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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-02-29 compared with 2023-03-01 · 1023 added, 822 removed, 1562 unchanged (54% of the section changed)

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Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income.

Net interest income is susceptible to interest rate

risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets.

Net interest income is susceptible to interest

rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets.

When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in

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changing interest rates is an uncertainty that can have an adverse effect on net income.

In adjusting the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression.

At times, depending on

the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in

In managing the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression.

At times, depending

on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in

order to increase its net interest margin.

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The primary tool utilized by the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis).

Information, such as principal balance, interest rate, maturity

date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet.

In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment

securities along with any optionality within the deposits and borrowings.

Information, such as principal balance, interest rate,

maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet.

In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related

investment securities along with any optionality within the deposits and borrowings.

The model is first run under an assumption of a flat rate scenario (e.g., no change in current interest rates) with a static balance sheet.

Three additional models are run in

which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet.

Under these scenarios, assets subject to prepayments are adjusted to account for

faster or slower prepayment assumptions.

Three additional models

are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet.

Under these scenarios, assets subject to prepayments are adjusted to

account for faster or slower prepayment assumptions.

Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario.

The resulting changes in net interest income are then measured

against the flat rate scenario.

The resulting changes in net interest income are

then measured against the flat rate scenario.

The Company also runs other interest rate scenarios to highlight potential interest rate risk.

In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period.

in net interest income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors.

In the rising rate scenarios, net interest income is projected to

experience an increase from the flat rate scenario;

however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, money market deposit accounts and time accounts.

Net interest income for the next

twelve months in the +200/+100/-200 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% reduction in net interest income.

The following table summarizes the percentage change in net interest income in

the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the December 31, 2022 balance sheet position:

The Company’s Interest Rate Sensitivity has migrated to a near neutral position.

In the declining rate scenario, net interest income is projected to modestly decrease when compared to the

forecasted net interest income in the flat rate scenario through the simulation period.

The decrease in net interest income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities

decline and/or reach their floors.

In the rising rate scenarios, net interest income is near neutral, impacted by slowing prepayments speeds and increased deposit reactivity;

the magnitude of potential impact on earnings may be affected by the

ability to lag deposit repricing on NOW, savings, money market deposit accounts and time accounts.

Net interest income for the next twelve months in the +200/+100/-200 bp scenarios, as described above, is within the internal policy risk limits of

not more than a 7.5% reduction in net interest income.

The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat

rate scenario using the December 31, 2023 balance sheet position:

Interest Rate Sensitivity Analysis

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net interest income

The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of short to mid-term interest rates which are heavily driven by

inflationary pressures and FOMC monetary policy.

In response to the economic impact of the pandemic, the federal funds rate was reduced to near zero in March 2020, term interest rates fell sharply across the yield curve and the Company reduced

deposit rates.

Post-pandemic, inflationary pressures have resulted in a higher overall yield curve, Fed Funds increases of 425 bps in 2022 and expectations for continued increases to short-term interest rates in 2023.

With deposit rates coming

off their historic lows, the Company will focus on managing deposit expense in a rising rate environment while allowing assets to reprice upward.

FINANCIAL STATEMENTS AND

SUPPLEMENTARY DATA

The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of short to mid-term interest

rates which are heavily driven by inflationary pressures and Federal Open Market Committee monetary policy.

In response to the economic impact of the pandemic, the federal funds rate was reduced to near zero in March 2020, term interest rates

fell sharply across the yield curve and the Company reduced deposit rates.

Post-pandemic, inflationary pressures have resulted in a higher overall yield curve with Federal Funds increases of 425 bps in 2022 with additional 100 bps of increases in

While deposit rates have increased meaningfully in 2023 in conjunction with the increase to short term interest rates, the Company continues to focus on managing deposit expense in an environment of elevated interest rates while allowing

assets to reprice upward.

FINANCIAL STATEMENTS

AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of NBT Bancorp Inc.

and subsidiaries (the Company) as of December 31, 2022 and 2021, the

related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of

the years in the three-year period ended December 31, 2022, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal

control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued

by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

We have audited the

accompanying consolidated balance sheets of NBT Bancorp Inc.

and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash

flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material

respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S.

accepted accounting principles.

audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 29, 2024 expressed an unqualified opinion on the

effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these

consolidated financial statements based on our audits.

Our responsibility is to

express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable

assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial

statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable

basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was

communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion

on the critical audit matter or on the accounts or disclosures to which it relates.

Those standards require that we plan and perform

the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of

the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated

financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our

audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated

financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially

challenging, subjective, or complex judgments.

The communication of a critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit

matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for credit losses – loans evaluated on a collective basis

As discussed in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for credit losses on loans evaluated on a

collective basis (the collective ACL on loans) was $100.8 million of a total allowance for credit losses of $100.8 million as of December 31, 2022.

The collective ACL on loans includes the measure of expected credit losses on a collective (pooled)

basis for class segments of loans that share similar risk characteristics.

The Company uses a discounted cash flow methodology where the respective quantitative allowance for each segment is measured by comparing the amortized cost to the present

value of expected principal, interest and recovery cash flows projected using an econometric, probability of default (PD) and loss given default (LGD) modeling methodology.

The Company uses PD regression models to develop the PD, and LGD models to

develop the LGD, using historical credit loss experience for both the Company and segment-specific selected peers.

The application of these models incorporates multiple weighted external economic forecasts for the economic variables over the

reasonable and supportable forecast period.

After the reasonable and supportable forecast period, the Company reverts to long-term average economic variables over a reversion period on a straight-line basis.

Contractual cash flows over the

contractual life of the loans are the basis for expected principal, interest and recovery cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective interest rate.

After quantitative considerations,

the Company applies additional qualitative adjustments, giving consideration to the effects of limitations inherent in the quantitative model, so that the collective ACL is reflective of the estimate of lifetime losses that exist in the loan

portfolio at the balance sheet date.

As discussed in Notes 1 and 6 to the consolidated

financial statements, the Company’s allowance for credit losses on loans evaluated on a collective basis (the collective ACL on loans) was $114.4 million of a total allowance for credit losses of $114.4 million as of December 31, 2023.

collective ACL on loans includes the measure of expected credit losses on a collective (pooled) basis for class segments of loans that share similar risk characteristics.

The Company uses a discounted cash flow methodology where the respective

quantitative allowance for each segment is measured by comparing the amortized cost to the present value of expected principal, interest and recovery cash flows projected using an econometric, probability of default (PD) and loss given default

(LGD) modeling methodology.

The Company uses PD regression models to develop the PD, and LGD models to develop the LGD, using historical credit loss experience for both the Company and segment-specific selected peers.

The application of these

models incorporates multiple weighted external economic forecasts for the economic variables over the reasonable and supportable forecast period.

After the reasonable and supportable forecast period, the Company reverts to long-term average

economic variables over a reversion period on a straight-line basis.

Contractual cash flows over the contractual life of the loans are the basis for expected principal, interest and recovery cash flows, adjusted for modeled defaults and expected

prepayments and discounted at the loan-level effective interest rate.

After quantitative considerations, the Company applies additional qualitative adjustments, giving consideration to the effects of limitations inherent in the quantitative

model, so that the collective ACL is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.

We identified the assessment of the collective ACL on loans as a critical audit matter.

A high degree of audit effort, including

specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL on loans due to significant measurement uncertainty.

Specifically, the assessment encompassed the evaluation of the

collective ACL on loans methodology, including the methods and models used to estimate (1) the PD and LGD and their significant assumptions including portfolio segmentation, the external economic forecasts and economic variables, and the related

weighting of the forecasts, the reasonable and supportable forecast periods, the composition of the peer group and the period from which historical Company and peer experience was used, (2) the expected prepayments assumption, and (3) the qualitative

adjustments and the significant assumptions, including the effects of limitations inherent in the quantitative model.

A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in

the assessment of the collective ACL on loans due to significant measurement uncertainty.

Specifically, the assessment encompassed the evaluation of the collective ACL on loans methodology, including the methods and models used to estimate (1)

the PD and LGD and their significant assumptions including the external economic forecasts and economic variables, and the related weighting of the forecasts, the reasonable and supportable forecast periods, the composition of the peer group and

the period from which historical Company and peer experience was used, (2) the expected prepayments assumption, and (3) the qualitative adjustments and the significant assumptions, including the effects of limitations inherent in the quantitative

The assessment also included an evaluation of the conceptual soundness and performance of the PD regression and LGD models.

addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.

In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the

operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL on loans estimate, including controls over the:

We evaluated the design and tested the operating effectiveness of certain internal controls

related to the Company’s measurement of the collective ACL on loans estimate, including controls over the:

development of the collective ACL on loans methodology

development of the PD regression models

continued use and appropriateness of changes made to PD regression and LGD models

continued use and appropriateness of changes made to the PD regression models

continued use and appropriateness of the LGD models

performance monitoring of the PD regression and LGD models

identification and determination of the expected prepayments assumption and the significant assumptions used in the PD regression and LGD models

development of the qualitative methodology, including the significant assumptions used in the measurement of select qualitative adjustments

development of the qualitative methodology and related adjustments, including the significant assumptions used in the measurement of select qualitative

analysis of the collective ACL on loans results, trends, and ratios.

We evaluated the Company’s process to develop the collective ACL on loans estimate by testing certain sources of data, factors, and

assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions.

We evaluated the Company’s process to develop the collective ACL on loans estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data,

factors, and assumptions.

In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:

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generally accepted accounting principles

evaluating judgments made by the Company relative to the development and performance monitoring of the PD regression and LGD models, by comparing

them to relevant Company-specific metrics and trends and the applicable industry practices

assessing the conceptual soundness and performance testing of the PD regression and LGD models, by inspecting the model documentation to determine

whether the models are suitable for their intended use

evaluating judgments made by the Company relative to the performance monitoring of the PD regression and LGD models, by comparing them to relevant

Company-specific metrics and trends and the applicable industry and regulatory practices

assessing the conceptual soundness and performance testing of the PD regression and LGD models, by inspecting the model documentation to determine whether

the models are suitable for their intended use

evaluating the expected prepayments assumption by comparing to relevant Company-specific metrics and trends and current economic considerations

evaluating the selection of economic forecast scenarios, including weighting of the scenarios, and underlying economic variables, by comparing to the

Company’s business environment and relevant industry practices

evaluating the selection of economic forecasts, including weighting of the forecasts, and underlying assumptions by comparing to the Company’s business

environment and relevant industry practices

evaluating the length of the period from which historical Company and peer experience was used and the reasonable and supportable forecast period by

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assessing the composition of the peer group by comparing to Company and specific portfolio risk characteristics

determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment, loan

portfolio categories and sub-categories and relevant industry practices

evaluating the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective ACL on loans by

comparing to relevant credit risk factors, the current economic environment and consistency with credit trends and identified limitations of the underlying quantitative models.

evaluating the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective ACL on loans by comparing to

relevant credit risk factors, the current economic environment and consistency with credit trends and identified limitations of the underlying quantitative models.

