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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-01 · 529 added, 416 removed, 461 unchanged (67% of the section changed)

5 unchanged sentences

(“NBT Holdings”) (collectively referred to herein as the “Company”).

This discussion will focus on results of

operations for the fiscal years ended December 31, 2022, 2021, and 2020, and financial condition as of December 31, 2022 and 2021, including capital resources and asset/liability management.

This discussion and analysis should be read in

conjunction with our consolidated financial statements and related notes.

When we refer to “NBT,” “we,” “our,”

“us,” and “the Company”, we mean NBT Bancorp Inc.

and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, NBT Bancorp Inc.

When we refer to the “Bank”, we mean our only bank subsidiary, NBT Bank,

National Association, and its subsidiaries.

This discussion will focus on results of operations for the fiscal years ended December 31, 2023, 2022, and 2021, and financial condition as of December 31, 2023 and 2022, including capital resources and

asset/liability management.

This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes.

Forward-Looking Statements

Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission (“SEC”), in the Company’s press releases or other public or stockholder communications

or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.

These statements may be identified by the use of phrases such

as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms.

There are a number of factors, many of which are beyond the Company’s control that could cause actual results

to differ materially from those contemplated by the forward-looking statements.

The discussion in Item 1A, “Risk Factors,” lists some of the factors that could cause our actual results to vary materially from those expressed or implied by any

forward-looking statements, and such discussion is incorporated into this discussion by reference.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including, but not limited

to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the SEC, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for

future periods to differ materially from those anticipated or projected.

Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect the

occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission (“SEC”), in the Company’s press releases or other public or stockholder

communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.

These statements may be identified by the use of

phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms.

There are a number of factors, many of which are beyond the Company’s control that could cause

actual results to differ materially from those contemplated by the forward-looking statements.

The discussion in Item 1A, “Risk Factors,” lists some of the factors that could cause our actual results to vary materially from those expressed or

implied by any forward-looking statements, and such discussion is incorporated into this discussion by reference.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including, but not

limited to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the SEC, could affect the Company’s financial performance and could cause the Company’s actual results or

circumstances for future periods to differ materially from those anticipated or projected.

Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect

the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

NBT Bancorp Inc.

is a financial holding company headquartered in Norwich, NY, with total assets of $13.31 billion at December 31, 2023.

The Company’s business, primarily conducted through the Bank and

its full-service retirement plan administration and recordkeeping subsidiary and full-service insurance agency subsidiary, consists of providing commercial banking, retail banking, wealth management and other financial services primarily to

customers in its market area, which includes central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central Connecticut.

The Company’s business philosophy is to operate as

a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers.

The financial review that follows focuses on the factors affecting the consolidated financial

condition and results of operations of the Company and its wholly-owned subsidiaries, the Bank, NBT Financial and NBT Holdings during 2022 and, in summary form, the preceding two years.

Net interest margin is presented in this discussion on a fully

taxable equivalent (“FTE”) basis.

The Company’s business, primarily conducted through the

Bank and its full-service retirement plan administration and recordkeeping subsidiary and full-service insurance agency subsidiary, consists of providing commercial banking, retail banking, wealth management and other financial services primarily

to customers in its market area, which includes upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central and northwestern Connecticut.

The Company’s business philosophy is to

operate as a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers.

The financial review that follows focuses on the factors affecting the consolidated

financial condition and results of operations of the Company and its wholly-owned subsidiaries, the Bank, NBT Financial and NBT Holdings during 2023 and, in summary form, the preceding two years.

Net interest margin is presented in this discussion

on a fully taxable equivalent (“FTE”) basis.

Average balances discussed are daily averages unless otherwise described.

The audited consolidated financial statements and related notes as of December 31, 2022 and 2021 and for each of the years in the three-year

period ended December 31, 2022 should be read in conjunction with this review.

The audited consolidated financial statements and related notes as of December 31, 2023 and 2022 and for each of the years in the

three-year period ended December 31, 2023 should be read in conjunction with this review.

Critical Accounting Policies

The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the financial services industry.

In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial

statements and accompanying notes.

There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position.

Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management

reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements.

Management considers the accounting policies relating to the allowance for credit losses (“allowance”, or “ACL”) and the determination of fair values for acquired assets and assumed liabilities in a business combination, including intangible

assets such as goodwill, to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations.

The Company’s methodology for estimating the allowance considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.

to Note 1 and Note 6 to the consolidated financial statements included elsewhere in this report.

Goodwill represents the cost of the acquired business in excess of the fair value of the related net assets acquired.

Following a merger, the determination of fair values for acquired assets and assumed liabilities, including intangible assets

such as goodwill, becomes critical.

All acquired assets, including goodwill and other intangible assets, and assumed liabilities in purchase acquisitions are recorded at fair value as of the acquisition date.

The Company expenses all

acquisition-related costs as incurred as required by Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.”

The determination of fair values for acquired loans in a business combination is a significant aspect of our financial reporting process.

valuation of acquired loans relied on a discounted cash flow approach applied on a pooled basis, utilizing a forecast of principal and interest payments.

This methodology segmented the acquired loan portfolio by loan type, term, interest rate,

payment frequency and payment, and incorporated specific key valuation assumptions, encompassing prepayments, probability of default, loss given default, and the discount rate to ascertain the fair value of these assets.

Given the inherent

subjectivity and reliance on future cash flows and market conditions, this process involves considerable judgment and estimation uncertainty.

The Company conducts an annual review of goodwill impairment and conducts quarterly analyses to identify any events that may necessitate an interim

The Company initially undertakes a qualitative evaluation of goodwill to ascertain whether certain events or circumstances indicate a likelihood that the fair value of a reporting unit is less than its carrying amount.

qualitative evaluation demands considerable managerial discretion, and if it suggests that the fair value of a reporting unit is unlikely to be less than the carrying value, no quantitative analysis is required.

Inputs for this qualitative

analysis requiring managerial judgment encompass macroeconomic conditions, industry and market conditions, the financial performance of the reporting unit, and other pertinent events influencing the fair value of the reporting unit.

For information on the Company’s significant accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to Note 1 to the consolidated financial statements included elsewhere in this

Critical Accounting Estimates

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles

that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

The Company follows financial accounting and reporting

policies that are in accordance with accounting principles generally accepted in the United States.

The more significant of these policies are summarized in Note 1 to the consolidated financial statements included elsewhere in this report.

Note 2 to the consolidated financial statements for recently adopted accounting standards.

Not all significant accounting policies require management to make difficult, subjective or complex judgments.

The allowance for credit losses and the

allowance for unfunded commitments policies noted below are deemed to meet the SEC’s definition of a critical accounting estimate.

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with U.S.

generally accepted accounting

principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

The Company follows financial accounting

and reporting policies that are in accordance with GAAP.

The allowance for credit losses and the allowance for unfunded commitments policies are deemed to meet the SEC’s definition of a critical accounting estimate.

Allowance for Credit Losses and Unfunded Commitments

The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments.

As a result of the Company’s January 1, 2020, adoption of Accounting

Standards Updates (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“CECL”) and its related amendments, our methodology for

estimating the reserve for credit losses changed significantly from December 31, 2019.

The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss.

The CECL approach requires an estimate

of the credit losses expected over the life of an exposure (or pool of exposures).

It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.” The estimate of

expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Historical loss experience is

generally the starting point for estimating expected credit losses.

The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did

not exist over the period from which historical experience was used.

Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable.

The allowance for credit losses for loans, as reported in our

consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries.

The allowance for losses on unfunded commitments

represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit.

However, a liability is not recognized for commitments unconditionally cancellable by the Company.

The measurement of Current Expected Credit Losses (“CECL”) on financial instruments requires an estimate of the credit

losses expected over the life of an exposure (or pool of exposures).

The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts

that affect the collectability of the reported amounts.

Historical loss experience is generally the starting point for estimating expected credit losses.

The Company then considers whether the historical loss experience should be adjusted for

asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used.

Finally, the Company considers forecasts about future economic conditions that are

reasonable and supportable.

The allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of

loan amounts, net of recoveries.

The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit.

liability is not recognized for commitments unconditionally cancellable by the Company.

The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.

5 unchanged sentences

While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions.

Going forward, the impact of utilizing

the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized.

changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast

As of December 31, 2022, the model incorporated a baseline economic outlook along with an alternative downside scenario.

