47,207 ) Net cash (used in) provided by financing activities $ ( 68,229 ) $ ( 72,271 ) $ 41,282 Net increase in cash and cash equivalents $ 38,947 $ 39,267 $ 28,528 Cash and cash equivalents at beginning of year 77,182 37,915 9,387 Cash and cash equivalents at end of year $ 116,129 $ 77,182 $ 37,915 A statement of changes in stockholders’ equity has not been presented since it is the same as the consolidated statement of changes in stockholders’ equity previously presented. 94 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.