We also assessed the sufficiency of the audit evidence obtained related to the collective ACL on loans estimate by evaluating the:

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potential bias in the accounting estimate.

value measurement of the acquired loans in the Salisbury Bancorp, Inc.

business combination

discussed in Note 3 to the consolidated financial statements, the Company acquired Salisbury Bancorp, Inc.

(Salisbury) on August 11, 2023.

The transaction was accounted for as a business combination using the acquisition method of accounting.

Accordingly, asset acquired, liabilities assumed, and consideration paid for Salisbury were recorded at the fair values at the acquisition date, including the fair value of acquired loans of $1.17 billion.

The fair value of acquired loans was

determined using a discounted cash flow methodology applied on a pooled basis that used a forecast of principal and interest payments based on certain key valuation assumptions including, probability of default, loss given default, prepayment

rate, and discount rate.

identified the assessment of the fair value measurement of the acquired loans as a critical audit matter.

A high degree of audit effort, including specialized skills and knowledge, and auditor judgment was involved in the assessment due to

significant measurement uncertainty.

Specifically, the assessment of the fair value measurement encompassed the evaluation of the key assumptions including probability of default, loss given default, prepayment rate, and discount rate.

following are the primary procedures we performed to address the critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s fair value measurement process for acquired

loans, including control over the determination of the key assumptions including probability of default, loss given default, prepayments, and discount rate.

We involved valuation professionals with specialized skills and knowledge who assisted

in developing an independent estimate of the fair value of the acquired loan portfolio, including developing independent assumptions utilizing market data for the loss assumptions, prepayment rate, and discount rate and comparing to the

Company’s estimate of fair value.

We have served as the Company’s auditor since 1987.

Albany, New York

March 1, 2023

February 29, 2024

NBT Bancorp Inc.

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Preferred stock, $ 0.01

Authorized 2,500,000 shares at December 31, 2022 and 2021

par value, 2,500,000 shares authorized

Common stock, $ 0.01

Authorized 100,000,000 shares at December 31, 2022 and 2021 , issued 49,651,493 at December 31, 2022 and 2021

par value, 100,000,000 shares authorized;

53,974,492 and 49,651,493 shares issued, respectively

Additional paid-in-capital

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Accumulated other comprehensive loss

Common stock in treasury, at cost, 6,793,670 and 6,483,481 shares at December 31, 2022 and 2021 , respectively

Common stock in treasury, at cost, 6,864,593 and 6,793,670 shares, respectively

Total stockholders’ equity

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and Subsidiaries

Statements of Income

Statements of

Years Ended December 31,

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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

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Securities available for sale:

Unrealized net holding (losses) gains arising during the period, gross

Unrealized net holding (losses) gains arising during the period, net

Reclassification adjustment for net (gains) in net income, gross

Reclassification adjustment for net (gains) in net income, net

Unrealized net holding gains (losses) arising during the period, gross

Unrealized net holding gains (losses) arising during the period, net

Reclassification adjustment for net losses in net income, gross

Reclassification adjustment for net losses in net income, net

Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross

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Cash flow hedges:

Unrealized losses on derivatives (cash flow hedges), gross

Unrealized losses on derivatives (cash flow hedges), net

Reclassification of net unrealized losses on cash flow hedges to interest expense, gross

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Amortization of prior service cost and actuarial losses, net

(Increase) decrease in unrecognized actuarial loss, gross

(Increase) decrease in unrecognized actuarial loss, net

Decrease (increase) in unrecognized actuarial loss, gross

Decrease (increase) in unrecognized actuarial loss, net

Total pension and other benefits, net

Total other comprehensive (loss) income

Comprehensive (loss) income

Total other comprehensive income (loss)

Comprehensive income (loss)

See accompanying notes to consolidated financial statements.

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Stockholders’ Equity

(In thousands, except share and per share data)

Comprehensive

(Loss) Income

(In thousands, except share and per share data)

Balance at December 31, 2020

Cumulative effect adjustment for ASU 2016-13 implementation as of January 1, 2020

Cash dividends - $ 1.10 per share

Purchase of 263,507 treasury

Purchase of 604,637 treasury shares

Net issuance of 143,555 shares to employee and other stock plans

Stock-based compensation

Other comprehensive income

Other comprehensive (loss)

Balance at December 31, 2021

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Balance at December 31, 2022

Cumulative effect adjustment for ASU 2022-02 implementation as of January 1, 2023

Cash dividends - $ 1.24

Issuance of 4,322,999 shares of common stock for acquisition

Purchase of 155,500 treasury shares

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Stock-based compensation

Other comprehensive (loss)

Other comprehensive income

Balance at December 31, 2023

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Net (gains) losses on sale of other real estate owned

Lease termination losses

Impairment of a minority interest equity investment

Net deferred income tax expense (benefit)

Net change in other assets and other liabilities

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Investing activities

Net cash used in acquisitions

Net cash provided by (used in) acquisitions

Securities available for sale :

Proceeds from maturities, calls and principal paydowns

Proceeds from sales

Securities held to maturity:

Proceeds from maturities, calls and principal paydowns

Proceeds from sales

Equity securities:

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Financing activities

Net (decrease) increase in deposits

Net increase (decrease) in short-term borrowings

Proceeds from issuance of subordinated debt

Payment of subordinated debt issuance costs

Net increase (decrease) in deposits

Net (decrease) increase in short-term borrowings

Repurchase of subordinated debt

Proceeds from issuance of long-term debt

Proceeds from long-term debt

Repayments of long-term debt

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Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

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Acquisitions:

Fair value of assets acquired

Fair value of assets acquired, excluding acquired cash and goodwill

Fair value of liabilities assumed

Common stock issued

See accompanying notes to consolidated financial statements.

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Actual results could differ from these estimates and such differences could be material to the financial statements.

Estimates associated with the allowance for credit losses, pension accounting, provision for income taxes, fair values of financial instruments and status of contingencies

are particularly susceptible to material change in the near term.

Estimates associated with the allowance for credit losses, pension accounting, provision for income taxes, fair values of financial instruments and status of

contingencies are particularly susceptible to material change in the near term.

The following is a description of significant policies and practices:

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

The Company combined ATM

and debit card fees with card related income previously reported in Other noninterest income which is now disclosed as Card services income.

The Company reclassified Data processing and communications expense into Technology and data services

The Company reclassified Equipment expense into Occupancy expense and Technology and data services expense.

In the “Parent Company Financial Information,” the investment in subsidiaries is recorded using the equity method of accounting.

In the “Parent Company

Financial Information,” the investment in subsidiaries is recorded using the equity method of accounting.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable

interest entity under GAAP.

Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the

right to receive residual returns and the right to make decisions about the entity’s activities.

the right to receive residual returns and the right to make decisions about the entity’s activities.

The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest.

As defined in applicable accounting

standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity.

A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the

activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

The Company’s wholly-owned subsidiaries CNBF

Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II are VIEs for which the Company is not the primary beneficiary.

Accordingly, the accounts of these entities are

not included in the Company’s consolidated financial statements.

As defined in applicable

accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity.

A controlling financial interest in a VIE is present when the Company has both the power and ability to

direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

The Company’s wholly-owned

subsidiaries CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II are VIEs for which the Company is not the primary beneficiary.

Accordingly, the accounts of

these entities are not included in the Company’s consolidated financial statements.

Segment Reporting

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services through its subsidiaries such as insurance, retirement plan administration and trust administration.

The Company operates in the geographical regions of central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western

Massachusetts, Vermont, southern Maine and central Connecticut.

The Company operates in the geographical regions of upstate New York, northeastern Pennsylvania, southern New Hampshire, western

Massachusetts, Vermont, southern Maine and central and northwestern Connecticut.

The Company has no reportable operating segments.

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The Company classifies its securities at date of purchase as either held to maturity (“HTM”), available for sale (“AFS”) or equity.

HTM debt securities are those that the

Company has the ability and intent to hold until maturity.

HTM debt securities are those that

the Company has the ability and intent to hold until maturity.

AFS debt securities are securities that are not classified as HTM.

AFS securities are recorded at

AFS securities are recorded

at fair value.

Unrealized holding gains and losses, net of the related tax effect, on AFS securities are excluded from earnings and are reported in the consolidated statements of changes in stockholders’ equity and the consolidated statements of

comprehensive income as a component of accumulated other comprehensive income or loss (“AOCI”).

comprehensive income (loss) as a component of accumulated other comprehensive income (loss) (“AOCI”).

HTM securities are recorded at amortized cost.

Equity securities are recorded at fair value, with net unrealized gains and losses recognized in

Transfers of securities between categories are recorded at fair value at the date of transfer.

Non-marketable equity securities are carried at cost.

Equity securities without readily determinable fair values are carried at cost.

performs a qualitative assessment on equity securities to determine whether the investments are impaired and downward or upward adjustments are recognized through the income statement.

Non-marketable equity securities and equity securities without readily determinable fair values are carried at cost.

The Company performs a qualitative assessment on equity securities to determine whether the investments are impaired and downward or

upward adjustments are recognized through the income statement.

All other equity securities are recorded at fair value, with net unrealized gains and losses recognized in income.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the interest method.

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Allowance for Credit Losses – HTM Debt Securities

With respect to its HTM debt securities, the Company is required to utilize the Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“CECL”) approach to estimate expected credit losses.

Management measures

expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as (as applicable):

internal or external (third-party) credit score or credit ratings, risk ratings or

classification, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry of the borrower, vintage, historical or expected credit loss patterns, and reasonable and supportable forecast periods.