The baseline outlook reflected an unemployment rate environment initially at 3.9% that increases slightly during the

The impact of utilizing the CECL

approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized.

Material changes to

these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the

forecast period.

As of December 31, 2023, the quantitative model 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

At December 31, 2023, the weightings were 70% and 30% for the baseline and downside economic forecasts, respectively.

The baseline outlook reflected an unemployment rate environment starting at 3.8% and increasing slightly during the

forecast period to 4.1%.

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.

The alternative downside scenario

assumed 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.

All else held equal, the changes in the weightings of our forecasted scenarios would impact the amount of estimated allowance for credit losses through changes in the quantitative reserve and scenario-specific

qualitative adjustments.

To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of December 31, 2022, the Company increased the downside scenario weighting by 10% to 60% and

decreased the baseline scenario to 40% weighting which resulted in a 3% increase in the overall estimated allowance for credit losses.

To further demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast

weightings assumptions as of December 31, 2022, the Company increased the downside scenario to 100% which resulted in a 16% increase in the overall estimated allowance for credit losses.

Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2024 at approximately 3.7% before decreasing to a low of 2.9% in the third quarter of 2024 and then increasing to 3.8% by

the end of the forecast period.

Other utilized economic variable forecasts are mixed compared to the prior year, with retail sales up, business output mixed, and housing starts down.

Key assumptions in the baseline economic outlook included

currently being in a full employment economy, continued tapering of the Federal Reserve balance sheet, and the Federal Open Market Committee (“FOMC”) beginning to cut rates in the second quarter of 2024.

The alternative downside scenario assumed

deteriorated economic conditions from the baseline outlook.

Under this scenario, northeast unemployment increases to a peak of 7.0% in the first quarter of 2025.

These scenarios and their respective weightings are evaluated at each measurement date

and reflect management’s expectations as of December 31, 2023.

All else held equal, the changes in the weightings of our forecasted scenarios would impact the amount of estimated allowance for credit losses through changes in the quantitative

reserve and scenario-specific qualitative adjustments.

To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of December 31, 2023, the Company attributed the change in

scenario weightings to the change in the allowance for credit losses, with a 10% decrease to the downside scenario and a 10% increase to the baseline scenario causing a 4% decrease in the overall estimated allowance for credit losses.

demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of December 31, 2023, the Company increased the downside scenario to 100% which resulted in a 26% increase in the overall

estimated allowance for credit losses.

Non-GAAP Measures

This Annual Report on Form 10-K contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Where non-GAAP disclosures are used in this Annual Report on Form 10-K, the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables.

Management believes that these non-GAAP

measures provide useful information that is important to an understanding of the results of the Company’s core business as well as provide information standard in the financial institution industry.

Non-GAAP measures should not be considered a

substitute for financial measures determined in accordance with GAAP and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or

financial condition of the Company.

Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation.

This Annual Report on Form 10-K contains financial information determined by methods other than in accordance with GAAP.

Where non-GAAP disclosures are used in this Annual Report on Form 10-K,

the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables.

Management believes that these non-GAAP measures provide useful information that is important to an understanding of

the results of the Company’s core business as well as provide information standard in the financial institution industry.

Non-GAAP measures should not be considered a substitute for financial measures determined in accordance with GAAP and

investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company.

Amounts previously reported in the

consolidated financial statements are reclassified whenever necessary to conform to current period presentation.

Significant factors management reviews to evaluate the Company’s operating results and financial condition include, but are not limited to:

net income and earnings per share, return on average assets

and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology

advancements, market share and peer comparisons.

net income and earnings per share, return on average

assets and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services,

technology advancements, market share and peer comparisons.

The following information should be considered in connection with the Company’s results for the fiscal year ended December 31, 2023:

net income of $152.0 million, or $3.52 diluted earnings per share;

noninterest income of $155.6 million, down 1.4% from 2021;

represents 30% of total revenues;

period end loans were $8.15 billion, up 8.7% (10.2% excluding Paycheck Protection Program (“PPP”) loans);

strong credit quality metrics including net charge-offs of 0.11% and allowance for loan losses to total loans at 1.24%;

the acquisition of Salisbury Bancorp, Inc.

(“Salisbury”) by the merger of Salisbury with and into the Company was completed on August 11, 2023;

net income for the year ended December 31, 2023 was $118.8 million, down $33.2 million from the year ended December 31, 2022;

diluted earnings per share of $2.65 for the year ended December 31, 2023, down $0.87 from the year ended December 31, 2022;

operating net income (1) , a non-GAAP measure, which excludes acquisition expenses,

acquisition-related provision for credit losses, securities (losses) gains and an impairment of a minority interest equity investment, net of tax, was $144.7 million, or $3.23 per diluted common share, for the year ended December 31,

excluding securities (losses) gains, noninterest income represented 29% of total revenues and was $151.5 million for the year ended December 31, 2023, down $5.2 million, or

3.3% from the year ended December 31, 2022;

noninterest expense, excluding $10.0 million of acquisition expenses for the year ended December 31, 2023 and $1.0 million for the year ended December 31, 2022, respectively,

was up $28.2 million, or 9.3%, from the prior year;

period end total loans were $9.65 billion, up $1.50 billion, or 18.4% from December 31, 2022, excluding the $1.18 billion of loans acquired from Salisbury, loans grew $320.6

million, or 3.9%, since December 31, 2022;

period end total deposits were $10.97 billion, up $1.47 billion, or 15.5% from December 31, 2022, excluding the $1.31 billion of deposits acquired from Salisbury, deposits

increased $164.1 million, or 1.7%, since December 31, 2022;

credit quality metrics including net charge-offs of 0.19% and allowance for loan losses to total loans at 1.19%;

book value per share of $30.26 at December 31, 2023;

tangible book value per share was $20.65 (1) at December 31, 2022.

tangible book value per share was $21.72 (1)

at December 31, 2023.

Non-GAAP measure - Refer to non-GAAP reconciliation below.

Salisbury Bancorp, Inc.

On August 11, 2023, NBT completed its acquisition of Salisbury.

Salisbury Bank was a Connecticut-chartered commercial bank with 13 banking offices in northwestern Connecticut, the Hudson Valley

region of New York, and southwestern Massachusetts.

In connection with the acquisition, the Company issued 4.32 million shares and acquired approximately $1.46 billion of identifiable assets, including $1.18 billion of loans, $122.7 million in

investment securities which were sold immediately after the merger, $31.2 million of core deposit intangibles and $4.7 million in a wealth management customer intangible, as well as $1.31 billion in deposits.

As of the acquisition date, the fair

value discount was $78.7 million for loans, net of the reclassification of the purchase credit deteriorated allowance, and was $3.0 million for subordinated debt.

The Company established a $14.5 million allowance for acquired Salisbury loans

which included both the $5.8 million allowance for purchase credit deteriorated (“PCD”) loans reclassified from loans and the $8.8 million allowance for non-PCD loans recognized through the provision for loan losses.

Results of Operations

Net income for the year ended December 31, 2023 was $118.8 million, or $2.65 per diluted common share, compared to $152.0 million, or $3.52 per diluted share, in the prior year.

Generated positive operating leverage of $21.7 million with total revenues increasing 8.1%, or $38.9 million, while operating expenses were higher by 6.0%, or $17.2 million.

Net interest income in 2022 improved in comparison to 2021, primarily due to higher yields on earning assets due to increases in the Federal Reserve’s targeted Federal Funds rate combined with growth in

earning assets, strongly overcoming a $17.6 million ($0.31 per diluted share) year-over-year decrease in income from the Paycheck Protection Program (“PPP”).

The Company recorded a provision for loan losses of $17.1 million ($0.31 per diluted share) in 2022, compared to a net benefit of $8.3 million ($0.15 per diluted share) in 2021.

Card services income was lower than 2021 driven by the impact from the Company being subject to the statutory price cap provisions of the Durbin Amendment to the Dodd-Frank Act (“Durbin Amendment”) of

approximately $8 million ($0.14 per diluted share).

2022 full-year results included $1.0 million in merger-related expenses.

Significant non-recurring transactions occurring in 2021 included a $4.3 million estimated litigation settlement cost related to a

pending lawsuit regarding certain of the Company’s deposit products and related disclosures.

Significant non-recurring transactions occurring in 2020 included a $4.8 million expense related to branch optimization.

Operating net income (1) , a non-GAAP measure, which excludes the impact of acquisition expenses,

acquisition-related provision for credit losses, securities (losses) gains and an impairment of a minority interest equity investment, the Company generated $3.23 per diluted share of earnings in 2023, compared to $3.56 per diluted share in

The Company incurred a $4.5 million ($0.08 per diluted share) securities loss on the sale of two subordinated debt securities held in the available for sale (“AFS”) portfolio

and a $5.0 million ($0.09 per diluted share) securities loss on the write-off of a subordinated debt security of a failed financial institution.

The Company incurred acquisition expenses of $10.0 million ($0.18 per diluted share) and $1.0 million ($0.02 per diluted share) related to the merger with Salisbury in 2023 and

2022, respectively.

The Company recorded a full $4.8 million ($0.08 per diluted share) impairment of its minority interest equity investment in a provider of financial and technology services to

residential solar equipment installers due to the uncertainty in the realizability of the investment in other noninterest expense in the consolidated statements of income.

Net interest income in 2023 increased $16.0 million in comparison to 2022, primarily due to the impact of the Salisbury acquisition.

The Company recorded a provision for loan losses of $25.3 million ($0.44 per diluted share) in 2023, compared to $17.1 million ($0.31 per diluted share) in 2022.

the provision expense for 2023 was $8.8 million of acquisition-related provision for loan losses.

Card services income decreased $8.2 million from prior year outcomes driven by the impact of the Company being subject to the statutory price cap provisions of the Durbin

Amendment to the Dodd-Frank Act (“Durbin Amendment”).

The following table sets forth certain financial highlights:

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Tangible book value per share

The Company’s 2022 earnings reflected a continued ability to invest in the Company’s future while managing through persistent volatility in the interest rate environment and overall economic

Operating net income:

Acquisition expenses

Acquisition-related provision for credit losses

Acquisition-related reserve for unfunded loan commitments

Impairment of a minority interest equity investment

Litigation settlement cost

Securities losses (gains)

Adjustment to net income

Adjustment to net income (net of tax)

Operating net income

Operating diluted earnings per share

The Company’s 2023 earnings reflected a continued ability to invest in the Company’s future while managing through significant volatility in the interest rate environment and overall economic

conditions which have challenged the financial services industry.

Throughout 2022, the Company, along with other financial services companies, experienced lingering disruptions from the COVID-19 pandemic.

Mainly, the volatility associated with

the rapid downward shift in the yield curve which remained fairly flat for the majority of 2021 and into early 2022, followed by the drastic rise in rates beginning in the second quarter of 2022, which resulted in an inverted yield curve for much

of the remainder of 2022 and into 2023.

This rate increase was highly correlated with a significant tightening of monetary policy to combat heightened inflation.

Mixed economic indicators, persistent inflation and material inversion of the yield curve have increased the potential for a recession in 2023.

While recession probabilities have increased,

excellent consumer and corporate balance sheets strengthened by government stimulus throughout the COVID-19 pandemic support a view that any form of recession could be mild.

Significant items that may have an impact on 2023 results include:

Throughout 2023, the Company, along with other financial services companies, experienced lingering disruptions from the coronavirus (“COVID-19”) pandemic.

Mainly, the interest rate

volatility associated with the rapid downward shift in the yield curve which remained fairly flat for the majority of 2021 and into early 2022, followed by the drastic rise in rates beginning in the second quarter of 2022, which resulted in an

inverted yield curve for the remainder of 2022 and throughout 2023.

This rate increase and curve inversion was highly correlated with a significant tightening of monetary policy to combat heightened inflation.

Additionally, the three regional

bank failures which occurred in the first quarter of 2023 resulted in heightened competition for balance sheet liquidity, which resulted in increased cost of funding as well assessment of earning asset growth capacity.

While economic indicators have remained mixed, they have trended toward the decline of inflation.

Given this decline in inflation the probability for Federal Funds rate reductions in 2024 have

This anticipated interest rate decline, coupled with strong consumer and corporate balance sheets support a view that the potential for recession has been reduced and that any form of economic slowdown could be mild.

Significant items

that may have an impact on 2024 results include:

Excess liquidity in the banking system has significantly decreased:

loan growth may be negatively impacted as interest rates have risen and lenders have begun to revert back to historical credit spreads to account for overall higher cost of funds;

cost of deposits as well as overall cost of funds could negatively impact net interest margin.

Excess liquidity allowed financial institutions to significantly lag deposit rates in 2022.

This lag has increased the potential for a rapid

increase in deposit rates during 2023 relative to federal funds rate increases;

higher interest rates have afforded deposit customers investment opportunities outside the banking system resulting in deposit declines across the industry.

Investment purchases have slowed as runoff investment cash flows have been

utilized as a source of funding.

Inflationary pressures have taken a hold of the economy as drivers of inflation, initially considered to be transitory in nature, have proven to be more persistent:

this spike to inflation has had a significant impact on current and expected Federal Reserve Monetary Policy;

the tightening of monetary policy through measures to raise interest rates has thus far had a benefit given the Company’s asset sensitive balance sheet position.

However, elevated deposit costs and the slowing of the economy could

arise as a result of the higher interest rates.

The Company’s continued focus on long-term strategies including growth in the New England markets, diversification of revenue, improving operating efficiencies and investing in technology.

The Company’s merger with Salisbury Bancorp, Inc.

(“Salisbury”) is expected to close in the second quarter of 2023 subject to customary closing conditions, including approval by the stockholders of Salisbury and

required regulatory approvals.

The Company’s 2023 outlook is subject to factors in addition to those identified above and those risks and uncertainties that could impact the Company’s future results are explained in Item 1A.

loan growth may be negatively impacted as interest rates have risen and lenders have reverted back to historical credit spreads to account for overall higher cost of funds;

cost of deposits as well as overall cost of funds could continue to negatively impact net interest margin.

While declining short term interest rates may allow

for cost of funds reductions, the elevated level of relative interest rates and the bank failures in early 2023 continue to pressure competition for deposits as well as the associated cost of funds;

higher short-term interest rates have continued to afford deposit customers investment opportunities outside the banking system

resulting in deposit declines across the industry, however, a decline to short-term interest rates could potentially mitigate this;

Investment purchases have slowed as runoff of investment cash flows have been utilized as a source of funding.

The Federal Reserve has continued to combat elevated inflation, with the result being inflationary pressures having declined in the second half of 2023:

this reduced inflation has had a material impact on current and expected Federal Reserve monetary policy;

the tightening of monetary policy through measures to raise interest rates seen in 2022 and 2023 could begin to reverse itself in 2024 given softening

the loosening of monetary policy through the reduction to short term interest rates in 2024 could have a negative impact on overall net interest income given

the decline in interest rates on floating rate assets.

This risk has been mitigated by the Bank’s migration to a more neutral interest rate sensitivity position.

The Company’s continued focus on long-term strategies including growth in the New England markets, diversification of revenue sources, improving operating efficiencies and

investing in technology.

The Company’s merger with Salisbury is expected to provide earnings benefit and incremental growth potential in these new markets.

The Company’s 2024 outlook is subject to factors in addition to those identified above and those risks and uncertainties that could impact the Company’s future

results are explained in Item 1A.

Risk Factors.

Asset/Liability Management

The Company attempts to maximize net interest income and net income, while actively managing its liquidity and interest rate sensitivity through the mix of various core deposit products and other

sources of funds, which in turn fund an appropriate mix of earning assets.

The Company attempts to maximize net interest income and net income, while actively managing its liquidity and interest rate sensitivity through the mix of various core deposit products and

other sources of funds, which in turn fund an appropriate mix of earning assets.

The changes in the Company’s asset mix and sources of funds, and the resulting impact on net interest income, on an FTE basis, are discussed below.

The following table

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

Interest income for

tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 21% for 2022, 2021 and 2020.

The following

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

Average Balances and Net Interest Income

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Net interest income for the year ended December 31, 2023 was $378.2 million, up $16.0 million, or 4.4%, from 2022.

PPP loan interest and fees recognized into interest income for the year ended December 31, 2022

was $3.7 million compared to $21.3 million in 2021.

FTE net interest margin was 3.34% for the year ended December 31, 2022, an increase of 31 basis points (“bps”) from 2021.

Interest income increased $44.2

million, or 13.0%, as the yield on average interest-earning assets increased 33 bps from 2021 to 3.54%, while average interest-earning assets of $10.90 billion increased $267.0 million primarily due to an increase in average loans and investment

Interest expense was up $3.1 million, or 16.5%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021 as the cost of interest-bearing liabilities increased 4 bps to 0.33%, driven by the Company shifting

from an excess liquidity position to an overnight borrowing position.