With respect to its HTM debt securities, the Company is required to utilize the Financial Accounting Standards Board (“FASB”) Accounting Standards

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

Measurement of Credit Losses on Financial Instruments (“CECL”) approach to estimate

expected credit losses.

Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as (as applicable):

internal or external (third-party) credit score

or credit ratings, risk ratings or classification, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry of the borrower, vintage, historical or expected credit loss patterns, and reasonable and

supportable forecast periods.

Management classifies the HTM portfolio into the following major security types:

government agency or U.S.

government-sponsored mortgage-backed and collateralized mortgage obligations securities, and state and municipal debt securities.

The mortgage-backed and collateralized mortgage obligations HTM securities are issued by U.S.

government-sponsored mortgage-backed and collateralized mortgage obligations securities, and state and

municipal debt securities.

The HTM mortgage-backed and collateralized mortgage obligations securities are issued by U.S.

government entities and agencies.

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Allowance for Credit Losses – AFS Debt Securities

The impairment model for AFS debt securities differs from the CECL approach utilized for HTM debt securities because AFS debt securities are measured

at fair value rather than amortized cost.

For AFS debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its

amortized cost basis.

The impairment model for AFS debt securities differs from the CECL approach utilized for HTM debt securities because AFS debt securities are

measured at fair value rather than amortized cost.

For AFS debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery

of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, in

making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the

debt security to make scheduled interest or principal payments, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost

basis of the security.

For AFS debt securities that do not meet the aforementioned

criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of

the issuer of the debt security to make scheduled interest or principal payments, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to

the amortized cost basis of the security.

The cash flows should be estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts.

If the present value of

cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Investments in Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock are required for membership in those organizations and are carried at cost since there is no

market value available.

the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the

amortized cost basis.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Investments in Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock are required for membership in those organizations and are carried at cost since there is

no market value available.

The FHLB New York continues to pay dividends and repurchase stock.

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Loan sales are recorded when the sales are funded.

Gains and losses on sales of

loans held for sale are included in other noninterest income in the Consolidated Statements of Income.

Gains and losses on sales

of loans held for sale are included in other noninterest income in the consolidated statements of income.

Mortgage loans held for sale are generally sold with servicing rights retained.

Mortgage servicing rights are recorded at fair value upon sale of the

loan, and are amortized in proportion to and over the period of estimated net servicing income.

Mortgage servicing rights are recorded at fair value upon sale

of the loan, and are amortized in proportion to and over the period of estimated net servicing income.

Loans are recorded at their current unpaid principal balance, net of unearned income and unamortized loan fees and expenses, which are amortized under the effective

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nonaccrual status, all interest previously accrued in the current period but not collected is reversed against interest income in that period.

Interest accrued in a prior period and not collected is charged-off against the allowance for credit losses.

Interest accrued in a prior period and not collected is charged-off against the allowance for credit

If ultimate repayment of a nonaccrual loan is expected, any payments received are applied in accordance with contractual terms.

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expected, any payment received on a nonaccrual loan is applied to principal until ultimate repayment becomes expected.

For all loan classes within the Company’s loan portfolio, nonaccrual loans are returned to accrual status when they become current as

to principal and interest and demonstrate a period of performance under the contractual terms and, in the opinion of management, are fully collectible as to principal and interest.

For loans in all portfolios, the principal amount is charged off in

full or in part as soon as management determines, based on available facts, that the collection of principal in full or in part is improbable.

For Commercial loans, management considers specific facts and circumstances relative to individual credits in

making such a determination.

For Consumer and Residential loan classes, management uses specific guidance and thresholds from the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy.

A loan is considered to be a troubled debt restructuring (“TDR”) when the Company

grants a concession to the borrower because of the borrower’s financial condition that the Company would not otherwise consider.

Such concessions generally include one or a combination of the following:

For all loan classes within the Company’s loan portfolio, nonaccrual loans are returned to accrual status when they become current

as to principal and interest and demonstrate a period of performance under the contractual terms and, in the opinion of management, are fully collectible as to principal and interest.

For loans in all portfolios, the principal amount is charged off

in full or in part as soon as management determines, based on available facts, that the collection of principal in full or in part is improbable.

For Commercial loans, management considers specific facts and circumstances relative to individual

credits in making such a determination.

Management Policy.

Beginning in 2023, with the Company’s adoption of ASU 2022-02, Financial Instru ments - CECL Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), the recognition of a troubled debt restructuring (“TDR”) was

eliminated and instead the Company evaluates borrowers who are experiencing financial difficulty or loan modifications to borrowers experiencing financial difficulties.

When a borrower is experiencing financial difficulties and the Company modifies

a loan, such modifications generally include one or a combination of the following:

an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk;

a change in scheduled payment

or principal forgiveness.

Modifications to borrowers experiencing financial difficulty may be different from those previously disclosed in TDR disclosures since the Company is no longer required to determine if a concession has been

granted, which was a requirement to determine whether a loan modification was considered to be a TDR.

Historically, a TDR would generally include one or a

combination of the following:

an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk;

a temporary reduction in the interest rate;

or a change in scheduled payment

TDR loans are nonaccrual loans;

however, they can be returned to accrual status after a period of performance, generally evidenced by six months

or a change in scheduled payment amount.

loans were nonaccrual loans;

however, they could be returned to accrual status after a period of performance, generally evidenced by six months

of compliance with their modified terms.

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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).

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.

The allowance for credit losses is

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

Loan losses are charged off against the allowance when management believes a loan

balance is confirmed to be uncollectible.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

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

and reasonable and supportable forecasts that affect the collectability of the reported amounts.

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

current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

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

The Company then considers whether the historical loss

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

Adjustments to historical loss information is made for

differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term as well as changes in environmental conditions, such as changes in unemployment rates, production metrics,

property values, or other relevant factors.

The Company then considers whether

the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience is used.

Adjustments to historical loss

information is made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term as well as changes in environmental conditions, such as changes in unemployment

rates, production metrics, property values, or other relevant factors.

Company historical loss experience is supplemented with peer information when there is insufficient loss data for the Company.

Peer selection is based on a review of institutions with comparable loss

experience as well as loan yield, bank size, portfolio concentration and geography.

Peer selection is based on a review of institutions

with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography.

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

Significant management judgment is required at various

points in the measurement process.

Significant management judgment is

required at various points in the measurement process.

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

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.

The following table illustrates the portfolio and class segments for the Company’s loan portfolio:

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.

During 2023, the Company made adjustments to the class segments within the portfolios to better align risk characteristics and reflect the

monitoring and assessment of risks as the portfolios continue to evolve.

Paycheck Protection Program was consolidated with Commercial & Industrial, as the portfolio had decreased to less than $ 1 million and no longer warranted a material class segment.

The Other Consumer class segment was further separated into Residential Solar and Other Consumer.

The growth in our

Residential Solar loans warranted evaluation of this class separately from the Other Consumer class segments.

The change to the class segments was applied retrospectively and did not have a significant impact on the allowance for loan losses.

The following

table illustrates the portfolio and class segments for the Company’s loan portfolio:

Portfolio Segment

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Commercial & Industrial

Paycheck Protection Program

Commercial Real Estate

Consumer Loans

Residential Solar

Other Consumer

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verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows.

Commercial and Industrial (“C&I”) – The Company offers a

variety of loan options to meet the specific needs of our C&I customers including term loans, time notes and lines of credit.

Such loans are made available to businesses for working capital needs and are typically collateralized by business assets

such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility.

To reduce these risks, management also attempts to obtain personal guarantees of the owners or to obtain government loan

guarantees to provide further support.

Paycheck Protection Program (“PPP”) – Section 1102 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) created the Paycheck Protection Program, a program administered by the Small Business Administration (the “SBA”) to

provide loans to small businesses for payroll and other basic expenses during the coronavirus (“COVID-19”) pandemic.

The Company has been a participant in the PPP as a lender.

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

guarantee is backed by the full faith and credit of the United States government.

PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain

workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied.

The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will

not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness.

Lenders receive pre-determined fees for processing and servicing PPP loans.

In addition, PPP loans are risk-weighted at zero

percent under the generally applicable Standardized Approach used to calculate risk-weighted assets for regulatory capital purposes.

The Company processed approximately 6,100 loans totaling $ 835 million in relief.

As of December 31, 2022 total forgiveness and paydown is

equal to 99 % of the original balance.

Commercial and Industrial (“C&I”) – The Company offers

a variety of loan options to meet the specific needs of our C&I customers including term loans, time notes and lines of credit.

Such loans are made available to businesses for working capital needs and are typically collateralized by business

assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility.

To reduce these risks, management also attempts to obtain personal guarantees of the owners or to obtain government

loan guarantees to provide further support.

Commercial Real Estate (“CRE”) – The Company offers CRE

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properties, such as apartments, commercial structures, health care facilities and other facilities.

The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed

analysis of the borrower’s underlying cash flows.

These loans are typically originated in amounts of no more than 80 % of the appraised value

of the property.

The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a

detailed analysis of the borrower’s underlying cash flows.

These loans are typically originated in amounts of no more than 80 % of the

appraised value of the property.

Government loan guarantees may be obtained to provide further support for agricultural property.

Consumer Loans

The Company offers a variety of Consumer loan products including Auto and Other Consumer loans.

The Company offers a variety of Consumer loan products including Auto, Residential Solar and Other Consumer loans.

Auto – The Company provides both direct and indirect

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relationships.

Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to six years , based upon the nature of the collateral and the size of the loan.

Other Consumer – The Other Consumer loan segment consists primarily of unsecured consumer loans, residential solar loans and direct consumer loans.

The Company offers unsecured consumer loans across a national footprint originated through our

relationships with national technology-driven consumer lending companies to finance such things as dental and medical procedures, K-12 tuition, solar energy installations and other consumer purpose loans.

Advances of credit through this business

line are subject to the Company’s underwriting standards including criteria such as FICO score and debt to income thresholds.

In 2017, the Company partnered with Sungage Financial, Inc.

to offer financing to consumers for solar ownership with the

program tailored for delivery through solar installers.

Auto loans are secured with collateral consisting of a perfected lien on the vehicle being purchased.

Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to six years , based upon the nature

of the collateral and the size of the loan.

Solar – The Company offers loans across a national

footprint originated through our relationships with national technology-driven consumer lending companies to finance the purchase and installation of residential solar energy.