The Federal Reserve raised its target fed funds rate to 425 basis points in 2022, positively impacting our yields on earning assets.

FTE net interest margin was 3.29% for the year ended

December 31, 2023, a decrease of 5 basis points (“bps”) from 2022.

Interest income increased $138.7 million, or 36.1%, as the yield on average interest-earning assets increased 100 bps from 2022 to 4.54%, while average interest-earning assets of

$11.57 billion increased $671.4 million primarily due to the Salisbury acquisition and organic loan growth partially offset by the decrease in short-term interest bearing accounts (“excess liquidity”).

Interest expense was up $122.7 million, or

560.7%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, driven by interest-bearing deposit costs increasing 140 bps to 1.56%, as well as a $404.0 million increase in the average balances of short-term

borrowings and a 524 bps rate paid on those borrowings.

The increase was also driven by the Company shifting from an excess liquidity position to an overnight borrowing position beginning in the fourth quarter of 2022.

Included in net interest

income was $4.3 million of acquisition-related net accretion, which positively impacted net interest margin by 4 bps.

The Federal Reserve raised its target fed funds rate to 550 basis points in 2023, positively impacting our yields on earning

Analysis of Changes in FTE Net Interest Income

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Loans and Corresponding Interest and Fees on Loans

The average balance of loans increased by approximately $229.8 million, or 3.0%, from 2021 to 2022 with the increases in specialty lending, commercial and industrial (“C&I”), commercial real

estate (“CRE”), indirect auto and residential mortgage portfolios being partly offset by a reduction in the average balance of PPP and other consumer loans.

The yield on average loans increased from 4.01% in 2021 to 4.28% in 2022, as loans

re-priced upward due to the interest rate environment in 2022.

The average balance of loans increased by approximately $1.03 billion, or 13.3%, from 2022 to 2023 driven by the Salisbury acquisition and organic loan growth,

with increases in commercial and industrial (“C&I”), commercial real estate (“CRE”), indirect auto, residential solar and residential mortgage portfolios being partly offset by a reduction in the average balance of other consumer loans.

yield on average loans increased from 4.28% in 2022 to 5.26% in 2023, as loans re-priced upward due to the interest rate environment in 2023.

FTE interest income from loans increased 39.1%, from $333.0 million in 2022 to $463.3 million in 2023.

This increase was due to the increases in yields and an increase in the average

Net interest income included interest and fees on PPP loans of $3.7 million and $21.3 million in 2022 and 2021, respectively.

This increase was due to the increases in yields and an increase in the average balance.

Total loans were $9.65 billion and $8.15 billion at December 31, 2023 and 2022, respectively.

Total PPP loans as of December 31, 2022 were $0.1 million (net of unamortized fees) with $101.5 million

of loans forgiven.

Excluding PPP loans, period end loans increased $752.0 million or 10.2% from December 31, 2021.

Period end loans increased $1.50 billion or 18.4% from December 31,

2022, which included $1.18 billion of loans acquired from Salisbury.

Commercial and industrial loans increased $88.2 million to $1.35 billion;

commercial real estate loans increased $152.6 million to

$2.81 billion;

and total consumer loans increased $489.5 million to $4.08 billion.

commercial real estate loans increased $819.0 million to $3.63 billion;

and total consumer loans

increased $593.4 million to $4.67 billion.

Total loans represent approximately 72.5% of assets as of December 31, 2023, as compared to 69.4% as of December 31, 2022.

The following table reflects the loan portfolio by major categories (1) , net of deferred fees and origination costs,

for the years indicated:

The following table reflects the loan portfolio by major categories (1) , net of deferred fees and origination

costs, for the years indicated:

Composition of Loan Portfolio

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Loans in the C&I and CRE portfolios, consist primarily of loans made to small and medium-sized entities.

The Company offers a variety of loan options to meet the specific needs of our commercial

customers including term loans, time notes and lines of credit.

Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion, equipment purchases, livestock purchases and seasonal

crop expenses.

These loans typically are usually collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility.

The Company offers CRE loans to

finance real estate purchases, refinancings, expansions and improvements to commercial and agricultural properties.

CRE loans are loans 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.

Risks associated with the CRE portfolio include the ability of borrowers to pay interest and principal during the loan’s term, as well as the ability of the

borrowers to refinance at the end of the loan term.

As of December 31, 2022, there were $196.3 million in CRE construction and development loans included in total loans.

The Company participated in the Small Business Administration’s (“SBA”) PPP, a guaranteed, forgivable loan program created under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)

and the Consolidated Appropriation Act targeted to provide small businesses with support to cover payroll and certain other expenses.

Loans made under the PPP are fully guaranteed by the SBA, the 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.

The Company offers a variety of loan options to meet the specific needs of our

commercial customers including term loans, time notes and lines of credit.

Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion, equipment purchases, livestock purchases and

seasonal crop expenses.

These loans are usually collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility.

The Company extends CRE loans to

facilitate various real estate transactions, encompassing acquisitions, refinancing, expansions, and enhancements to both commercial and agricultural properties.

These loans are secured by liens on real estate assets, covering a spectrum of

properties including apartments, commercial structures, healthcare facilities, and others, whether occupied by owners or non-owners.

Risks associated with the CRE portfolio pertain to the borrowers’ capacity to meet interest and principal

payments throughout the loan’s duration, as well as their ability to secure refinancing upon the loan’s maturity.

The Company has a risk management framework that includes rigorous underwriting standards, targeted portfolio stress testing,

interest rate sensitivities on commercial borrowers and comprehensive credit risk monitoring mechanisms.

The Company remains vigilant in monitoring market trends, economic indicators, and regulatory developments to promptly adapt our risk

management strategies as needed.

Within the CRE portfolio, approximately 78% comprises Non-Owner Occupied CRE, with the remaining 22% being Owner-Occupied CRE.

Non-Owner Occupied CRE includes diverse sectors across the

Company’s markets such as apartments (33%), office spaces (17%), and construction (13%), along with retail, manufacturing, small commercial, accommodations, and others.

Notably, office CRE loans account for 5% of the total outstanding loans,

predominantly serving suburban medical and professional tenants across suburban and small urban markets.

These loans carry an average size of $2.5 million, with 14% maturing over the next two years.

As of December 31, 2023, the total CRE

construction and development loans amounted to $347.2 million.

The Company participated in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), a guaranteed, forgivable loan program created under the Coronavirus Aid, Relief and

Economic Security Act (“CARES Act”) and the Consolidated Appropriation Act targeted to provide small businesses with support to cover payroll and certain other expenses.

Loans made under the PPP are fully guaranteed by the SBA, the 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 with approximately 99% forgiven as of December 31, 2022.

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.

Residential real estate loans consist primarily of loans secured by a first or second mortgage on primary residences.

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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 fees at origination that are deferred and recognized into interest income over the estimated life of the

credit through this business line are to prime borrowers and are subject to the Company’s underwriting standards.

Typically, the Company collects fees at origination that are deferred and recognized into interest income over the estimated life of

The Company offers a variety of consumer loan products including indirect auto, home equity and other consumer loans.

Indirect auto loans include indirect installment loans to individuals, which are

primarily secured by automobiles.

Indirect auto loans include indirect installment loans to individuals,

which are primarily secured by automobiles.

Although automobile loans have generally been originated through dealers, all applications submitted through dealers are subject to the Company’s normal underwriting and loan approval procedures.

Other Consumer

loans consist of direct installment loans to individuals most secured by automobiles and other personal property and unsecured consumer loans across a national footprint originated through our relationship with national technology-driven consumer

lending companies that began over 10 years ago beginning with our investment in Springstone Financial LLC (“Springstone”) which was subsequently acquired by LendingClub in 2014.

In addition to installment loans, the Company also offers personal

lines of credit, overdraft protection, home equity lines of credit and second mortgage loans (loans secured by a lien position on one-to-four family residential real estate) to finance home improvements, debt consolidation, education and other

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.

consumer loans consist of direct installment loans to individuals most secured by automobiles and other personal property and unsecured consumer loans across a national footprint originated through our relationship with national technology-driven

consumer lending companies that began over 10 years ago beginning with our investment in Springstone Financial LLC (“Springstone”) which was subsequently acquired by LendingClub in 2014.

Springstone and LendingClub loans are in a planned run-off

In addition to installment loans, the Company also offers personal lines of credit, overdraft protection, home equity lines of credit and second mortgage loans (loans secured by a lien position on one-to-four family residential real

estate) to finance home improvements, debt consolidation, education and other uses.

For home equity loans, consumers are able to borrow up to 85% of the equity in their homes, and are generally tied to Prime with a ten year draw followed by a

fifteen year amortization.

Loans by Maturity and Interest Rate Sensitivity

The following table presents the maturity distribution and an analysis of loans that have predetermined and floating interest rates.

Scheduled repayments are reported in the maturity category in

which the contractual maturity is due.

Scheduled repayments are reported in the maturity category

in which the contractual maturity is due.

For loans without contractual maturities, classification of maturity is consistent with the policy elections to measure the allowance for credit losses.

Specifically, C&I and CRE lines of credit assume

one year maturity for relationships over $1.0 million and five year maturity for relationships under $1.0 million, while home equity line of credits maturities are classified based on their fixed rate conversion date plus five years.

includes PPP and other consumer includes residential solar, home equity and other consumer loans.

Specifically, C&I and CRE lines of credit

assume one year maturity for relationships over $1.0 million and five year maturity for relationships under $1.0 million, while home equity line of credits maturities are classified based on their fixed rate conversion date plus five years.

C&I includes PPP and other consumer includes home equity and other consumer loans.

Remaining Maturity at December 31, 2023

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Securities and Corresponding Interest and Dividend Income

The average balance of taxable securities available for sale (“AFS”) and held to maturity (“HTM”) increased $514.3 million, or 26.9%, from 2021 to 2022.

The yield on average taxable securities was

1.78% for 2022 compared to 1.67% in 2021.

The average balance of tax-exempt securities AFS and HTM increased from $220.8 million in 2021 to $233.5 million in 2022.

The FTE yield on tax-exempt securities decreased from 2.23% in 2021 to 2.17% in

The average balance of taxable securities AFS and held to maturity (“HTM”) decreased $47.3 million, or 2.0%, from 2022 to 2023.

The yield on average taxable securities was 1.90% for 2023

compared to 1.78% in 2022.

The average balance of tax-exempt securities AFS and HTM decreased from $233.5 million in 2022 to $214.1 million in 2023.

The FTE yield on tax-exempt securities increased from 2.17% in 2022 to 3.14% in 2023.

The average balance of Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock increased to $48.6 million in 2023 from $27.0 million in 2022.

The yield on investments in Federal Reserve Bank

and FHLB stock increased from 2.44% in 2021 to 3.68% in 2022.

The yield on investments in Federal Reserve

Bank and FHLB stock increased from 3.68% in 2022 to 6.92% in 2023.

Securities Portfolio

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Currently, there are no subprime mortgages in the investment portfolio.

The following tables set forth information with regard to contractual maturities of debt securities shown in amortized cost ($) and weighted average yield (%) at December 31, 2022.

Weighted-average

yields are an arithmetic computation of income (not FTE adjusted) divided by amortized cost.

Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives.

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.

The following tables set forth information with regard to contractual masturities of debt securities shown in amortized cost ($) and weighted average yield (%) at December 31, 2023.

Weighted-average yields are an arithmetic computation of income (not FTE adjusted) divided by amortized cost.

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.

Less than 1 Year

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The Company utilizes traditional deposit products such as time, savings, NOW, money market and demand deposits as its primary source for funding.

Other sources, such as short-term FHLB advances,

federal funds purchased, securities sold under agreements to repurchase, brokered time deposits and long-term FHLB borrowings are utilized as necessary to support the Company’s growth in assets and to achieve interest rate sensitivity objectives.

Other sources,

such as short-term FHLB advances, federal funds purchased, securities sold under agreements to repurchase, brokered time deposits and long-term FHLB borrowings are utilized as necessary to support the Company’s growth in assets and to achieve

interest rate sensitivity objectives.

The average balance of interest-bearing liabilities totaled $7.47 billion in 2023 and increased $815.0 million from 2022.

The increase was primarily driven by the increase in interest-bearing deposits, higher federal funds purchased and increased

short-term borrowings as the Company shifted from an excess liquidity position to an overnight borrowing position at the beginning of the fourth quarter of 2022.

The rate paid on interest-bearing liabilities increased from 0.29% in 2021 to 0.33%

This increase in rates caused an increase in interest expense of $3.1 million, or 16.5%, from $18.8 million in 2021 to $21.9 million in 2022.

The increase was primarily driven by the interest-bearing deposits acquired from

Salisbury and an increase in short-term borrowings.

The rate paid on interest-bearing liabilities increased from 0.33% in 2022 to 1.93% in 2023.

This increase in rates caused an increase in interest expense of $122.7 million, or 560.7%, from

$21.9 million in 2022 to $144.6 million in 2023.

Average interest-bearing deposits increased $375.4 million, or 5.9%, from 2022 to 2023.

Average money market deposits decreased $29.5 million, or 1.2% during 2023 compared to 2022.

accounts increased $126.3 million, or 8.7% during 2022 as compared to 2021 due primarily to larger commercial customers taking advantage of higher yielding investment opportunities in both the Company’s wealth management solutions as well as

other attractive offerings in the market.

The average balance of savings accounts increased $172.5 million, or 10.4% during 2022 compared to 2021.

The average balance of time deposits decreased $112.2 million, or 19.4%, from 2021 to 2022.

average balance of demand deposits increased $131.3 million, or 3.7%, during 2022 compared to 2021.

The rate paid on average interest-bearing deposits was down 1 basis point to 0.16% for 2022.

The rate paid for money market deposit accounts remained flat at 0.20% from 2021 to 2022.

accounts decreased $23.4 million, or 1.5% during 2023 as compared to 2022.

The average balance of savings accounts decreased $113.6 million, or 6.2%, during 2023 compared to 2022.

The average balance of time deposits increased $542.0 million, or

116.6%, from 2022 to 2023.

The average balance of demand deposits decreased $233.3 million, or 6.3%, during 2023 compared to 2022.

The Company continues to experience the migration from no interest and low interest checking and savings accounts

into higher cost money market and time deposit instruments.

The decrease in average balances was due primarily to larger commercial customers shifting balances to higher yielding investment opportunities in both the Company’s wealth management

solutions as well as other offerings in the market.

The Company’s composition of total deposits is diverse and granular with over 563,000 accounts with an average per account balance of $19,483 as of December 31, 2023.

The rate paid on average interest-bearing deposits was up 140 bps to 1.56% for 2023.

The rate paid for money market deposit accounts increased 238 bps to 2.58% from 2022 to 2023.

The rate paid

for NOW deposit accounts increased from 0.16% in 2022 to 0.53% in 2023.

The rate paid for savings deposits decreased from 0.05% in 2021 to 0.03% in 2022.

The rate paid for time deposits decreased from 0.70% during 2021 to 0.38% during 2022.

The rate paid for savings deposits increased from 0.03% in 2022 to 0.04% in 2023.

The rate paid for time deposits increased from 0.38% during 2022 to 3.30% during 2023.

Years Ended December 31,

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Over twelve months

Average federal funds purchased increased to $14.6 million in 2022 as the Company moved from an excess liquidity position to an overnight borrowing position.

The rate paid on federal funds purchased

was 4.02% in 2022.

Average repurchase agreements decreased to $69.6 million in 2022 from $100.5 million in 2021.

The average rate paid on repurchase agreements decreased from 0.13% in 2021 to 0.10% in 2022.

Average short-term borrowings increased

to $46.4 million in 2022 from $1.3 million in 2021 due to a combination of loan growth and a decrease in deposits.

The average rate paid on short-term borrowings increased from 2.00% in 2021 to 4.24% in 2022.

Average long-term debt decreased from

$15.5 million in 2021 to $6.6 million in 2022.

Average federal funds purchased increased to $24.6 million in 2023.

The rate paid on federal funds purchased was 5.16% in 2023.

Average repurchase agreements increased to $70.3 million in 2023

from $69.6 million in 2022.

The average rate paid on repurchase agreements increased from 0.10% in 2022 to 1.06% in 2023.

Average short-term borrowings increased to $450.4 million in 2023 from $46.4 million in 2022.

The average rate paid on

short-term borrowings increased from 4.24% in 2022 to 5.24% in 2023.

Average long-term debt increased from $6.6 million in 2022 to $24.2 million in 2023.

The average balance of junior subordinated debt remained at $101.2 million in 2023.