Advances of credit through this business line are subject to the

Company’s underwriting standards including criteria such as FICO score and debt to income thresholds.

In 2017, the Company partnered with Sungage Financial, LLC.

to offer financing to consumers for solar ownership with the program tailored for

delivery through solar installers.

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

Typically, the Company collects origination fees that are deferred

and recognized into interest income over the estimated life of the loan.

Residential solar loans carry a fixed rate of interest with principal repayment terms

typically ranging from five to twenty-five

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

Other Consumer – The Other Consumer loan segment consists primarily of unsecured consumer loans and direct consumer loans.

The Company offers unsecured consumer loans across a national footprint originated through our relationships with

national technology-driven consumer lending companies to finance such things as dental and medical procedures, K-12 tuition and other consumer purpose loans.

Advances of credit through this business line are subject to the Company’s underwriting

standards including criteria such as FICO score and debt to income thresholds.

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

Typically, the Company collects

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

The Company offers a variety of direct consumer installment loans to finance various personal expenditures.

In addition to installment loans, the Company also offers personal

lines of credit, overdraft protection, debt consolidation, education and other uses.

Direct consumer installment loans carry a fixed rate of interest with principal repayment terms typically ranging from one to fifteen years , based upon the nature of the collateral

and the size of the loan.

In addition to installment

loans, the Company also offers personal lines of credit, overdraft protection, debt consolidation, education and other uses.

Direct consumer installment loans carry a fixed rate of interest with principal repayment terms typically ranging from one to fifteen years , based upon the

nature of the collateral and the size of the loan.

Consumer installment loans are often secured with collateral consisting of a perfected lien on the asset being purchased or a perfected lien on a consumer’s deposit account.

Risk is reduced through underwriting criteria,

which include credit verification, appraisals, a review of the borrower’s financial condition and personal cash flows.

A security interest, with title insurance when necessary, is taken in the underlying real estate.

Risk is reduced

through underwriting criteria, which include credit verification, appraisals, a review of the borrower’s financial condition and personal cash flows.

A security interest, with title insurance when necessary, is taken in the underlying real

Residential loans consist primarily of loans secured by a first or second mortgage on primary residences, home equity loans and lines of credit in

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Mortgage title insurance and hazard insurance are normally required.

Construction loans have

a unique risk because they are secured by an incomplete dwelling.

Construction loans have a unique risk because

they are secured by an incomplete dwelling.

This risk is reduced through periodic site inspections, including one at each loan draw period.

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

These loans carry a higher

risk than first mortgage residential loans as they are often in a second position with respect to collateral.

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

draw followed by a fifteen-year amortization.

These loans carry a higher risk than first mortgage residential loans as they are often in a

second position with respect to collateral.

Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimation of expected credit losses,

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relationships between the two variables for each asset class, primarily due to the nature of the underlying collateral.

These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when the

relationship between the Company’s historical default and loss severity deviate from that of the wider industry.

These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when

the relationship between the Company’s historical default and loss severity deviated from that of the wider industry.

The historical PD curves, together with corresponding economic conditions, establish a quantitative relationship between economic

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interest rate.

The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:

management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower

or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

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

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

The contractual term excludes expected extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by

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

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

Qualitative considerations include limitations inherent in the quantitative model;

trends experienced in nonperforming and delinquent loans;

changes in value of

underlying collateral;

changes in value

of underlying collateral;

changes in lending policies and procedures;

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portfolio concentrations that may affect loss experience across one or more components of the portfolio;

the experience, ability and depth of lending

management and staff;

the experience, ability and depth of

lending management and staff;

the Company’s credit review system;

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such as competition, legal and regulatory requirements.

Loans that do not share risk characteristics and meet materiality criteria are evaluated on an individual basis and are excluded from the pooled

When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

If the loan is not collateral dependent, the

allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate.

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.

When management determines that foreclosure is probable, expected credit

losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on

discounted expected cash flows using the loan’s initial effective interest rate.

Generally, individually assessed loans are collateral dependent.

A loan for which the terms have been modified resulting in a concession, and for

which the borrower is experiencing financial difficulties is considered to be a TDR.

The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used

to discount the expected cash flows, not the rate specified within the restructuring.

If the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral, then management uses the current fair value of the

collateral, less selling costs.

If management determines that the value of the modified loan is less than the recorded investment in the loan, a write-down would be recorded .

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 credit losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense.

The estimate includes consideration of

the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives.

Estimating credit losses on unfunded commitments requires the Bank to consider the following categories of

off-balance sheet credit exposure:

The estimate includes

consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives.

Estimating credit losses on unfunded commitments requires the Bank to consider the

following categories of off-balance sheet credit exposure:

unfunded commitments to extend credit, unfunded lines of credit and standby letters of credit.

Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount.

Each of these unfunded commitments is then analyzed for a probability of funding to calculate a

probable funding amount.

The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate a reserve on unfunded commitments.

Accrued Interest Receivable

Accrued interest receivable balances are presented separately within other assets balance sheet line item.

The Company has excluded interest

receivable that is included in amortized cost of financing receivables from related disclosures requirements and accrued interest receivable is written off by reversing interest income.

Accrued interest receivable balances are included in other assets on the consolidated balance sheets.

The Company has excluded interest receivable

that is included in amortized cost of financing receivables from related disclosure requirements and accrued interest receivable is written off by reversing interest income.

For loans, write off typically occurs upon becoming over 90 to 120 days past due and therefore the

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The Company determines if a lease is present at the inception of an agreement.

Right-of-use (“ROU”) assets and lease liabilities are recognized at lease commencement based

on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date.

ROU assets and operating lease liabilities, are included in other assets and other

liabilities, respectively, on the consolidated balance sheets .

Right-of-use (“ROU”) assets and lease liabilities are recognized at lease commencement

based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date.

ROU assets and operating lease liabilities, are included in other assets and

other liabilities, respectively, on the consolidated balance sheets .

Leases with original terms of 12 months or less are recognized in profit or loss on a

straight-line basis over the lease term.

Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make

lease payments arising from the lease.

Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to

make lease payments arising from the lease.

ROU assets are further adjusted for lease incentives.

Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized

on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statements of income .

Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is

recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statements of income .

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.

For real estate leases, non-lease components and other

non-components, such as common area maintenance charges, real estate taxes and insurance are not included in the measurement of the lease liability since they are generally able to be segregated.

Our leases relate primarily to office space and bank

branches, and some contain options to renew the lease.

These options to renew are generally not considered reasonably certain to exercise, and are therefore not included in the lease term until such time that the option to renew is reasonably certain.

For real estate leases, non-lease components and

other non-components, such as common area maintenance charges, real estate taxes and insurance are not included in the measurement of the lease liability since they are generally able to be segregated.

Our leases relate primarily to office space and

bank branches, and some contain options to renew the lease.

These options to renew are generally not considered reasonably certain to exercise, and are therefore not included in the lease term until such time that the option to renew is reasonably

Other Real Estate Owned

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market value of the assets received, less estimated selling costs, is charged to the allowance for loan losses and any subsequent valuation write-downs are charged to other expense.

In connection with the determination of the allowance for loan losses

and the valuation of OREO, management obtains appraisals for properties.

In connection with the determination of the allowance for loan

losses and the valuation of OREO, management obtains appraisals for properties.

Operating costs associated with the properties are charged to expense as incurred.

Gains on the sale of OREO are included in income when title has passed and the sale has met the

minimum down payment requirements prescribed by GAAP.

Gains on the sale of OREO are included in income when title has passed and the sale has

met the minimum down payment requirements prescribed by GAAP.

The balance of OREO is recorded in other assets on the consolidated balance sheets.

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Intangible assets that have indefinite useful lives are not amortized, but are tested at least annually for impairment.

Intangible assets that have finite useful lives are

amortized over their useful lives.

Intangible assets that have finite useful lives

are amortized over their useful lives.

Core deposit intangibles and trust intangibles at the Company are amortized using the sum-of-the-years’-digits method.

Covenants not to compete are amortized on a straight-line basis.

Customer lists are amortized

using an accelerated method.

When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the asset carrying value, using estimates of undiscounted future cash flows over the

remaining asset life.

Customer lists are

amortized using an accelerated method.

flows over the remaining asset life.

Any impairment loss is measured by the excess of carrying value over fair value.

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The Bank has purchased life insurance policies on certain employees, key executives and directors.

Bank-owned life insurance is recorded at the amount that can be realized

under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Bank owned life insurance is recorded at the amount that can be

realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Treasury Stock

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between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those

temporary differences are expected to be recovered or settled.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which

those temporary differences are expected to be recovered or settled.

The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes interest accrued and penalties related

to unrecognized tax benefits in income tax expense.

Tax positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being

presumed to occur.

A valuation allowance, if needed, reduces deferred tax

assets to the amount expected to be realized.

The realization of deferred tax assets is primarily dependent upon the generation of adequate future taxable income.

The Company recognizes interest accrued and penalties related to unrecognized tax

benefits in income tax expense.

Tax positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination

being presumed to occur.

The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination.

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to certain current and former executives and a defined benefit postretirement healthcare plan that covers certain employees.

Costs associated with these plans, based on actuarial computations of current and future benefits for employees, are charged to

current operating expenses.

Costs associated with these plans, based on actuarial computations of current and future benefits for employees, are charged

to current operating expenses.

Stock-Based Compensation

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Comprehensive Income (Loss)

At the Company, comprehensive income (loss) represents net income plus OCI, which consists primarily of the net change in unrealized gains (losses) on AFS debt securities

for the period, changes in the funded status of employee benefit plans and unrealized gains (losses) on derivatives designated as hedging instruments.

AOCI represents the net unrealized gains (losses) on AFS debt securities, the previously unrecognized

portion of the funded status of employee benefit plans and the fair value of instruments designated as hedging instruments, net of income taxes, as of the consolidated balance sheet dates.

At the Company, comprehensive income (loss) represents net income plus OCI, which consists primarily of the net change in unrealized gains (losses) on AFS debt

securities for the period, changes in the funded status of employee benefit plans and unrealized gains (losses) on derivatives designated as hedging instruments.

AOCI represents the net unrealized gains (losses) on AFS debt securities, the previously

unrecognized portion of the funded status of employee benefit plans and the fair value of instruments designated as hedging instruments, net of income taxes, as of the consolidated balance sheet dates.