The average rate paid for junior subordinated debt in 2022 was 3.70%, up from 2.07% in 2021.

average rate paid for junior subordinated debt in 2023 was 7.23%, up from 3.70% in 2022.

Total short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, which generally represent overnight borrowing transactions and other short-term

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comprised primarily of FHLB advances, are collateralized by the FHLB stock owned by the Company, certain of its mortgage-backed securities and a blanket lien on its residential real estate mortgage loans.

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.

As of December 31, 2022 and 2021 the subordinated debt

net of unamortized issuance costs was $98.5 million and $98.3 million, respectively.

The Company repurchased $2.0 million of the subordinated notes during the year ended December 31, 2022 at a discount of $0.1 million.

On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030.

The subordinated notes, which qualify as Tier 2 capital, bear interest at an

annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears

commencing on October 1, 2025.

The subordinated debt issuance cost of $2.2 million is being amortized on a straight-line basis into interest expense over five years.

The Company repurchased $2.0 million of the subordinated notes during the year

ended December 31, 2022 at a discount of $0.1 million.

Subordinated notes assumed in connection with the Salisbury acquisition included $25.0 million of 3.50% fixed-to-floating rate subordinated notes due 2031.

The subordinated notes, which qualify

as Tier 2 capital, bear interest at an annual rate of 3.50%, payable quarterly in arrears commencing on June 30, 2021, and a floating rate of interest equivalent to the three-month SOFR plus a spread of 2.80%, payable quarterly in arrears

commencing on June 30, 2026.

As of the acquisition date, the fair value discount was $3.0 million.

As of December 31, 2023 and December 31, 2022 the subordinated debt net of unamortized issuance costs and fair value discount was $119.7 million and $96.9

million, respectively.

Which will be amortized into interest expense over the expected call or maturity date.

Noninterest Income

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Noninterest income for the year ended December 31, 2023 was $142.2 million, down $13.4 million, or 8.6%, from the year ended December 31, 2022.

Excluding net securities (losses) gains, noninterest income for the year

ended December 31, 2022 was $156.7 million, down $0.5 million or 0.3%, from the year ended December 31, 2021.

The decrease from the prior year was driven by lower card services income from the impact of the Company being subject to the statutory

price cap provisions of the Durbin Amendment of approximately $8 million as well as lower other income drive by lower commercial loan swap fees.

The decrease was partly offset by the increase in income from retirement plan administration fees

driven by higher activity-based fees and continued organic growth and higher service charges on deposit accounts as the volume of transactions has normalized to near pre-pandemic levels.

During 2023, the Company incurred a $4.5 million securities loss on the

sale of two subordinated debt securities held in the AFS portfolio and a $5.0 million securities loss on the write-off of a subordinated debt security of a failed financial institution.

Excluding net securities (losses) gains, noninterest income

for the year ended December 31, 2023 was $151.5 million, down $5.2 million or 3.3%, from the year ended December 31, 2022.

The decrease from the prior year was driven by lower card services income from the impact

of the statutory price cap provisions of the Durbin Amendment of approximately $8.0 million and lower retirement plan administration fees driven by a decrease in certain activity-based fees.

These decreases were partially offset by an increase in

wealth management and insurance services.

Noninterest Expense

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Office supplies and postage

FDIC expenses

FDIC assessment

Amortization of intangible assets

Loan collection and other real estate owned, net

Merger expenses

Acquisition expenses

Total noninterest expense

Noninterest expense for the year ended December 31, 2023 was $341.7 million, up $37.2 million or 12.2%, from the year ended December 31, 2022.

In 2022, the Company incurred merger expenses of $1.0

million related to the pending acquisition of Salisbury.

Excluding merger expenses, noninterest expense for the year ended December 31, 2022 was $303.5 million, up $16.2 million or 5.6%, from the year ended December 31, 2021.

The increase from

the prior year was driven by higher salaries and employee benefits due to increased salaries and wages including merit pay increases and higher levels of incentive compensation accruals.

In addition, the increase in technology and data services

was due to continued investment in digital platform solutions and the increase in professional fees and outside services was due to external services for several tactical and strategic initiatives.

Other expenses decreased from the prior year due

to $4.3 million in estimated litigation settlement costs in 2021 related to a settled lawsuit regarding certain of the Company’s deposit products and related disclosures, partly offset by higher travel and training expenditures along with an

increase in the provision for the reserve for unfunded commitments.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year.

The Company incurred acquisition expenses for the

year ended December 31, 2023 and December 31, 2022 of $10.0 million and $1.0 million, respectively, related to the merger with Salisbury.

Included in other noninterest expenses for the year ended December 31, 2023, the Company recorded a $4.8

million impairment of its minority interest equity investment in a provider of financial and technology services to residential solar equipment installers due to the uncertainty in the realizability of the investment.

Excluding acquisition

expenses and the impairment of a minority interest equity investment, noninterest expense for the year ended December 31, 2023 was $326.9 million, up $23.4 million or 7.7%, from the year ended December 31, 2022.

The increase from the prior year

was driven by higher salaries and employee benefits due to the Salisbury acquisition, increased salaries and wages including merit pay increases and higher health and welfare benefits, which were partially offset by lower levels of incentive

compensation.

In addition, the increase in technology and data services was due to continued investment in digital platforms solutions, the increase in the FDIC assessment expense was driven by the statutory increase in the FDIC assessment rate,

increased occupancy expense was driven by the addition of Salisbury locations and other expenses were higher due to the increase in actuarially determined expense related to the Company’s retirement plans.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns

filed during the subsequent year.

Adjustments based on filed returns are recorded when identified, which is generally in the fourth quarter of the subsequent year for U.S.

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5376, the Inflation Reduction Act (“IRA”), was signed into law.

The IRA, among other things, introduced a corporate alternative minimum tax, excise tax on stock repurchases

and a clean vehicle credit.

The IRA, among other things, introduced a corporate alternative minimum tax, excise tax on stock

repurchases and a clean vehicle credit.

The Company does not expect the impact to be material and will continue to monitor the impacts of the IRA on the business to determine if any future tax impacts may result from this legislation.

Income tax expense for the year ended December 31, 2023 was $34.7 million, down $9.5 million, or 21.5%, from the year ended December 31, 2022.

The effective tax rate was 22.5% in 2022 and 2021.

The effective tax rate was 22.6% in 2023 and was 22.5% in 2022.

Risk Management – Credit Risk

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components of the Company’s underwriting and monitoring functions are critical to the timely identification, classification and resolution of problem credits.

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities.

generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection.

Loans may also be placed on nonaccrual when circumstances indicate that the borrower may

be unable to meet the contractual principal or interest payments.

The threshold for evaluating classified and nonperforming loans specifically evaluated for individual credit loss is $1.0 million.

OREO represents property acquired through

foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, troubled loans modifications, other real estate owned (“OREO”) and nonperforming securities.

Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection.

Loans may also be placed on nonaccrual when circumstances indicate that the

borrower may be unable to meet the contractual principal or interest payments.

The threshold for evaluating classified, commercial and commercial real estate loans risk graded substandard or doubtful, and nonperforming loans specifically

evaluated for individual credit loss is $1.0 million.

OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.

Nonperforming Assets

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Nonaccrual loans:

Troubled debt restructured loans

Troubled loan modifications (1)

Total nonaccrual loans

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Total allowance for loan losses to nonaccrual loans

TDRs prior to adoption of ASU 2022-02.

The following tables are related to nonperforming loans in prior periods.

Nonperforming loans are summarized by business line which does not align with how the Company currently assesses credit risk

in the estimate for credit losses under CECL.

Nonperforming loans are summarized by business line which does not align with how the Company currently assesses credit

risk in the estimate for credit losses under CECL.

As of December 31,

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Total nonperforming assets were $37.9 million at December 31, 2023, compared to $21.2 million at December 31, 2022.

Nonperforming loans at December 31, 2022 were $21.1 million or 0.26% of total loans,

compared with $32.7 million or 0.44% of total loans at December 31, 2021.

The decrease in nonperforming loans primarily resulted from a reduction in commercial and residential nonaccrual loans.

Total nonaccrual loans were $17.2 million or 0.21% of

total loans at December 31, 2022, compared to $30.3 million or 0.40% of total loans at December 31, 2021.

Past due loans as a percentage of total loans was 0.33% at December 31, 2022, up slightly from 0.29% of total loans at December 31, 2021.

The allowance for credit losses was 478.72% of nonperforming loans at December 31, 2022 as compared to 280.98% at December 31, 2021.

The allowance for credit losses was 584.92% of nonaccrual loans at

December 31, 2022 as compared to 303.78% at December 31, 2021.

Nonperforming loans at December 31, 2023 were $37.9 million or 0.39% of total

loans, compared with $21.1 million or 0.26% of total loans at December 31, 2022.

The increase in nonperforming assets was attributable to a diversified, multi-tenant commercial real estate development relationship that was placed into a

nonaccrual status in the fourth quarter of 2023, in which NBT is a participant.

The relationship is being actively managed and recent appraised values continue to support its carrying value, and as such, no specific reserve has been established.

Total nonaccrual loans were $34.2 million or 0.35% of total loans at December 31, 2023, compared to $17.2 million or 0.21% of total loans at December 31, 2022.

Past due loans as a percentage of total loans was 0.32% at December 31, 2023, down

slightly from 0.33% of total loans at December 31, 2022.

In addition to nonperforming loans discussed above, the Company has also identified approximately $87.7 million in potential problem loans at December 31, 2023 as compared to $52.0 million at

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Potential problem

loans are classified by the Company’s loan rating system as “substandard.” The decrease in potential problem loans from December 31, 2021 is primarily due to the improved economic conditions which resulted in loans coming off deferral and

returning to payment.

Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations.

As of December 31, 2022, 8.2% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic.

loans are classified by the Company’s loan rating system as “substandard.” The increase in potential problem loans from December 31, 2022 is primarily due to the migration of $48.2 million to substandard, partially offset by an increase of $13.5

million in nonaccrual commercial loan balances.

Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans.

Accordingly, there can be no assurance that other loans will not become over 90 days past

due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses.

To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular

industry and originates loans primarily within its footprint.

Accordingly, there can be no assurance that

other loans will not become over 90 days past due, be placed on nonaccrual, become troubled loans modifications or require increased allowance coverage and provision for loan losses.

To mitigate this risk the Company maintains a diversified loan

portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.

Allowance for Loan Losses

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The Company recorded a net decrease to retained earnings of $4.3 million as of January 1, 2020 for the cumulative

effect of adopting ASU 2016-13.

The transition adjustment included a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for unfunded commitments reserve, and $1.5 million impact to the

deferred tax asset.

effect of adopting Accounting Standards Updates (“ASU”) 2016-13.

The transition adjustment included a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for unfunded commitments reserve

and $1.5 million impact to the deferred tax asset.

Beginning January 1, 2023, the Company adopted ASU 2022-02 Financial Instruments - CECL Losses (Topic 326):

Troubled Debt Restructurings and Vintage

Disclosures (“ASU 2022-02”), which resulted in an insignificant change to the Company’s methodology for estimating the allowance for credit losses on Troubled Debt Restructurings (“TDRs”) since December 31, 2022.

The January 1, 2023

decrease in allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $0.6 million, which increased retained earnings by $0.5 million and decreased the deferred tax asset by $0.1 million.

Management considers the accounting policy relating to the allowance for credit losses to be a critical estimate given the degree of judgment exercised in evaluating the level of the allowance

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The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans).

It replaces the incurred loss approach’s threshold that required recognition of a

credit loss when it was probable a loss event was incurred.

The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on

It replaces the incurred loss approach’s threshold that required recognition of

a credit loss when it was probable a loss event was incurred.

The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost 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.

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Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses.

These are necessary to maintain the allowance at a

level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio.

These are necessary to maintain the allowance

at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio.

While management uses available information to recognize losses on loans, additions or reductions to the

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Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

Management estimates the allowance balance for credit losses using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and

supportable forecasts.

Management estimates the allowance balance for credit losses using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable

and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

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Significant management judgment is required at each point in the measurement process.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics

The respective quantitative allowance for each segment is measured using an econometric, discounted probability of default (PD) and loss given default (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.

After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that

exist in the loan portfolio at the balance sheet date.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk

characteristics exist.

The respective quantitative allowance for each segment is measured using an econometric, discounted probability of default and loss given default modeling methodology in which distinct, segment-specific multi-variate

regression models are applied to multiple, probabilistically weighted external economic forecasts.

Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference

between the net present value of modeled cash flows and amortized cost basis.

After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime

losses that exist in the loan portfolio at the balance sheet date.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.

Upon adoption of CECL, management revised

the manner in which loans were pooled for similar risk characteristics.

Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been

combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.

Upon adoption of CECL, management

revised the manner in which loans were pooled for similar risk characteristics.

Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have

been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.

Additional information about our Allowance for Loan Losses is included in Notes 1 and 6 to the consolidated financial statements as well as in the “Critical Accounting Estimates” section of the

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The allowance for credit losses totaled $114.4 million at December 31, 2023, compared to $100.8 million at December 31, 2022.

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 increase in the allowance for credit losses from December 31, 2021 to December 31, 2022 was primarily due to the increase in loan balances, primarily due to the increase in

residential solar loans, during 2022 and the slight deterioration in the economic forecast compared to prior year.

The allowance for credit losses as a percentage of loans was 1.19%

at December 31, 2023, compared to 1.24% at December 31, 2022.

The increase in the allowance for credit losses from December 31, 2022 to December 31, 2023 was primarily due to the $14.5 million of allowance for acquired Salisbury loans which

included both the $5.8 million allowance for PCD loans reclassified from loans and the $8.8 million allowance for non-PCD loans recognized through the provision for loan losses.

The allowance for credit losses was 302.05% of nonperforming loans at December 31, 2023 as compared to 478.72% at December 31, 2022.

The allowance for credit losses was 334.38% of nonaccrual

loans at December 31, 2023 as compared to 584.92% at December 31, 2022.

The 2023 decline in the coverage of the allowance to nonperforming and nonaccrual loans largely relates to one nonperforming relationship that is individually evaluated for

allowance which had no reserve established at December 31, 2023.

The provision for loan losses was $25.3 million for the year ended December 31, 2023, compared to $17.1 million for the year ended December 31, 2022.

Provision expense increased from the prior

year primarily due to the $8.8 million of acquisition-related provision for loan losses due to the Salisbury acquisition and an increase in net charge-offs.

Net charge-offs totaled $16.8 million for 2023, up from $8.3 million in 2022.

charge-offs to average loans was 19 bps for 2023 compared to 11 bps for 2022.

(Dollars in thousands)

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Net loans charged-off

Allowance for credit loss on PCD acquired loans

Provision for loan losses

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Net charge-offs to average loans outstanding

2020 includes an adjustment of $3.0 million as a result of our January 1, 2020, adoption of Accounting Standards Codification (“ASC”) 326.

2020 includes an adjustment of $3.0 million as a result of the January 1, 2020, adoption of ASC 326 and 2023 includes an adjustment of $0.6 million

as a result of the January 1, 2023, adoption of ASU 2022-02.

Consumer charge-off and recoveries include consumer and home equity.

Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology.

The following tables related to the allowance for loan

losses in prior periods under the incurred methodology.

The following tables related to the allowance for

loan losses in prior periods under the incurred methodology.

Charge-off and recoveries are summarized by business line which does not align with how the Company currently assesses credit risk in the estimate for credit losses under CECL.

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Net charge-offs to average loans outstanding

The provision for loan losses was $17.1 million for the year ended December 31, 2022, compared to a net benefit of $8.3 million for the year ended December 31, 2021.

Provision expense increased from

the prior year primarily due to deteriorated economic condition forecast in the current year as compared to significant improvements experienced in the economic condition forecast in the prior year and loan growth experienced during the current

Net charge-offs totaled $8.3 million for 2022, down from $9.7 million in 2021.

Net charge-offs to average loans was 11 bps for 2022 compared to 13 bps for 2021.

Allocation of the Allowance for Loan Losses

(Dollars in thousands)

Percent of Loans

Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology.

The following table relates to the allowance for loan

losses in prior periods.

The following table relates to the allowance for

loan losses in prior periods.

Category percentage of loans are summarized by business line which does not align with how the Company currently assesses credit risk in the estimate for credit losses under CECL.

(Dollars in thousands)

Percent of Loans

Commercial and agricultural

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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 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 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.

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.

As of December 31, 2023 and 2022, the allowance for losses on unfunded commitments totaled $5.1 million.

Prior to January 1, 2020, the Company

calculated the allowance for losses on unfunded commitments using the incurred loss methodology.

Prior to January 1, 2020, the

Company calculated the allowance for losses on unfunded commitments using the incurred loss methodology.