Derivative Instruments and Hedging Activities

The Company records all derivatives on the balance sheet at fair value.

The accounting for changes in the fair value of derivatives depends on the intended use of the

derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.

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.

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 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.

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.

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For derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are reported in OCI.

When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized

in the consolidated statements of income.

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

recognized in the consolidated statements of income.

When the Company purchases or sells a portion of a commercial loan that has an existing interest rate swap, it may enter into a risk participation agreement to provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation.

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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.

Credit risk on the risk participation agreements is determined after considering the risk rating, probability of default

and loss given default of the counterparties.

Business Combinations

combinations are accounted for under the acquisition method of accounting.

Acquired assets, including separately identifiable intangible assets, and assumed liabilities are recorded at their acquisition date estimated fair values.

The excess of

the cost of acquisition over these fair values is recognized as goodwill.

During the measurement period, which cannot exceed one year from the acquisition date, changes to estimated fair values are recognized as an adjustment to goodwill.

Certain transaction costs are expensed as incurred.

See Note 3 for additional information.

Fair Value Measurements

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The three levels of the fair value hierarchy are described below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or

indirectly, for substantially the full term of the asset or liability;

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted

assets or liabilities;

Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly

or indirectly, for substantially the full term of the asset or liability;

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no

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reported at fair value utilizing Level 1 and Level 2 inputs.

The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales

of investment securities.

The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and

sales of investment securities.

Prices obtained from these sources include prices derived from market quotations and matrix pricing.

The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S.

The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the

Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Management reviews the methodologies used in pricing the securities by its

third-party providers in pricing the securities.

Management reviews the methodologies used in pricing the securities

by its third-party providers in pricing the securities.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions.

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Other Financial Instruments

The Company is a party to certain instruments with off-balance-sheet risk such as commitments to extend credit, unused lines of credit, standby letter of credit and

certain agricultural real estate loans sold to investors with recourse.

The Company is a party to certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.

financial instruments include commitments to extend credit, unused lines of credit, standby letter of credit and certain agricultural real estate loans sold to investors with recourse.

The Company’s policy is to record such instruments when funded.

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The Company typically receives a fee for these transactions.

The fair value of standby letters of credit is recorded upon

The fair value of standby letters of credit is recorded upon inception.

Repurchase Agreements

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Revenue from Contracts with Customers

Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification (“ASC”) Topic 606) (“ASC 606” and “ASU 2014-09”), and all subsequent ASUs that modified ASC

The implementation of ASC 606 did not have a material impact on the measurement or recognition of revenue;

as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

ASC 606 does not apply to revenue associated

with financial instruments, including revenue from loans and securities and certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives and certain credit card fees are also not in scope.

ASC 606 is applicable to noninterest revenue streams such as retirement plan administration fees, trust and asset management income, deposit related fees and annuity and insurance commissions;

however, the recognition of these revenue streams did not

change significantly upon adoption of ASC 606.

The Company recognizes revenue in accordance with ASU 2014-09, Revenue

from Contracts with Customers (Accounting Standards Codification (“ASC”) Topic 606) (“ASC 606”), and all subsequent ASUs that modified ASC 606.

ASC 606 does not apply to revenue associated with financial instruments, including revenue from

loans and securities and certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives and certain credit card fees are also not in scope.

ASC 606 is applicable to noninterest revenue

streams such as retirement plan administration fees, trust and asset management income, deposit related fees and annuity and insurance commissions.

Noninterest revenue streams in-scope of ASC 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of overdraft fees, monthly service fees, check orders and other deposit account related fees.

Overdraft, monthly service, check

orders and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Payment for service charges on deposit accounts is primarily

received immediately or in the following month through a direct charge to customers’ accounts.

Overdraft, monthly service,

check orders and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Payment for service charges on deposit accounts is

primarily received immediately or in the following month through a direct charge to customers’ accounts.

Card Services Income

ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM.

Debit card income is primarily comprised

of interchange fees earned whenever the Company’s debit cards are processed through card payment networks.

The Company’s performance obligations for these revenue streams are satisfied, and related revenue recognized, when the services are rendered or

upon completion.

Debit card income is primarily

comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks.

The Company’s performance obligations for these revenue streams are satisfied, and related revenue recognized, when the services are

rendered or upon completion.

Payment is typically received immediately or in the following month.

Retirement Plan Administration Fees

Retirement plan administration fees are primarily generated for services related to the recordkeeping, administration and plan design solutions of defined benefit, defined

contribution and revenue sharing plans.

Retirement plan administration fees are primarily generated for services related to the recordkeeping, administration and plan design solutions of defined benefit,

defined contribution and revenue sharing plans.

Revenue is recognized in arrears for services already provided in accordance with fees established in contracts with customers or based on rates agreed to with investment trade platforms based on ending

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comprised of fees earned from the management and administration of trusts, pensions and other customer assets.

The Company’s performance obligation is generally satisfied with the resulting fees recognized monthly, based upon services completed or the

month-end market value of the assets under management and the applicable fee rate.

The Company’s performance obligation is generally satisfied with the resulting fees recognized monthly, based upon services completed or

the month-end market value of the assets under management and the applicable fee rate.

Payment is generally received shortly after services are rendered or a few days after month end through a direct charge to customers’ accounts.

The Company does not earn

performance-based incentives.

The Company does

not earn performance-based incentives.

Financial services revenue primarily consists of commissions received on brokered investment product sales.

For other financial services revenue, the Company’s performance obligation is generally satisfied upon the

issuance of the annuity policy.

For other financial services revenue, the Company’s performance obligation is generally satisfied upon

the issuance of the annuity policy.

Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue.

The Company does not earn a significant amount of trailing commission fees on brokered

investment product sales.

The Company does not earn a significant amount of trailing commission fees on

brokered investment product sales.

The majority of the trailing commission fees are calculated based on a percentage of market value of a period end and revenue is recognized when an investment product’s market value can be determined.

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date of the policy.

The Company earns performance based incentives, commonly known as contingency payments, which usually are based on certain criteria established by the insurance carrier such as premium volume, growth and insured loss ratios.

The Company earns performance based incentives, commonly known as contingent payments, which usually are based on certain criteria established by the insurance carrier such as premium volume, growth and insured loss ratios.

Contingent payments are accrued for based upon management’s expectations for the year.

Commission expense associated with sales of insurance products is expensed as incurred.

The Company does not earn a significant amount of trailing commission fees on

insurance product sales.

The Company does not earn a significant amount of trailing commission fees

on insurance product sales.

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The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.

The Company elected the practical

expedient, which allows immediate expensing of contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less, and did not capitalize any contract acquisition costs upon

adoption of ASC 606 as of or during the year ended December 31, 2022, 2021 and 2020.

The Company elected the

practical expedient, which allows immediate expensing of contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less, and did not capitalize any contract acquisition

costs as of or during the year ended December 31, 2023, 2022 and 2021.

Trust Operations

Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the accompanying consolidated balance sheets, since such assets are not

assets of the Company.

Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the accompanying consolidated balance sheets, since such assets are

not assets of the Company.

Subsequent Events

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Recently Adopted Accounting Standards

In March 2020, the FASB issued ASU 2020-04, Reference Rate

Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

On January 7, 2021, the FASB issued ASU 2021-01, which refines the scope of Topic 848 and clarifies some of its guidance.

ASU 2020-04 and

related amendments provide temporary optional expedients and exceptions to the existing guidance for applying GAAP to affected contract modifications and hedge accounting relationships in the transition away from the London Interbank Offered

Rate (“LIBOR”) or other interbank offered rates on financial reporting.

The guidance also allows a one-time election to sell and/or reclassify to AFS or trading HTM debt securities that reference an interest rate affected by reference rate

The amendments in this ASU are effective March 12, 2020 through December 31, 2022 and permits relief solely for reference rate reform actions and permits different elections over the effective date for legacy and new activity.

In December 2020, the FASB issued ASU 2022-06, Reference Rate

Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 .

The ASU extends the period of time companies can utilize the reference rate reform relief guidance provided by ASU 2020-04 and ASU 2021-01.

The guidance which was effective

upon issuance, defers the sunset date from December 31, 2022 to December 31, 2024, after which companies will no longer be permitted to apply the relief guidance in Topic 848.

The adoption did not have a material impact on the consolidated

financial statements and related disclosures.

Accounting Standards Issued Not Yet Adopted

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - CECL Losses (Topic 326):

2022, the FASB issued ASU 2022-02, Financial Instruments - CECL Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures.

The ASU eliminates

the guidance on Troubled Debt Restructurings (“TDRs”) and requires an evaluation on all loan modifications to determine if they result in a new loan or a continuation of the existing loan.

The ASU also requires that entities disclose

current-period gross charge-offs by year of origination.

The elimination of the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously

modified, resulting in a cumulative effect adjustment to retained earnings in the period of adoption for changes in the allowance for credit losses.

The amendments in this ASU are effective for the Company on January 1, 2023, with early adoption

The adoption is not expected to have a material impact on the consolidated financial statements and related disclosures.

In 2020, the Company acquired Alliance Benefit Group of Illinois, Inc.

for a total consideration of $ 9.1 million.

As part of the acquisition, the Company recorded goodwill of $ 5.8

million and $ 5.1 million of contingent consideration recorded in other liabilities on the consolidated balance sheet as of December 31,

The operating results of acquired companies are included in the consolidated results after the dates of acquisition.

Pending Acquisition of Salisbury Bancorp, Inc.

On December 5, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Salisbury Bancorp, Inc.

(“Salisbury”), Salisbury Bank and Trust Company (“Salisbury Bank”), Salisbury’s subsidiary bank, and NBT Bank, the Company’s subsidiary bank, pursuant to which the Company will acquire Salisbury.

Salisbury, with assets of approximately $ 1.54 billion at December 31, 2022, is headquartered in Lakeville, Connecticut.

Its primary subsidiary, Salisbury Bank, is a Connecticut chartered

commercial bank with 14 banking locations in northwestern Connecticut, the Hudson Valley region of New York and southwestern

Massachusetts.

Subject to the terms and conditions of the Merger Agreement, which has been approved by the boards of directors of each party, Salisbury will

merge with and into the Company, with the Company as the surviving entity, and immediately thereafter, Salisbury Bank will merge with and into NBT Bank, with NBT Bank as the surviving bank (the “Merger”).

Under the terms of the Merger Agreement, each outstanding share of Salisbury common stock will be converted into the right to receive 0.7450 shares of the Company’s common stock.

The Merger is subject to customary closing conditions, including the receipt of regulatory approvals and

approval by the stockholders of Salisbury, and is expected to close in the second quarter of 2023.

The ASU eliminates the guidance on TDRs and requires an

evaluation on all loan modifications to determine if they result in a new loan or a continuation of the existing loan.

The ASU also requires that entities disclose current-period gross charge-offs by year of origination.

The elimination of

the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously modified, resulting in a cumulative effect adjustment to retained earnings in

the period of adoption for changes in the allowance for credit losses.

The amendments in this ASU are effective for the Company on January 1, 2023, with early adoption permitted.

The Company adopted ASU 2022-02 on January 1, 2023 using the

modified retrospective method and recorded a net increase to retained earnings of $ 0.5 million.

The transition adjustment includes

a $ 0.6 million impact to the allowance for credit losses on loans and a $ 0.1 million impact to the deferred tax asset.

Accounting Standards Issued Not Yet Adopted

In October 2023, the

FASB issued ASU 2023-06, Disclosure Improvements , which amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification.

The ASU was issued in

response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were redundant, duplicative, overlapping, outdated, or superseded.

The new guidance is intended to align GAAP requirements with

those of the SEC.

The ASU will become effective on the earlier of the date on which the SEC removes its disclosure requirements for the related disclosure or June 30, 2027.

Early adoption is not permitted.

The adoption, other than to meet the new

disclosure requirements, is not expected to have a material impact on the consolidated financial statements.

2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures , that addresses requests for improved income tax disclosures from investors, lenders, creditors and other allocators of capital

that use the financial statements to make capital allocation decisions.

The ASU requires enhanced disclosures primarily related to existing rate reconciliation and income taxes paid information to help investors better assess how the Company’s

operations and related tax risks and tax planning and operational opportunities affect the Company’s tax rate and prospects for future cash flows.

The ASU 2023-09 improves the transparency of income tax.

The amendments in this ASU are effective

for the Company on January 1, 2025 and should be applied on a prospective basis.

Retrospective application and early adoption are permitted.

The adoption, other than to meet the new disclosure requirements, is not expected to have a material

impact on the consolidated financial statements.

Salisbury Bancorp, Inc.

On August 11, 2023, the Company completed the acquisition of Salisbury Bancorp, Inc.

(“Salisbury”) through the merger of Salisbury with and into the

Company, with the Company surviving the merger, for $ 161.7 million in stock.

Salisbury Bank and Trust Company, Salisbury’s wholly-owned

bank subsidiary, was a Connecticut-chartered commercial bank headquartered in Lakeville, Connecticut with 13 banking offices.

acquisition enhances the Company’s presence in Massachusetts’ Berkshire county, and extends its footprint into New York’s Dutchess, Orange and Ulster counties and Connecticut’s Litchfield county.

In connection with the acquisition, the Company issued

4.32 million shares and acquired approximately $ 1.46 billion of identifiable assets.

Goodwill of $ 79.7 million was recognized as a result of the merger

and is not amortizable or deductible for tax purposes.

During the fourth quarter of 2023, the Company revised the estimated fair value of premises and equipment, net and related deferred income taxes based upon receipt of land and building

appraisals, which resulted in a $ 1.7 million increase in goodwill.

The effects of the acquired assets and liabilities have been included in

the consolidated financial statements since that date.

As a result of the full integration of the operations of Salisbury, it is not practicable to determine all revenue or net income included in the Company’s operating results relating to Salisbury

since the date of acquisition as Salisbury results cannot be separately identified.

The Company determined that this acquisition constitutes a business combination and therefore was accounted for using the acquisition method of

Accordingly, as of the date of the acquisition, the Company recorded the assets acquired, liabilities assumed and consideration paid at fair value based on management’s best estimates using information available at the date of the

acquisition and these estimates are subject to adjustment based on updated information not available at the time of the acquisition.

The amount of goodwill arising from the acquisition consists largely of the synergies and economies of scale expected

from combining the operations of the Company with Salisbury.

Accrued income taxes and deferred taxes associated with the Salisbury acquisition were recorded on a provisional basis and could vary from the actual recorded balance and tax provisions

when returns are finalized.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed:

August 11, 2023

(In thousands)

Salisbury Bancorp, Inc.

Consideration:

Cash paid to shareholders (fractional shares)

Common stock issuance

Total net consideration

Recognized amounts of identifiable assets acquired and (liabilities) assumed:

Cash and cash equivalents

Securities available for sale

Loans, net of allowance for credit losses on purchased credit deteriorated loans

Premises and equipment, net

Core deposit intangibles

Wealth management customer intangible

Bank owned life insurance

Total identifiable assets acquired

Other liabilities

Total liabilities assumed

Total identifiable assets, net

The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed.

The Company used an independent valuation specialist

to assist with the determination of fair values for certain acquired assets and assumed liabilities.

Cash and due from banks - The estimated fair value was determined to approximate the carrying amount of these assets.

Securities available for sale - The estimated fair value of the investment portfolio was based on quoted market prices and dealer quotes.

The investment securities were sold

immediately after the acquisition and no gains or losses were recorded.

Loans - The estimated fair value of loans were based on a discounted cash flow methodology applied on a pooled basis for non-purchased credit deteriorated (“non-PCD”) loans and for

purchased credit deteriorated (“PCD”) loans.

The valuation considered underlying characteristics including loan type, term, rate, payment schedule and credit rating.

Other factors included assumptions related to prepayments, probability of

default and loss given default.

The discount rates applied were based on a build-up approach considering the funding mix, servicing costs, liquidity premium and factors related to performance risk.

Core deposit intangible - The core deposit intangible was valued utilizing the cost savings method approach, which recognizes the cost savings represented by the expense of

maintaining the core deposit base versus the cost of an alternative funding source.

The valuation incorporates assumptions related to account retention, discount rates, deposit interest rates, deposit maintenance costs and alternative funding

Wealth management customer intangible - The wealth management customer intangible was valued utilizing the income approach, which employs a present value analysis, which

calculates the expected after-tax cash flow benefits of the net revenues generated by the acquired customers over the expected lives of the acquired customers, discounted at a long-term market-oriented after-tax rate of return on investment.

value assigned to the acquired customers represents the future economic benefit from acquiring the customers (net of operating expenses).

Deposits - The fair value of noninterest bearing demand deposits, interest checking, money market and savings deposit accounts from Salisbury were assumed to approximate the

carrying value as these accounts have no stated maturity and are payable on demand.

Certificate of deposit (time deposit accounts) were valued at the present value of the certificates’ expected contractual payments discounted at market rates for

similar certificates.

Borrowings - The estimated fair value of short-term borrowings was determined to approximate stated value.

Subordinated debt was valued using a discounted cash flow approach

incorporating a discount rate that incorporated similar terms, maturity and credit rating.

Accounting for Acquired Loans - Acquired loans are classified into two categories:

PCD loans and non-PCD loans.

PCD loans are defined

as a loan or group of loans that have experienced more than insignificant credit deterioration since origination.

Non-PCD loans will have an allowance established on the acquisition date, which is recognized as an expense through the provision

for credit losses.

For PCD loans, an allowance is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost”.

There is no provision for credit loss expense recognized on PCD loans because the initial

allowance is established by grossing-up the amortized cost of the PCD loan.

A day 1 allowance for credit losses on non-PCD loans of $ 8.8

million was recorded through the provision for loan losses within the unaudited interim consolidated statements of income.

following table provides details related to the fair value of acquired PCD loans.

(In thousands)

Par value of PCD loans at acquisition

Allowance for credit losses at acquisition

Discount at acquisition

Fair value of PCD loans at acquisition

Direct costs related to the acquisition were expensed as incurred.

integration-related expenses were $ 10.0 million and $ 1.0 million during the years ended 2023 and 2022, respectively.

These amounts have been separately stated in the consolidated statements of income and are included in operating activities in the consolidated

statements of cash flows.

Supplemental Pro Forma Financial Information (Unaudited)

The following table presents certain

unaudited pro forma financial information for illustrative purposes only, for the years ended December 31, 2023 and 2022, as if Salisbury had been acquired on January 1, 2022.

This unaudited pro forma information combines the historical results

of Salisbury with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods.

The pro forma information is not indicative of what

would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition.

The unaudited pro forma information does not consider any changes to the provision expense resulting from recording loan assets at fair

value, cost savings or business synergies.

As a result, actual amounts would have differed from the unaudited pro forma information presented and the differences could be significant.

Pro Forma (Unaudited)

Years Ended December 31,

(In thousands)

Total revenue, net of interest expense

Other Acquisitions

July 2023, the Company, through its subsidiary, EPIC Advisors Inc., completed its acquisition of certain assets of Retirement Direct, LLC, a retirement plan administration business based near Charlotte, North Carolina for a total consideration of

$ 2.8 million.

As part of the acquisition, the Company recorded goodwill of $ 0.9 million and $ 1.0 million contingent consideration recorded

in other liabilities on the consolidated balance sheet as of December 31, 2023.

operating results of the acquired company is included in the consolidated results after the date of acquisition.

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

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securities as of December 31, 2023 and 2022.

The components of net realized gains (losses) on AFS securities are as follows.

Years Ended December 31,

(In thousands)

Gross realized gains

Gross realized (losses)

N et AFS realized gains (losses)

The Company had no net realized gains (losses) on AFS securities for the years ended December 31, 2022 and 2021.

Included in net realized gains (losses) on AFS securities, the Company recorded gains from

calls of approximately $ 3 thousand for the year ended December 31, 2020, which were reclassified out of AOCI and into earnings .

During the year ended December 31, 2023, there were $ 4.5 million of gross realized losses

reclassified out of AOCI and into earnings and the Company incurred a $ 5.0 million loss on the write-off of an AFS corporate debt

security from a subordinated debt investment of a financial institution that failed.

These losses were reclassified out of AOCI and into earnings in net securities losses in the consolidated statements of income.

During the years ended December 31,

2022 and 2021, there were no gains or losses reclassified out of AOCI and into earnings.

The amortized cost, estimated fair value and unrealized gains (losses) of HTM securities are as follows:

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Total HTM securities

At December 31, 2022 and 2021, all of the mortgaged-backed HTM securities were comprised of U.S.

At December 31, 2023 and

2022, all of the mortgaged-backed HTM securities were comprised of U.S.

government agency and government-sponsored enterprises securities.

was no allowance for credit losses on HTM securities as of December 31, 2022 and 2021 because the expectation of nonrepayment of the amortized cost is zero, except for state & municipal securities, which such expected losses from nonrepayment are immaterial.

Included in net realized gains (losses), the Company recorded gains from calls on HTM

securities of approximately $ 4 thousand for

the year ended December 31, 2022, approximately $ 29 thousand for the year ended December 31, 2021 and approximately $ 24 thousand for the year ended D ecember 31, 2020 .

During the year ended December 31, 2020, the Company sold HTM securities with an amortized cost of $ 1.0 million and resulted in a realized loss of $ 1 thousand.

significant deterioration in the creditworthiness of the issuer of the HTM securities, the circumstances caused the Company to change its intent to hold the HTM securities sold to maturity, which did not affect the Company’s intent to hold the

remainder of the HTM portfolio to maturity.

There were no sales of HTM securities in the years ended December 31, 2022 and 2021.

AFS and HTM securities with amortized costs totaling $ 1.73 billion at December 31, 2022 and $ 1.63 billion at D ecember 31, 2021 were pledged to secure public deposits and for other purposes required or permitted by law.

Additionally,

at D ecember 31, 2022 and 2021, AFS and HTM securities with an amortized cost of $ 149.5 million and $ 162.1 million, respectively, were pledged as collateral for securities sold under repurchase agreements.

The following table set forth information with regard to gains and (losses) on equity securities:

allowance for credit losses on HTM securities as of December 31, 2023 and 2022 because the expectation of nonrepayment of the amortized cost is zero, except for state & municipal securities, which such expected

losses from nonrepayment were immaterial.

The Company recorded no gains from calls on HTM securities for year ended December 31,

Included in net securities (losses) gains, the Company recorded gains from calls on HTM securities of approximately $ 4 thousand for

the year ended December 31, 2022 and approximately $ 29 thousand for the year ended December 31, 2021.

AFS and HTM securities with amortized costs totaling $ 2.03 billion at December 31, 2023 and $ 1.73

billion at December 31, 2022 were pledged to secure public deposits and for other purposes required or permitted by law.

Additionally, at December 31, 2023 and 2022, AFS and HTM securities with an amortized cost of $ 177.2 million and $ 149.5 million,

respectively, were pledged as collateral for securities sold under repurchase agreements.

The following table sets forth information with regard to gains and (losses) on equity securities:

(In thousands)

Net (losses) and gains recognized on equity securities

Net (losses) and gains recognized on equity securities sold during the period

Unrealized (losses) and gains recognized on equity securities still held

Net gains and (losses) recognized on equity securities

Net gains and (losses) recognized on equity securities sold during the period

Unrealized gains and (losses) recognized on equity securities still held

As of December 31, 2023 and 2022 the carrying value of equity securities without readily determinable fair values was $ 1.0 million.

The Company performed a qualitative assessment to determine whether the investments were impaired and identified no areas of concern as of December 31, 2022 and

There were no impairments, downward or upward adjustments recognized for equity securities without readily determinable fair

values during the years ended December 31, 2022 and 2021.

The following table set forth information with regard to contractual maturities of debt securities at December 31, 2022:

The Company performed a qualitative assessment to determine whether the investments were impaired and identified no areas of concern as

of December 31, 2023 and 2022.

There were no impairments, or downward or upward adjustments recognized for equity securities without

readily determinable fair values during the years ended December 31, 2023 and 2022.

The following table sets forth information with regard to contractual maturities of debt securities at December 31, 2023:

(In thousands)

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Mortgage-backed

Collateralized mortgage obligations

Collateralize mortgage obligations

State & municipal

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and/or implicit guarantee of the U.S.

government, are widely recognized as “risk free,” and have a long history of zero credit loss.

Therefore, the Company did not record an allowance for credit losses for these securities as of December 31, 2022 and

government, which are widely recognized as “risk free,” and have a long history of zero credit loss.

Therefore, the Company did not record an allowance for credit losses for these securities as of December 31,

2023 and 2022.

The remaining HTM debt securities at December 31, 2023 and 2022 were comprised of state and municipal obligations generally with bond ratings of A to AAA.

Utilizing the CECL approach, the Company determined that the expected credit loss on its

HTM municipal bond portfolio was immaterial and therefore no allowance for credit loss was recorded as of December 31, 2022 and 2021.

Utilizing the CECL methodology, the Company determined that the expected credit

loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit loss was recorded as of December 31, 2023 and 2022.

AIR on HTM debt securities totaled $ 4.7 million at December 31, 2023 and $ 3.8 million at December 31, 2022 and is

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Commercial real estate

Paycheck protection program

Residential real estate

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Company had $ 0.4 million and $ 0.6

million of residential loans held for sale as of December 31, 2022 and 2021, respectively.

million of residential real estate loans held for sale as of December 31, 2023 and 2022, respectively.

Beginning in 2023, the Company began selling residential solar loans.

As of December 31, 2023 the Company had $ 2.9 million of residential solar loans held for sale.

The total amount of loans serviced by the Company for unrelated third parties was $ 856.9 million and $ 592.7 million at December 31, 2023 and 2022, respectively.

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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, 2023 and 2022, the Company serviced $ 26.4 million

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Allowance for Credit Losses and Credit Quality of Loans

As described in Note 2, the Company’s adoption of ASU 2022-02 resulted in an insignificant change to its methodology for estimating the allowance for credit losses on TDRs.

The decrease in allowance for credit loss on TDR loans relating to

the adoption of ASU 2022-02 was $ 0.6 million.

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

The allowance for credit losses as a percentage of loans was 1.24 % at December 31, 2022 , compared to

1.23 % at December 31, 2021 .

The January 1, 2020 (“Day 1”) increase in the allowance for credit loss on loans relating to the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments was $ 3.0

million, which decreased retained earnings by $ 2.3 million and increased the deferred tax asset by $ 0.7 million.

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 allowance for credit losses calculation incorporated a 6-quarter forecast period to account for forecast economic conditions under each scenario

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forecast in measuring the allowance.

The quantitative model as of December 31, 2022 incorporates a baseline economic outlook along with an alternative downside scenario sourced from a

The quantitative model as of December 31, 2023 incorporated a baseline economic outlook along with an alternative downside scenario sourced from a

reputable third-party to accommodate other potential economic conditions in the model.

The baseline outlook reflected an unemployment rate environment initially around pre-COVID-19 levels at 3.9% that increases slightly during the forecast period to

Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the first quarter of 2023 at approximately 3.9% and hovering around 4.6% by the end of the forecast period.

Other utilized economic variables have generally

deteriorated in their respective forecasts, with retail sales and housing starts forecasts declining from the prior year.

Key assumptions in the baseline economic outlook included a full employment economy being realized in the near future, continued

tapering of the Federal Reserve balance sheet, an increasing yield on ten-year treasury securities, and a gradual decline in global oil prices.

The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the

baseline outlook.

Under this scenario, northeast unemployment rises from 3.9% in the fourth quarter of 2022 to a peak of 6.9% in the first quarter of 2024.

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

reflect management’s expectations as of December 31, 2022.

Additional adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation, and recent

trends in asset value indices.

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) 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 improving, 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.

Additional qualitative adjustments were made for factors not incorporated in the forecasts or the

model, such as loss rate expectations for certain loan pools, considerations for inflation and recent trends in asset value indices.

Additional monitoring for industry concentrations, loan growth and policy exceptions was also conducted.

All these factors were considered through separate quantitative processes and incorporated when applicable into

the estimate of current expected credit losses at December 31, 2022.

The quantitative model as of December 31, 2021 incorporates a baseline economic outlook along with alternative upside and downside scenarios sourced from

a reputable third-party to accommodate other potential economic conditions in the model.

The baseline outlook reflected an unemployment rate environment initially above pre-COVID-19 levels at 4.8% but falling below pre-COVID-19 levels by the end of

the forecast period to 3.5%.

Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2022 at approximately 9% and hover around 5% by the middle and end of the forecast period.

The alternative downside

scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook.

Under this scenario, northeast unemployment rose from 5.7% in the fourth quarter of 2021 to a peak of 8% in the first quarter of 2023, remaining around

or above 7% for the entire forecast period.

The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with a swift return to full employment by the second quarter of 2022 and with northeast unemployment moving

down to 3.1% by the end of the forecast period.

The quantitative model as of December 31, 2022 incorporated a baseline economic outlook along with an alternative downside scenario sourced from a

reputable third-party to accommodate other potential economic conditions in the model.

At December 31, 2022, the weightings were 50% and 50% for the baseline and downside economic forecasts, respectively.

The baseline outlook reflected an

unemployment rate environment initially around pre-coronavirus (“COVID-19”) levels at 3.9% that increases slightly during the forecast period to 4.0%.

Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter

of 2023 at approximately 3.9% and hovering around 4.6% by the end of the forecast period.

Other utilized economic variables have generally deteriorated in their respective forecasts, with retail sales and housing starts forecasts declining from the

Key assumptions in the baseline economic outlook included a full employment economy being realized in the near future, continued tapering of the Federal Reserve balance sheet, an increasing yield on ten-year treasury securities and a

gradual decline in global oil prices.

The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook.

Under this scenario, northeast unemployment rises from 3.9% in the fourth quarter of

2022 to a peak of 6.9% in the first quarter of 2024.

These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2022.

At December 31, 2021, the weightings were 60%, 10%

and 30% for the baseline, upside and downside economic forecasts, respectively.

Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in the second and

third quarters of 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government sponsored loan programs.

The Company also continued to monitor the

level of criticized and classified loans in the fourth quarter of 2021 compared to the level contemplated by the model during similar, historical economic conditions, and an adjustment was made to estimate potential additional losses above modeled

Additionally, qualitative adjustments were made for Moody’s baseline economic forecast to include impacts of the Build Back Better Act not passing by December 31, 2021 and to address potential economic deterioration due to Omicron, as well as

isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates in historical periods.

These factors were considered through separate quantitative processes and incorporated into the estimate

of current expected credit losses at December 31, 2021.

Additional qualitative adjustments were made

for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation and recent trends in asset value indices.

Additional monitoring for industry concentrations, loan growth

and policy exceptions was also conducted.

The quantitative model as of December 31, 2021 incorporated a baseline economic outlook along with alternative upside and downside scenarios sourced

from a reputable third-party to accommodate other potential economic conditions in the model.

The baseline outlook reflected an unemployment rate environment above pre-COVID-19 levels for the entire forecast period, though steadily improving, before

returning to low single digits by the end of 2023.

Northeast GDP’s annual growth (on a quarterly basis) was expected to start 2021 in the low to mid-single digits, with a peak growth rate of 8% in the fourth quarter of 2021 and steadily falling back

down to normalized levels through 2023 and 2024.

Other utilized economic variables show improvement in their respective forecasts, namely business output.

Key assumptions in the baseline economic outlook included an additional stimulus package passed

at the same timing and a comparable level to that of the actual $900 billion COVID-19 relief package passed in December 2020 along with no significant secondary surge in COVID-19 cases or pandemic-related business closures.

The alternative downside

scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook.

In the same way, the alternative upside scenario assumed a faster economic recovery and more effective management of the COVID-19 virus from the

baseline outlook.

The baseline outlook reflected an unemployment rate environment initially above pre-COVID-19 levels at 4.8% but falling below pre-COVID-19 levels by the

end of the forecast period to 3.5%.

Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2022 at approximately 9% and hover around 5% by the middle and end of the forecast period.

The alternative

downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook.

Under this scenario, northeast unemployment rose from 5.7% in the fourth quarter of 2021 to a peak of 8% in the first quarter of 2023,

remaining around or above 7% for the entire forecast period.

The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with a swift return to full employment by the second quarter of 2022 and with northeast

unemployment moving down to 3.1% by the end of the forecast period.

These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2021.

Additional adjustments were made for COVID-19 related factors not incorporated in

the forecasts, such as the mitigating impact of unprecedented stimulus in 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government-sponsored loan

The commercial & industrial and consumer segment models were based upon percent change in unemployment with modeled values as of December 31, 2020 well outside the observed historical experience.

Therefore, adjustments were required to

produce outputs more aligned with default expectations given the forecast economic environment.

Additionally, the Company identified a slightly higher level of criticized and classified loans during 2020 than those contemplated by the model during

similar economic conditions in the past for which an adjustment was made for estimated expected additional losses above modeled output.

These factors were considered through a separate quantitative process and incorporated into the estimate for

allowance for credit losses at December 31, 2020.

There were no loans purchased with credit deterioration during the years ended December 31, 2022 and 2021.

During 2022, the Company purchased $ 11.5 million of residential loans at a 1.53 % premium and $ 50.1 million in consumer loans at par.

The allowance for credit losses recorded for these loans on the purchase date was $ 3.2 million.

During 2021, the Company purchased $ 58.9

million of residential loans at premiums ranging from 2 % to 5 % and $ 92.5 million of consumer loans at a par.

allowance for credit losses recorded for these loans on the purchase date was $ 6.8 million.

The Company made a policy election to

report AIR in the other assets line item on the balance sheet.

AIR on loans totaled $ 25.0 million at December 31, 2022 and $ 19.5 million at

December 31, 2021 and there was no estimated allowance for credit losses related to AIR at December 31, 2022 and 2021.

At December 31, 2021, the

weightings were 60%, 10% and 30% for the baseline, upside and downside economic forecasts, respectively.

Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented

stimulus in the second and third quarters of 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government sponsored loan programs.

The Company also

continued to monitor the level of criticized and classified loans in the fourth quarter of 2021 compared to the level contemplated by the model during similar, historical economic conditions, and an adjustment was made to estimate potential

additional losses above modeled losses.

deterioration due to Omicron, as well as isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates in historical periods.

There were $ 219.5 million of PCD loans acquired from Salisbury during the year ended December 31, 2023, which resulted in an allowance for credit losses at acquisition of $ 5.8 million.

There were no loans purchased with credit

deterioration during the year ended December 31, 2022.

During 2023, the Company purchased $ 3.8 million of residential loans at a 7.00 %

premium with a $ 31 thousand allowance for credit losses recorded for these loans.

During 2022, the Company purchased $ 11.5 million of residential loans at a 1.53 %

premium and $ 50.1 million of consumer loans at a par with an allowance for credit losses recorded on the purchase date of $ 3.2 million.

The Company made a policy election to report AIR in the other assets line item on the consolidated balance sheets.

AIR on loans totaled $ 34.1 million at December 31, 2023 and $ 25.0 million at December 31, 2022 and there was no estimated allowance for credit losses related to AIR at December 31, 2023 and 2022 as it is excluded from amortized cost.

The following tables present the activity in the allowance for credit losses by our portfolio segment:

(In thousands)

Balance as of December 31, 2021

Balance as of January 1, 2023 (after

adoption of ASU 2022-02)

Allowance for credit loss on PCD acquired loans

Balance as of December 31, 2023

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Ending Balance as of De cember 31, 2022

Balance as of January 1, 2020 (after adoption of ASC 326)

Balance as of December 31, 2020

Ending Balance as of December 31, 2021

The allowance for credit losses as of December 31, 2023 increased compared to the allowance estimates as of December 31, 2022 due to the recording of $ 14.5 million of allowance for acquired Salisbury loans as of the acquisition date, which included both the $ 8.8 million of non-PCD allowance recognized through the provision for loan losses and the $ 5.8 million of PCD allowance reclassified from loans.

The increase in the allowance for credit losses from December 31, 2021 to December 31, 2022 was primarily due to an increase in loan balances and a modest

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The decrease in the allowance for credit losses from December 31, 2020 to December 31, 2021 was primarily due to the improvement in the economic forecast, partly offset by providing for the increase in loan

The increase in the allowance for credit losses from Day 1 to December 31, 2020 was primarily due to the deterioration of macroeconomic factors surrounding the COVID-19 pandemic.

Individually Evaluated Loans

As of December 31, 2022, there were two

relationships identified to be evaluated for loss on an individual basis which, in aggregate, had an amortized cost basis of $ 2.4

million, with no allowance for credit loss.

As of December 31, 2021, there were five relationships identified to be evaluated for loss on an individual basis with an aggregate amortized cost basis of $ 10.2 million and no allowance for credit loss.

The decrease in

the amortized cost basis on an individual basis from December 31, 2021 to December 31, 2022 was primarily due to principal payments and resolution of one

relationship in which the cost basis was substantially collected and the related $ 0.8 million allowance for credit losses was reversed.

The following table sets forth

information with regard to past due and nonperforming loans by loan segment:

As of December 31, 2023, there were two relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of $ 17.3 million, with no allowance for credit loss.

As of December 31, 2022, two

different relationships were identified to be evaluated for loss on an individual basis, which in aggregate, had an amortized cost basis of $ 2.4 million, with no

allowance for credit loss.

The following table sets

forth information with regard to past due and nonperforming loans by loan segment:

(In thousands)

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Consumer loans:

Residential solar

Other consumer

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Consumer loans:

Residential solar

Other consumer

Total consumer loans

As of December 31, 2022 and 2021, there were $ 1.1 million and $ 8.8 million, respectively, of loans in nonaccrual that were

specifically evaluated for individual expected credit loss without an allowance for credit losses.

As of December 31, 2023 and 2022, there were $ 17.3 million and $ 1.1 million, respectively, of loans in

nonaccrual that were specifically evaluated for individual expected credit loss without an allowance for credit losses.

Credit Quality Indicators

The Company has developed an internal loan grading system to evaluate and quantify the Company’s loan portfolio with respect to quality and risk.

The system focuses on,

among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries.

The internal grading system

enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and provide management with an early warning system, which facilitates recognition and response to problem loans and potential problem loans.

The system focuses

on, among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries.

The internal grading

system enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and provide management with an early warning system, which facilitates recognition and response to problem loans and potential problem loans.

Commercial Grading System

For Commercial and Industrial (“C&I”), Paycheck Protection Program (“PPP”) and Commercial Real Estate (“CRE”) loans, the Company uses a grading system that relies on

quantifiable and measurable characteristics when available.

This includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history

to stated repayment terms and industry averages.

For Commercial and Industrial (“C&I”) and Commercial Real Estate (“CRE”) loans, the Company uses a grading system that relies on quantifiable and measurable

characteristics when available.

This includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms

and industry averages.

Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management.

C&I and CRE loans are graded Doubtful, Substandard, Special

Mention and Pass.

C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass.

A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its

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Substandard loans have a high probability of payment default or they have other well-defined weaknesses.

They require more intensive supervision by

bank management.

They require more intensive supervision

by bank management.

Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization.

Repayment may depend on collateral or other credit

risk mitigants.

Repayment may depend on collateral or other

credit risk mitigants.

For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual.

Although Substandard assets, in the aggregate, will have a distinct potential

for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard.

Although Substandard assets in the aggregate will have a distinct

potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard.

Special Mention

Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position

at some future date.

Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s

position at some future date.

These loans pose elevated risk, but their weakness does not yet justify a Substandard classification.

Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling with an

ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage and/or tight liquidity).

Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support

a Special Mention rating.

Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling

with an ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage and/or tight liquidity).

Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may

also support a Special Mention rating.

Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent.

Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention.

Pass loans are in compliance with loan covenants and

payments are generally made as agreed.

Pass loans are in compliance with loan covenants

and payments are generally made as agreed.

Pass loans range from superior quality to fair quality.

Pass loans also include any portion of a government guaranteed loan, including PPP loans.

Pass loans also include any portion of a government guaranteed loan, including Paycheck Protection Program loans.

Consumer and Residential Grading System

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All loans not meeting any of the above criteria are considered Performing.

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

origination (vintage) :

The following tables illustrate the Company’s credit

quality by loan class by vintage and, beginning in 2023 with the Company’s January 1, 2023 adoption of ASU 2022-02, also includes gross charge-offs by loan class by vintage for the year ended December 31, 2023.

Included in other consumer gross

charge-offs, the Company recorded $ 0.2 million in overdrawn deposit accounts reported as 2022 originations and $ 0.8 million in overdrawn deposit accounts reported as 2023 originations for the year ended December 31, 2023.

(In thousands)

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Special mention