Liquidity Risk

Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources.

objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their

credit needs.

Management’s Asset Liability Committee (“ALCO”) is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of

Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on

alternate funding sources.

The objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds

will be available to meet their credit needs.

are potential sources or uses of liquidity.

Liquidity policies must also provide the flexibility to implement appropriate strategies, along with regular monitoring of liquidity and testing of the contingent liquidity plan.

Requirements change as loans grow, deposits and

securities mature and payments on borrowings are made.

Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions.

Requirements change as

loans grow, deposits and securities mature and payments on borrowings are made.

Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of

changing economic conditions.

Loan repayments and maturing investment securities are a relatively predictable source of funds.

However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest

rates, the housing market, general and local economic conditions, and competition in the marketplace.

Management continually monitors marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or

asset prepayments.

The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix

of average liabilities.

However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are

strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace.

Management continually monitors marketplace trends to identify patterns that might improve the predictability of

the timing of deposit flows or asset prepayments.

The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding

mix of average liabilities.

This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary.

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December 31, 2023 and $1.92 billion at December 31, 2022.

In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral.

At December 31, 2022 and 2021, the Bank

had the capacity to borrow $622.7 million and $580.8 million, respectively, from this program.

In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile and residential solar loans as collateral.

At December 31, 2023

and 2022, the Bank had the capacity to borrow $1.02 billion and $622.7 million, respectively, from this program.

The Company’s internal policies authorize borrowing up to 25% of assets.

Under this policy, remaining available borrowing capacity totaled $2.41

billion at December 31, 2022 and $2.89 billion at December 31, 2021.

Under this policy, remaining available borrowing capacity

totaled $2.99 billion at December 31, 2023 and $2.41 billion at December 31, 2022.

This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives.

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impact the Company’s liquidity position in 2024.

Higher interest rates could result in deposit declines as depositors have alternative opportunities for yield on their excess funds.

In the current economic environment, draws against lines of

credit could drive asset growth higher.

Continued increases to interest rates could result in deposit declines as depositors have alternative opportunities for yield on their excess funds.

In the current economic environment, draws

against lines of credit could drive asset growth higher.

Disruptions in wholesale funding markets could spark increased competition for deposits.

These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%.

Significant monetary and fiscal policy actions taken by the federal government during the COVID-19 pandemic have helped to mitigate these risks.

Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during

the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.

These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum

policy level of 5%.

Note, enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.

While the pandemic has come to an end, this enhanced monitoring continues as rising interest rates and the recent bank failures have led to a deposit decline in the banking system and increased volatility to liquidity risk.

At December 31, 2023, a portion of the Company’s loans and securities were pledged as collateral on borrowings.

Therefore, once on-balance-sheet liquidity is depleted, future growth of earning

Therefore, once on-balance-sheet liquidity is reduced, future growth of earning

assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.

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transactions.

Net cash flows used in financing activities totaled $328.7 million in 2022 and net cash flows provided by financing activities totaled $984.8 million in 2021.

The critical elements of financing

activities are proceeds from deposits, borrowings and stock issuance.

Net cash flows used in financing activities totaled $105.4 million and $328.7 million in 2023 and 2022, respectively.

The critical elements of financing activities are proceeds from deposits,

borrowings and stock issuance.

In addition, financing activities are impacted by dividends and treasury stock transactions.

Commitments to Extend Credit

The Company makes contractual commitments to extend credit, which include unused lines of credit, which are subject to the Company’s credit approval and monitoring procedures.

At December 31, 2022

and 2021, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $2.42 billion and $2.30 billion, respectively.

In the opinion of management, there are no material commitments to extend credit, including

unused lines of credit that represent unusual risks.

The Company makes contractual commitments to extend credit, which include unused lines of credit, which are subject to the Company’s credit approval and

monitoring procedures.

At December 31, 2023 and 2022, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $2.68 billion and $2.42 billion, respectively.

In the opinion of management, there are no

material commitments to extend credit, including unused lines of credit that represent unusual risks.

All commitments to extend credit in the form of loans, including unused lines of credit, expire within one year.

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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.

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.

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Interest Rate Swaps

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.

The Company records all derivatives on the consolidated 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

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 and

that qualify as cash flow hedges, changes in fair value of the cash flow hedges are reported in AOCI.

When the cash flows associated with the hedged item are realized, the gain or loss included in AOCI is subsequently reclassified and 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

For derivatives designated

and that qualify as cash flow hedges, changes in fair value of the cash flow hedges are reported in accumulated other comprehensive income or loss (“AOCI”).

When the cash flows associated with the hedged item are realized, the gain or loss included

in AOCI is subsequently reclassified and 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.

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2023 and 2022, the Company had approximately $1.0 million and $0.6 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.

At December 31, 2023 and 2022, the Company serviced $26.4 million and $31.0 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, 2023 and 2022.

Capital Resources

Consistent with its goal to operate a sound and profitable financial institution, the Company actively seeks to maintain a “well-capitalized” institution in accordance with regulatory standards.

principal source of capital to the Company is earnings retention.

The Company’s capital measurements are in excess of both regulatory minimum guidelines and meet the requirements to be considered well-capitalized.

Consistent with its goal to operate a sound and profitable financial institution, the Company actively seeks to maintain a “well-capitalized” institution in accordance with regulatory

The principal source of capital to the Company is earnings retention.

The Company’s and the Bank’s capital measurements are in excess of both regulatory minimum guidelines and meet the requirements to be considered well-capitalized.

The Company’s primary source of funds to pay interest on trust preferred debentures and pay cash dividends to its stockholders are dividends from its subsidiaries.

Various laws and regulations

restrict the ability of banks to pay dividends to their stockholders.

Generally, the payment of dividends by the Company in the future as well as the payment of interest on the capital securities will require the generation of sufficient future

earnings by its subsidiaries.

The Bank also is subject to substantial regulatory restrictions on its ability to pay dividends to the Company.

Under Office of the Comptroller of the Currency (“OCC”) regulations, the Bank may not

pay a dividend, without prior OCC approval, if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net

income over the preceding two years.

At December 31, 2022 and 2021, approximately $145.3 million and $164.6 million, respectively, of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without

approval by the OCC.

Various laws and regulations restrict

the ability of banks to pay dividends to their stockholders.

Generally, the payment of dividends by the Company in the future as well as the payment of interest on the capital securities will require the generation of sufficient future earnings

by its subsidiaries.

The Bank is also subject to regulatory restrictions on its ability to pay dividends to the Company.

Under Office of the Comptroller of the Currency (“OCC”)

regulations, the Bank may not pay a dividend, without prior OCC approval, if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the

calendar year and its retained net income over the preceding two years.

At December 31, 2023 and 2022, approximately $106.6 million and $145.3 million, respectively, 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 being in compliance with regulatory capital requirements.

The Bank is currently in compliance with these requirements.

Under the State of Delaware General

Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.

State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.

Stock Repurchase Plan

The Company purchased 155,500 shares of its common stock during the year ended December 31, 2023 at an average price of $31.79 per share under its previously announced share repurchase program.

of December 31, 2022, there were 1,600,000 shares available for repurchase under this plan authorized on December 20, 2021 and set to expire on December 31, 2023.

This repurchase program under which these shares were purchased was due to expire on December 31, 2023;

however, on December 18, 2023, the Board of Directors authorized and approved an amendment to the repurchase program.

Pursuant to the amended

stock repurchase program, the Company may repurchase up to 2,000,000 shares of the outstanding shares of its common stock with all repurchases under the stock repurchase program to be made by December 31, 2025.

The Company may repurchase shares

of its common stock from time to time to mitigate the potential dilutive effect of stock-based incentive plans and other potential uses of common stock for corporate purposes.

As of December 31, 2023, there were 2,000,000 shares available for

repurchase under this plan which is set to expire on December 31, 2025.

The Company purchased no shares of its common stock during the fourth quarter of 2023.

Recent Accounting Updates

1 unchanged sentence

2022 OPERATING RESULTS AS COMPARED TO 2021 OPERATING RESULTS

For similar operating and financial data and discussion of our results for the year ended December 31, 2021 compared to our results for the year ended December 31, 2020 , refer to

Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 1, 2022 and is incorporated

herein by reference.

For similar operating and financial data and discussion of our results for the year ended December 31, 2022 compared to our results for the year ended December 31, 2021 ,

refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 1, 2023 and is

incorporated herein by reference.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis