NBT BANCORP INC 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations. Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s Asset Liability Committee (“ALCO”) meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In 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. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates. The primary tool utilized by the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (e.g., no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk. 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 Change in interest rates (in bps points) Percent change in net interest income +200 (0.06 %) +100 0.27 % -200 (0.36 %) 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 2023. 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. 48 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors NBT Bancorp Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of NBT Bancorp Inc. and subsidiaries (the Company) as of December 31, 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. 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, 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. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit 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 $114.4 million of a total allowance for credit losses of $114.4 million as of December 31, 2023. The collective ACL on loans includes the measure of expected credit losses on a collective (pooled) basis for class segments of loans that share similar risk characteristics. The Company uses a discounted cash flow methodology where the respective quantitative allowance for each segment is measured by comparing the amortized cost to the present value of expected principal, interest and recovery cash flows projected using an econometric, probability of default (PD) and loss given default (LGD) modeling methodology. The Company uses PD regression models to develop the PD, and LGD models to develop the LGD, using historical credit loss experience for both the Company and segment-specific selected peers. The application of these models incorporates multiple weighted external economic forecasts for the economic variables over the reasonable and supportable forecast period. After the reasonable and supportable forecast period, the Company reverts to long-term average economic variables over a reversion period on a straight-line basis. Contractual cash flows over the contractual life of the loans are the basis for expected principal, interest and recovery cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective interest rate. After quantitative considerations, the Company applies additional qualitative adjustments, giving consideration to the effects of limitations inherent in the quantitative model, so that the collective ACL is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. We identified the assessment of the collective ACL on loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL on loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL on loans methodology, including the methods and models used to estimate (1) the PD and LGD and their significant assumptions including the external economic forecasts and economic variables, and the related weighting of the forecasts, the reasonable and supportable forecast periods, the composition of the peer group and the period from which historical Company and peer experience was used, (2) the expected prepayments assumption, and (3) the qualitative adjustments and the significant assumptions, including the effects of limitations inherent in the quantitative model. The assessment also included an evaluation of the conceptual soundness and performance of the PD regression and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. 49 Table of Contents The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL on loans estimate, including controls over the: • development of the collective ACL on loans methodology • 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 and related adjustments, including the significant assumptions used in the measurement of select qualitative adjustments • analysis of the collective ACL on loans results, trends, and ratios. We evaluated the Company’s process to develop the collective ACL on loans estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in: • evaluating the Company’s collective ACL on loans methodology for compliance with U.S. generally accepted accounting principles • evaluating judgments made by the Company relative to the 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 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 comparing them to specific portfolio risk characteristics and trends • assessing the composition of the peer group by comparing to Company and specific portfolio risk characteristics • evaluating the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective ACL on loans by comparing to relevant credit risk factors, the current economic environment and consistency with credit trends and identified limitations of the underlying quantitative models. We also assessed the sufficiency of the audit evidence obtained related to the collective ACL on loans estimate by evaluating the: • cumulative results of the audit procedures • qualitative aspects of the Company’s accounting practices • potential bias in the accounting estimate. Fair value measurement of the acquired loans in the Salisbury Bancorp, Inc. business combination As 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. We 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. The 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. /s/ KPMG LLP We have served as the Company’s auditor since 1987. Albany, New York February 29, 2024 50 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Balance Sheets As of December 31, (In thousands except share and per share data) 2023 2022 Assets Cash and due from banks $ 173,811 $ 166,488 Short-term interest-bearing accounts 31,378 30,862 Equity securities, at fair value 37,591 30,784 Securities available for sale, at fair value 1,430,858 1,527,225 Securities held to maturity (fair value $ 814,524 and $ 812,647 , respectively) 905,267 919,517 Federal Reserve and Federal Home Loan Bank stock 45,861 44,713 Loans held for sale 3,371 562 Loans 9,650,713 8,150,147 Less allowance for loan losses 114,400 100,800 Net loans $ 9,536,313 $ 8,049,347 Premises and equipment, net 80,675 69,047 Goodwill 361,851 281,204 Intangible assets, net 40,443 7,341 Bank owned life insurance 265,732 232,409 Other assets 395,889 379,797 Total assets $ 13,309,040 $ 11,739,296 Liabilities Demand (noninterest bearing) $ 3,413,829 $ 3,617,324 Savings, NOW and money market 6,230,456 5,444,837 Time 1,324,709 433,772 Total deposits $ 10,968,994 $ 9,495,933 Short-term borrowings 386,651 585,012 Long-term debt 29,796 4,815 Subordinated debt, net 119,744 96,927 Junior subordinated debt 101,196 101,196 Other liabilities 276,968 281,859 Total liabilities $ 11,883,349 $ 10,565,742 Stockholders’ equity Preferred stock, $ 0.01 par value, 2,500,000 shares authorized $ - $ - Common stock, $ 0.01 par value, 100,000,000 shares authorized; 53,974,492 and 49,651,493 shares issued, respectively 540 497 Additional paid-in-capital 740,943 577,853 Retained earnings 1,021,831 958,433 Accumulated other comprehensive loss ( 160,934 ) ( 190,034 ) Common stock in treasury, at cost, 6,864,593 and 6,793,670 shares, respectively ( 176,689 ) ( 173,195 ) Total stockholders’ equity $ 1,425,691 $ 1,173,554 Total liabilities and stockholders’ equity $ 13,309,040 $ 11,739,296 See accompanying notes to consolidated financial statements. 51 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, (In thousands, except per share data) 2023 2022 2021 Interest, fee and dividend income Interest and fees on loans $ 462,669 $ 332,768 $ 302,175 Securities available for sale 29,812 29,653 23,305 Securities held to maturity 20,681 17,582 12,551 Other 9,627 4,067 1,845 Total interest, fee and dividend income $ 522,789 $ 384,070 $ 339,876 Interest expense Deposits $ 104,641 $ 9,923 $ 10,714 Short-term borrowings 25,608 2,623 158 Long-term debt 925 161 389 Subordinated debt 6,076 5,424 5,437 Junior subordinated debt 7,320 3,749 2,090 Total interest expense $ 144,570 $ 21,880 $ 18,788 Net interest income $ 378,219 $ 362,190 $ 321,088 Provision for loan losses 25,274 17,147 ( 8,257 ) Net interest income after provision for loan losses $ 352,945 $ 345,043 $ 329,345 Noninterest income Service charges on deposit accounts $ 15,425 $ 14,630 $ 13,348 Card services income 20,829 29,058 34,682 Retirement plan administration fees 47,221 48,112 42,188 Wealth management 34,763 33,311 33,718 Insurance services 15,667 14,696 14,083 Bank owned life insurance income 6,750 6,044 6,217 Net securities (losses) gains ( 9,315 ) ( 1,131 ) 566 Other 10,838 10,858 12,992 Total noninterest income $ 142,178 $ 155,578 $ 157,794 Noninterest expense Salaries and employee benefits $ 194,250 $ 187,830 $ 172,580 Technology and data services 38,163 35,712 34,717 Occupancy 28,408 26,282 26,048 Professional fees and outside services 17,601 16,810 16,306 Office supplies and postage 6,917 6,140 6,006 FDIC assessment 6,257 3,197 3,041 Advertising 3,054 2,822 2,521 Amortization of intangible assets 4,734 2,263 2,808 Loan collection and other real estate owned, net 2,618 2,647 2,915 Acquisition expenses 9,978 967 - Other 29,684 19,795 20,339 Total noninterest expense $ 341,664 $ 304,465 $ 287,281 Income before income tax expense $ 153,459 $ 196,156 $ 199,858 Income tax expense 34,677 44,161 44,973 Net income $ 118,782 $ 151,995 $ 154,885 Earnings per share Basic $ 2.67 $ 3.54 $ 3.57 Diluted $ 2.65 $ 3.52 $ 3.54 See accompanying notes to consolidated financial statements. 52 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, (In thousands) 2023 2022 2021 Net income $ 118,782 $ 151,995 $ 154,885 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized net holding gains (losses) arising during the period, gross $ 22,987 $ ( 209,212 ) $ ( 37,432 ) Tax effect ( 5,746 ) 52,303 9,358 Unrealized net holding gains (losses) arising during the period, net $ 17,241 $ ( 156,909 ) $ ( 28,074 ) Reclassification adjustment for net losses in net income, gross $ 9,450 $ - $ - Tax effect ( 2,363 ) - - Reclassification adjustment for net losses in net income, net $ 7,087 $ - $ - Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross $ 427 $ 513 $ 577 Tax effect ( 107 ) ( 128 ) ( 145 ) Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net $ 320 $ 385 $ 432 Total securities available for sale, net $ 24,648 $ ( 156,524 ) $ ( 27,642 ) Cash flow hedges: Reclassification of net unrealized losses on cash flow hedges to interest expense, gross $ - $ - $ 21 Tax effect - - ( 5 ) Reclassification of net unrealized losses on cash flow hedges to interest expense, net $ - $ - $ 16 Total cash flow hedges, net $ - $ - $ 16 Pension and other benefits: Amortization of prior service cost and actuarial losses, gross $ 2,640 $ 737 $ 1,373 Tax effect ( 660 ) ( 184 ) ( 343 ) Amortization of prior service cost and actuarial losses, net $ 1,980 $ 553 $ 1,030 Decrease (increase) in unrecognized actuarial loss, gross $ 3,296 $ ( 14,292 ) $ 3,780 Tax effect ( 824 ) 3,573 ( 945 ) Decrease (increase) in unrecognized actuarial loss, net $ 2,472 $ ( 10,719 ) $ 2,835 Total pension and other benefits, net $ 4,452 $ ( 10,166 ) $ 3,865 Total other comprehensive income (loss) $ 29,100 $ ( 166,690 ) $ ( 23,761 ) Comprehensive income (loss) $ 147,882 $ ( 14,695 ) $ 131,124 See accompanying notes to consolidated financial statements. 53 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share and per share data) Common Stock Additional Paid-in- Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Common Stock in Treasury Total Balance at December 31, 2020 $ 497 $ 578,082 $ 749,056 $ 417 $ ( 140,434 ) $ 1,187,618 Net income - - 154,885 - - 154,885 Cash dividends - $ 1.10 per share - - ( 47,738 ) - - ( 47,738 ) Purchase of 604,637 treasury shares - - - - ( 21,714 ) ( 21,714 ) Net issuance of 143,555 shares to employee and other stock plans - ( 5,520 ) - - 2,269 ( 3,251 ) Stock-based compensation - 4,414 - - - 4,414 Other comprehensive (loss) - - - ( 23,761 ) - ( 23,761 ) Balance at December 31, 2021 $ 497 $ 576,976 $ 856,203 $ ( 23,344 ) $ ( 159,879 ) $ 1,250,453 Net income - - 151,995 - - 151,995 Cash dividends - $ 1.16 per share - - ( 49,765 ) - - ( 49,765 ) Purchase of 400,000 treasury shares - - - - ( 14,713 ) ( 14,713 ) Net issuance of 89,811 shares to employee and other stock plans - ( 3,653 ) - - 1,397 ( 2,256 ) Stock-based compensation - 4,530 - - - 4,530 Other comprehensive (loss) - - - ( 166,690 ) - ( 166,690 ) Balance at December 31, 2022 $ 497 $ 577,853 $ 958,433 $ ( 190,034 ) $ ( 173,195 ) $ 1,173,554 Cumulative effect adjustment for ASU 2022-02 implementation as of January 1, 2023 - - 502 - - 502 Net income - - 118,782 - - 118,782 Cash dividends - $ 1.24 per share - - ( 55,886 ) - - ( 55,886 ) Issuance of 4,322,999 shares of common stock for acquisition 43 161,680 - - - 161,723 Purchase of 155,500 treasury shares - - - - ( 4,944 ) ( 4,944 ) Net issuance of 84,577 shares to employee and other stock plans - ( 3,692 ) - - 1,450 ( 2,242 ) Stock-based compensation - 5,102 - - - 5,102 Other comprehensive income - - - 29,100 - 29,100 Balance at December 31, 2023 $ 540 $ 740,943 $ 1,021,831 $ ( 160,934 ) $ ( 176,689 ) $ 1,425,691 See accompanying notes to consolidated financial statements. 54 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, (In thousands) 2023 2022 2021 Operating activities Net income $ 118,782 $ 151,995 $ 154,885 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 25,274 17,147 ( 8,257 ) Depreciation and amortization of premises and equipment 10,695 10,155 9,896 Net amortization on securities 2,736 3,460 5,832 Amortization of intangible assets 4,734 2,263 2,808 Amortization of operating lease right-of-use assets 6,843 6,643 7,176 Excess tax benefit on stock-based compensation ( 296 ) ( 288 ) ( 385 ) Stock-based compensation expense 5,102 4,530 4,414 Bank owned life insurance income ( 6,750 ) ( 6,044 ) ( 6,217 ) Amortization of subordinated debt issuance costs 437 437 438 Discount on repurchase of subordinated debt - ( 106 ) - Proceeds from sale of loans held for sale 53,969 5,674 55,065 Originations of loans held for sale ( 55,960 ) ( 5,475 ) ( 54,608 ) Net gains on sales of loans held for sale ( 156 ) ( 122 ) ( 361 ) Net security losses (gains) 9,315 1,131 ( 566 ) Net (gains) losses on sale of other real estate owned ( 69 ) ( 259 ) 182 Impairment of a minority interest equity investment 4,750 - - Net deferred income tax expense (benefit) 5,958 ( 19,850 ) 864 Net change in other assets and other liabilities ( 27,907 ) 11,932 ( 11,981 ) Net cash provided by operating activities $ 157,457 $ 183,223 $ 159,185 Investing activities Net cash provided by (used in) acquisitions $ 44,564 $ ( 2,616 ) $ ( 1,550 ) Securities available for sale : Proceeds from maturities, calls and principal paydowns 116,453 213,722 395,386 Proceeds from sales 124,577 - - Purchases - ( 264,569 ) ( 775,963 ) Securities held to maturity: Proceeds from maturities, calls and principal paydowns 100,954 177,554 181,620 Purchases ( 88,022 ) ( 365,033 ) ( 299,014 ) Equity securities: Proceeds from calls - - 1,000 Purchases ( 11 ) ( 1,000 ) - Other: Net increase in loans ( 338,111 ) ( 659,949 ) ( 9,305 ) Proceeds from Federal Home Loan Bank stock redemption 91,535 36,125 2,422 Purchases of Federal Reserve Bank and Federal Home Loan Bank stock ( 90,945 ) ( 55,740 ) ( 167 ) Proceeds from settlement of bank owned life insurance 3,766 1,873 4,413 Purchase of bank owned life insurance - - ( 40,000 ) Purchases of premises and equipment, net ( 9,254 ) ( 7,009 ) ( 7,740 ) Proceeds from sales of other real estate owned 268 426 1,290 Net cash used in investing activities $ ( 44,226 ) $ ( 926,216 ) $ ( 547,608 ) Financing activities Net increase (decrease) in deposits $ 164,085 $ ( 738,536 ) $ 1,152,777 Net (decrease) increase in short-term borrowings ( 231,743 ) 487,217 ( 70,592 ) Repurchase of subordinated debt - ( 2,000 ) - Proceeds from long-term debt 25,000 1,519 - Repayments of long-term debt ( 118 ) ( 10,699 ) ( 25,101 ) Proceeds from the issuance of shares to employee and other stock plans 91 - 112 Cash paid by employer for tax-withholding on stock issuance ( 1,877 ) ( 1,751 ) ( 2,931 ) Purchase of treasury stock ( 4,944 ) ( 14,713 ) ( 21,714 ) Cash dividends ( 55,886 ) ( 49,765 ) ( 47,738 ) Net cash (used in) provided by financing activities $ ( 105,392 ) $ ( 328,728 ) $ 984,813 Net increase (decrease) in cash and cash equivalents $ 7,839 $ ( 1,071,721 ) $ 596,390 Cash and cash equivalents at beginning of year 197,350 1,269,071 672,681 Cash and cash equivalents at end of year $ 205,189 $ 197,350 $ 1,269,071 55 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued) Years Ended December 31, 2023 2022 2021 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest expense $ 130,180 $ 20,608 $ 20,285 Income taxes paid, net of refund 27,636 62,795 46,097 Noncash investing activities: Loans transferred to other real estate owned $ 94 $ 105 $ 181 Acquisitions: Fair value of assets acquired, excluding acquired cash and goodwill $ 1,415,712 $ 705 $ - Fair value of liabilities assumed 1,380,386 - - Common stock issued 161,723 - - See accompanying notes to consolidated financial statements. 56 Table of Contents NBT Bancorp Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2023 and 2022 1. Summary of Significant Accounting Policies The accounting and reporting policies of NBT Bancorp Inc. (“NBT Bancorp”) and its subsidiaries, NBT Bank, National Association (“NBT Bank” or the “Bank”), NBT Financial Services, Inc. and NBT Holdings, Inc. , conform, in all material respects, with generally accepted accounting principles in the United States of America (“GAAP”) and to general practices within the banking industry. Collectively, NBT Bancorp and its subsidiaries are referred to herein as (the “Company”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates and such differences could be material to the financial statements. Estimates associated with the allowance for credit losses, pension accounting, provision for income taxes, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term. The following is a description of significant policies and practices: Consolidation The accompanying consolidated financial statements include the accounts of NBT Bancorp and its wholly-owned subsidiaries mentioned above. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to the current year’s presentation. In the “Parent Company Financial Information,” the investment in subsidiaries is recorded using the equity method of accounting. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The Company’s wholly-owned subsidiaries CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements. Segment Reporting The Company’s operations are primarily in the community banking industry and include the provision of traditional banking services. The Company also provides other services through its subsidiaries such as insurance, retirement plan administration and trust administration. The Company operates in the geographical regions of 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. Cash Equivalents The Company considers amounts due from correspondent banks, cash items in process of collection and institutional money market mutual funds to be cash equivalents for purposes of the consolidated statements of cash flows. 57 Table of Contents Securities The Company classifies its securities at date of purchase as either held to maturity (“HTM”), available for sale (“AFS”) or equity. HTM debt securities are those that the Company has the ability and intent to hold until maturity. AFS debt securities are securities that are not classified as HTM. AFS securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on AFS securities are excluded from earnings and are reported in the consolidated statements of changes in stockholders’ equity and the consolidated statements of comprehensive income (loss) as a component of accumulated other comprehensive income (loss) (“AOCI”). HTM securities are recorded at amortized cost. Transfers of securities between categories are recorded at fair value at the date of transfer. 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. Dividend and interest income are recognized when earned. Realized gains and losses on securities sold are derived using the specific identification method for determining the cost of securities sold. Allowance for Credit Losses – HTM Debt Securities With respect to its HTM debt securities, the Company is required to utilize the 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: U.S. government agency or 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. These securities are either explicitly and/or implicitly guaranteed by the U.S. government as to timely repayment of principal and interest, are highly rated by major rating agencies, and have a long history of zero credit losses. Therefore, the Company did not record an allowance for credit loss for these securities. State and municipal bonds generally carry a Moody’s rating of A to AAA. In addition, the Company has a limited amount of New York state local municipal bonds that are not rated. The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual bond over its contractual life and considers historical credit loss information, current conditions and reasonable and supportable forecasts. Given the rarity of municipal defaults and losses, the Company utilized Moody’s Municipal Loss Forecast Model as the sole source of municipal default and loss rates which provides decades of data across all municipal sectors and geographies. As with the loan portfolio, cash flows are forecast over a 6-quarter period under various weighted economic conditions, with a reversion to long-term average economic conditions over a 4-quarter period on a straight-line basis. Management may exercise discretion to make adjustments based on environmental factors. The Company determined that the expected credit loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit losses was recorded. Allowance for Credit Losses – AFS Debt Securities The impairment model for AFS debt securities differs from the CECL approach utilized for HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. The cash flows should be estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Investments in Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock are required for membership in those organizations and are carried at cost since there is no market value available. The FHLB New York continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of Federal Reserve Bank and FHLB stock. Loan Held for Sale and Loan Servicing Loans held for sale are recorded at the lower of cost or fair value on an individual basis. Loan sales are recorded when the sales are funded. Gains and losses on sales of loans held for sale are included in other noninterest income in the consolidated statements of income. Mortgage loans held for sale are generally sold with servicing rights retained. Mortgage servicing rights are recorded at fair value upon sale of the loan, and are amortized in proportion to and over the period of estimated net servicing income. 58 Table of Contents Loans Loans are recorded at their current unpaid principal balance, net of unearned income and unamortized loan fees and expenses, which are amortized under the effective interest method over the estimated lives of the loans. Interest income on loans is accrued based on the principal amount outstanding. For all loan classes within the Company’s loan portfolio, loans are placed on nonaccrual status when timely collection of principal and/or interest in accordance with contractual terms is in doubt. Loans are transferred to nonaccrual status generally when principal or interest payments become over ninety days delinquent, unless the loan is well secured and in the process of collection, or sooner when management concludes circumstances indicate that borrowers may be unable to meet contractual principal or interest payments. When a loan is transferred to a nonaccrual status, all interest previously accrued in the current period but not collected is reversed against interest income in that period. Interest accrued in a prior period and not collected is charged-off against the allowance for credit losses. If ultimate repayment of a nonaccrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment of principal is not expected, any payment received on a nonaccrual loan is applied to principal until ultimate repayment becomes expected. For all loan classes within the Company’s loan portfolio, nonaccrual loans are returned to accrual status when they become current as to principal and interest and demonstrate a period of performance under the contractual terms and, in the opinion of management, are fully collectible as to principal and interest. For loans in all portfolios, the principal amount is charged off in full or in part as soon as management determines, based on available facts, that the collection of principal in full or in part is improbable. For Commercial loans, management considers specific facts and circumstances relative to individual credits in making such a determination. For Consumer and Residential loan classes, management uses specific guidance and thresholds from the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy. 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 amount; 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 amount. TDR 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. Allowance for Credit Losses - Loans The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance 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. Company historical loss experience is supplemented with peer information when there is insufficient loss data for the Company. Peer selection is based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. Significant management judgment is required at various points in the measurement process. Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. 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. 59 Table of Contents 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 Class Commercial Loans Commercial & Industrial Commercial Real Estate Consumer Loans Auto Residential Solar Other Consumer Residential Loans Commercial Loans The Company offers a variety of commercial loan products. The Company’s underwriting analysis for commercial loans typically includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. Commercial and Industrial (“C&I”) – The Company offers a variety of loan options to meet the specific needs of our C&I customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs and are typically collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. To reduce these risks, management also attempts to obtain personal guarantees of the owners or to obtain government loan guarantees to provide further support. Commercial Real Estate (“CRE”) – The Company offers CRE loans to finance real estate purchases, refinancing’s, expansions and improvements to commercial and agricultural properties. CRE loans are loans that are secured by liens on real estate, which may include both owner-occupied and nonowner-occupied properties, such as apartments, commercial structures, health care facilities and other facilities. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 80 % of the appraised value of the property. Government loan guarantees may be obtained to provide further support for agricultural property. Consumer Loans The Company offers a variety of Consumer loan products including Auto, Residential Solar and Other Consumer loans. Auto – The Company provides both direct and indirect financing of automobiles (“Auto”). The Company maintains relationships with many dealers primarily in the communities that we serve. Through these relationships, the Company primarily finances the purchases of automobiles indirectly through dealer relationships. 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. Residential 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. Residential solar loans carry a fixed rate of interest with principal repayment terms typically ranging from five to twenty-five years. 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. 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. 60 Table of Contents Residential Residential loans consist primarily of loans secured by a first or second mortgage on primary residences, home equity loans and lines of credit in first and second lien positions and residential construction loans. We originate adjustable-rate and fixed rate, one-to-four-family residential loans for the construction or purchase of a residential property or the refinancing of a mortgage. These loans are collateralized by properties located in the Company’s market area. Loans on one-to-four-family residential are generally originated in amounts of no more than 85 % of the purchase price or appraised value (whichever is lower) or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. For home equity loans, consumers are able to borrow up to 85 % of the equity in their homes and are generally tied to Prime with a ten-year draw followed by a fifteen-year amortization. These loans carry a higher risk than first mortgage residential loans as they are often in a second position with respect to collateral. Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate (“PD”) curves through the use of segment-specific loss given default (“LGD”) risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each asset class, primarily due to the nature of the underlying collateral. These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when the relationship between the Company’s historical default and loss severity deviated from that of the wider industry. The historical PD curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle. Using the historical relationship between economic conditions and loan performance, management’s expectation of future loan performance is incorporated using externally developed economic forecasts which are probabilistically weighted to reflect potential forecast inaccuracy and model limitations. These forecasts are applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology. The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level stated interest rate. The contractual term excludes expected extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit losses is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; changes in value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss experience across one or more components of the portfolio; the experience, ability and depth of lending management and staff; the Company’s credit review system; and the effect of external factors; such as competition, legal and regulatory requirements. 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. 61 Table of Contents Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Estimating credit losses on unfunded commitments requires the Bank to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit and standby letters of credit. Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount. The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate a reserve on unfunded commitments. Accrued Interest Receivable Accrued interest receivable balances are 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 amount of such write offs are immaterial. Historically, the Company has not experienced uncollectible accrued interest receivable on investment securities. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation of premises and equipment is determined using the straight-line method over the estimated useful lives of the respective assets. Expenditures for maintenance, repairs and minor replacements are charged to expense as incurred. Leases The Company determines if a lease is present at the inception of an agreement. Right-of-use (“ROU”) assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets and operating lease liabilities, are included in other assets and other liabilities, respectively, on the consolidated balance sheets . Leases with original terms of 12 months or less are recognized in profit or loss on a straight-line basis over the lease term. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statements of income . The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes and insurance are not included in the measurement of the lease liability since they are generally able to be segregated. Our leases relate primarily to office space and bank branches, and some contain options to renew the lease. These options to renew are generally not considered reasonably certain to exercise, and are therefore not included in the lease term until such time that the option to renew is reasonably certain. Other Real Estate Owned Other real estate owned (“OREO”) consists of properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are recorded at the lower of fair value of the asset acquired less estimated costs to sell or “cost” (defined as the fair value at initial foreclosure). At the time of foreclosure, or when foreclosure occurs in-substance, the excess, if any, of the loan over the fair market value of the assets received, less estimated selling costs, is charged to the allowance for loan losses and any subsequent valuation write-downs are charged to other expense. In connection with the determination of the allowance for loan losses and the valuation of OREO, management obtains appraisals for properties. Operating costs associated with the properties are charged to expense as incurred. Gains on the sale of OREO are included in income when title has passed and the sale has met the minimum down payment requirements prescribed by GAAP. The balance of OREO is recorded in other assets on the consolidated balance sheets. 62 Table of Contents Goodwill and Other Intangible Assets Goodwill represents the cost of acquired business in excess of the fair value of the related net assets acquired. Goodwill is not amortized but tested at the reporting unit level for impairment on an annual basis and on an interim basis or when events or circumstances dictate. The Company has elected June 30 as the annual impairment testing date for the insurance and retirement services reporting units and December 31 for the Bank reporting unit. The Company has the option to first assess qualitative factors, by performing a qualitative analysis, to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the impairment test is not required. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test. In the quantitative impairment test, the estimated fair value of a reporting unit is compared to the carrying amount in order to determine if impairment is indicated. If the estimated fair value exceeds the carrying amount, the reporting unit is not deemed to be impaired. If the estimated fair value is below the carrying value of the reporting unit, the difference is the amount of impairment. Intangible assets that have indefinite useful lives are not amortized, but are tested at least annually for impairment. Intangible assets that have finite useful lives are amortized over their useful lives. Core deposit intangibles and trust intangibles at the Company are amortized using the sum-of-the-years’-digits method. Covenants not to compete are amortized on a straight-line basis. Customer lists are amortized using an accelerated method. When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the asset carrying value, using estimates of undiscounted future cash flows over the remaining asset life. Any impairment loss is measured by the excess of carrying value over fair value. Determining the fair value of a reporting unit under the goodwill impairment tests and determining the fair value of other intangible assets are judgmental and often involve the use of significant estimates and assumptions. Estimates of fair value are primarily determined using the discounted cash flows method, which uses significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return and projected growth rates. Future events may impact such estimates and assumptions and could cause the Company to conclude that our goodwill or intangible assets have become impaired, which would result in recording an impairment loss. Bank Owned Life Insurance The Bank has purchased life insurance policies on certain employees, key executives and directors. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Treasury Stock Treasury stock acquisitions are recorded at cost. Subsequent sales of treasury stock are recorded on an average cost basis. Gains on the sale of treasury stock are credited to additional paid-in-capital. Losses on the sale of treasury stock are charged to additional paid-in-capital to the extent of previous gains, otherwise charged to retained earnings. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. 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. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Pension Costs The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all of its employees, as well as supplemental employee retirement plans to certain current and former executives and a defined benefit postretirement healthcare plan that covers certain employees. Costs associated with these plans, based on actuarial computations of current and future benefits for employees, are charged to current operating expenses. 63 Table of Contents Stock-Based Compensation The Company maintains various long-term incentive stock benefit plans under which restricted stock units are granted to certain directors and key employees. Compensation expense is recognized in the consolidated statements of income over the requisite service period, based on the grant-date fair value of the award. For restricted stock units, compensation expense is recognized ratably over the vesting period for the fair value of the award, measured at the grant date. Earnings Per Share Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company’s dilutive stock options and restricted stock units). Comprehensive Income (Loss) At the Company, comprehensive income (loss) represents net income plus OCI, which consists primarily of the net change in unrealized gains (losses) on AFS debt securities for the period, changes in the funded status of employee benefit plans and unrealized gains (losses) on derivatives designated as hedging instruments. AOCI represents the net unrealized gains (losses) on AFS debt securities, the previously unrecognized portion of the funded status of employee benefit plans and the fair value of instruments designated as hedging instruments, net of income taxes, as of the consolidated balance sheet dates. Derivative Instruments and Hedging Activities The Company records all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in the consolidated statements of income. When the Company purchases or sells a portion of a commercial loan that has an existing interest rate swap, it may enter into a risk participation agreement to provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions . Any fee paid to the Company under a risk participation agreement is in consideration of the credit risk of the counterparties and is recognized in the income statement. Credit risk on the risk participation agreements is determined after considering the risk rating, probability of default and loss given default of the counterparties. Business Combinations Business 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. 64 Table of Contents Fair Value Measurements GAAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted price for such instruments. The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or quote from alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the methodologies used in pricing the securities by its third-party providers in pricing the securities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flows. Other Financial Instruments The Company is a party to certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, standby letter of credit and certain agricultural real estate loans sold to investors with recourse. The Company’s policy is to record such instruments when funded. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers. Under the standby letters of credit, the Company is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary. Standby letters of credit typically have one year expirations with an option to renew upon annual review. The Company typically receives a fee for these transactions. The fair value of standby letters of credit is recorded upon inception. Repurchase Agreements Repurchase agreements are accounted for as secured financing transactions since the Company maintains effective control over the transferred securities and the transfer meets the other criteria for such accounting. Obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheets. The securities underlying the agreements are delivered to a custodial account for the benefit of the counterparties with whom each transaction is executed. The counterparties, who may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, agree to resell to the Company the same securities at the maturities of the agreements. 65 Table of Contents Revenue from Contracts with Customers 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. Card Services Income ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks. The Company’s performance obligations for these revenue streams are satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Retirement Plan Administration Fees Retirement plan administration fees are primarily generated for services related to the recordkeeping, administration and plan design solutions of defined benefit, defined contribution and revenue sharing plans. Revenue is recognized in arrears for services already provided in accordance with fees established in contracts with customers or based on rates agreed to with investment trade platforms based on ending investment balances held. The Company’s performance obligation is satisfied, and related revenue recognized based on services completed or ending investment balances, for which receivables are recorded at the time of revenue recognition. Wealth Management Wealth Management revenue primarily is comprised of trust and other financial services revenue. Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts, pensions and other customer assets. The Company’s performance obligation is generally satisfied with the resulting fees recognized monthly, based upon services completed or the month-end market value of the assets under management and the applicable fee rate. Payment is generally received shortly after services are rendered or a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Financial services revenue primarily consists of commissions received on brokered investment product sales. For other financial services revenue, the Company’s performance obligation is generally satisfied upon the issuance of the annuity policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company does not earn a significant amount of trailing commission fees on brokered investment product sales. The majority of the trailing commission fees are calculated based on a percentage of market value of a period end and revenue is recognized when an investment product’s market value can be determined. Insurance Revenue Insurance and other financial services revenue primarily consists of commissions received on insurance. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation related to insurance sales for both property and casualty insurance and employee benefit plans is generally satisfied upon the later of the issuance or effective date of the policy. The Company earns performance based incentives, commonly known as 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 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. 66 Table of Contents Other Other noninterest income consists of other recurring revenue streams such as account and loan fees, interest rate swap fees, safe deposit box rental fees and other miscellaneous revenue streams. These revenue streams are primarily transactional based and payment is received immediately or in the following month, and therefore, the Company’s performance obligation is satisfied, and the related revenue is recognized, at a point in time. The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of ASC 606: Years Ended December 31, (In thousands) 2023 2022 2021 Noninterest income In-Scope of ASC 606: Service charges on deposit accounts $ 15,424 $ 14,630 $ 13,348 Card services income 20,829 29,058 34,682 Retirement plan administration fees 47,221 48,112 42,188 Wealth management 34,763 33,311 33,718 Insurance services 15,667 14,696 14,083 Other 10,838 10,858 12,992 Total noninterest income in-scope of ASC 606 $ 144,742 $ 150,665 $ 151,011 Total noninterest income out-of-scope of ASC 606 $ ( 2,564 ) $ 4,913 $ 6,783 Total noninterest income $ 142,178 $ 155,578 $ 157,794 Contract Balances A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration or before payment is due, which would result in contract receivables or assets, respectively. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment or for which payment is due from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. Contract Acquisition Costs ASC 606 requires the capitalization, and subsequently amortization into expense, of certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company elected the practical expedient, which allows immediate expensing of contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less, and did not capitalize any contract acquisition costs 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. Subsequent Events The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified. 2. Recent Accounting Pronouncements Recently Adopted Accounting Standards In March 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 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. 67 Table of Contents 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. In December 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. 3. Acquisitions 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. The 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 accounting. 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) $ 15 Common stock issuance 161,723 Total net consideration $ 161,738 Recognized amounts of identifiable assets acquired and (liabilities) assumed: Cash and cash equivalents $ 48,665 Securities available for sale 122,667 Loans, net of allowance for credit losses on purchased credit deteriorated loans 1,174,237 Premises and equipment, net 13,026 Core deposit intangibles 31,188 Wealth management customer intangible 4,654 Bank owned life insurance 30,315 Other assets 37,631 Total identifiable assets acquired $ 1,462,383 Deposits $ ( 1,308,976 ) Borrowings ( 55,461 ) Other liabilities ( 15,949 ) Total liabilities assumed $ ( 1,380,386 ) Total identifiable assets, net $ 81,997 Goodwill $ 79,741 68 Table of Contents 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 rates. 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. The 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. The following table provides details related to the fair value of acquired PCD loans. (In thousands) PCD Loans Par value of PCD loans at acquisition $ 219,076 Allowance for credit losses at acquisition 5,772 Discount at acquisition ( 24,512 ) Fair value of PCD loans at acquisition $ 200,336 Direct costs related to the acquisition were expensed as incurred. Acquisition 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. 69 Table of Contents 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) 2023 2022 Total revenue, net of interest expense $ 542,241 $ 578,543 Net income 112,330 168,101 Other Acquisitions In 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. The operating results of the acquired company is included in the consolidated results after the date of acquisition. 4. Securities The amortized cost, estimated fair value and unrealized gains (losses) of AFS securities are as follows: (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value As of December 31, 2023 U.S. treasury $ 133,302 $ - $ ( 8,278 ) $ 125,024 Federal agency 248,384 - ( 33,644 ) 214,740 State & municipal 96,251 11 ( 9,956 ) 86,306 Mortgage-backed: Government-sponsored enterprises 399,532 7 ( 44,264 ) 355,275 U.S. government agency securities 74,281 14 ( 7,302 ) 66,993 Collateralized mortgage obligations: Government-sponsored enterprises 452,715 15 ( 48,257 ) 404,473 U.S. government agency securities 162,171 - ( 25,100 ) 137,071 Corporate 48,442 - ( 7,466 ) 40,976 Total AFS securities $ 1,615,078 $ 47 $ ( 184,267 ) $ 1,430,858 As of December 31, 2022 U.S. treasury $ 132,891 $ - $ ( 11,233 ) $ 121,658 Federal agency 248,419 - ( 42,000 ) 206,419 State & municipal 97,036 5 ( 14,190 ) 82,851 Mortgage-backed: Government-sponsored enterprises 454,177 9 ( 54,675 ) 399,511 U.S. government securities 81,844 15 ( 7,676 ) 74,183 Collateralized mortgage obligations: Government-sponsored enterprises 498,021 9 ( 59,473 ) 438,557 U.S. government securities 171,090 - ( 21,284 ) 149,806 Corporate 60,404 - ( 6,164 ) 54,240 Total AFS securities $ 1,743,882 $ 38 $ ( 216,695 ) $ 1,527,225 70 Table of Contents There was no allowance for credit losses on AFS securities as of December 31, 2023 and 2022. 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: (In thousands) Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value As of December 31, 2023 Federal agency $ 100,000 $ - $ ( 17,784 ) $ 82,216 Mortgage-backed: Government-sponsored enterprises 228,720 - ( 31,613 ) 197,107 U.S. government agency securities 17,086 3 ( 566 ) 16,523 Collateralized mortgage obligations: Government-sponsored enterprises 187,457 57 ( 12,021 ) 175,493 U.S. government agency securities 63,878 - ( 10,908 ) 52,970 State & municipal 308,126 211 ( 18,122 ) 290,215 Total HTM securities $ 905,267 $ 271 $ ( 91,014 ) $ 814,524 As of December 31, 2022 Federal agency $ 100,000 $ - $ ( 20,678 ) $ 79,322 Mortgage-backed: Government-sponsored enterprises 249,511 - ( 36,819 ) 212,692 U.S. government agency securities 18,396 4 ( 619 ) 17,781 Collateralized mortgage obligations: Government-sponsored enterprises 207,738 200 ( 14,876 ) 193,062 U.S. government agency securities 66,628 - ( 9,842 ) 56,786 State & municipal 277,244 5 ( 24,245 ) 253,004 Total HTM securities $ 919,517 $ 209 $ ( 107,079 ) $ 812,647 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. There was no 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, 2023. 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: Years Ended December 31, (In thousands) 2023 2022 Net gains and (losses) recognized on equity securities $ 135 $ ( 1,135 ) Less: Net gains and (losses) recognized on equity securities sold during the period - - Unrealized gains and (losses) recognized on equity securities still held $ 135 $ ( 1,135 ) 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, 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. 71 Table of Contents The following table sets forth information with regard to contractual maturities of debt securities at December 31, 2023: (In thousands) Amortized Cost Estimated Fair Value AFS debt securities: Within one year $ 50,389 $ 49,462 From one to five years 536,097 483,546 From five to ten years 356,944 315,359 After ten years 671,648 582,491 Total AFS debt securities $ 1,615,078 $ 1,430,858 HTM debt securities: Within one year $ 92,757 $ 92,724 From one to five years 113,075 109,686 From five to ten years 262,943 231,113 After ten years 436,492 381,001 Total HTM debt securities $ 905,267 $ 814,524 Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Except for U.S. government securities and government-sponsored enterprises securities, there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at December 31, 2023, 2022 and 2021. The following table sets forth information with regard to investment securities with unrealized losses, for which an allowance for credit losses has not been recorded, segregated according to the length of time the securities had been in a continuous unrealized loss position: Less Than 12 Months 12 Months or Longer Total (In thousands) Fair Value Unrealized Losses Number of Positions Fair Value Unrealized Losses Number of Positions Fair Value Unrealized Losses Number of Positions As of December 31, 2023 AFS securities: U.S. treasury $ - $ - - $ 125,024 $ ( 8,278 ) 8 $ 125,024 $ ( 8,278 ) 8 Federal agency - - - 214,740 ( 33,644 ) 16 214,740 ( 33,644 ) 16 State & municipal - - - 85,528 ( 9,956 ) 66 85,528 ( 9,956 ) 66 Mortgage-backed 53 ( 1 ) 7 421,259 ( 51,565 ) 156 421,312 ( 51,566 ) 163 Collateralized mortgage obligations 1,333 ( 6 ) 2 536,678 ( 73,351 ) 118 538,011 ( 73,357 ) 120 Corporate 1,379 ( 75 ) 1 39,597 ( 7,391 ) 14 40,976 ( 7,466 ) 15 Total securities with unrealized losses $ 2,765 $ ( 82 ) 10 $ 1,422,826 $ ( 184,185 ) 378 $ 1,425,591 $ ( 184,267 ) 388 HTM securities: Federal agency $ - $ - - $ 82,216 $ ( 17,784 ) 4 $ 82,216 $ ( 17,784 ) 4 Mortgage-backed 12,221 ( 365 ) 1 201,320 ( 31,814 ) 33 213,541 ( 32,179 ) 34 Collateralize mortgage obligations - - - 219,820 ( 22,929 ) 54 219,820 ( 22,929 ) 54 State & municipal 14,422 ( 127 ) 21 171,904 ( 17,995 ) 189 186,326 ( 18,122 ) 210 Total securities with unrealized losses $ 26,643 $ ( 492 ) 22 $ 675,260 $ ( 90,522 ) 280 $ 701,903 $ ( 91,014 ) 302 As of December 31, 2022 AFS securities: U.S. treasury $ 55,616 $ ( 3,864 ) 5 $ 66,042 $ ( 7,369 ) 3 $ 121,658 $ ( 11,233 ) 8 Federal agency - - - 206,419 ( 42,000 ) 16 206,419 ( 42,000 ) 16 State & municipal 3,679 ( 341 ) 2 78,395 ( 13,849 ) 64 82,074 ( 14,190 ) 66 Mortgage-backed 204,447 ( 15,048 ) 149 267,926 ( 47,303 ) 32 472,373 ( 62,351 ) 181 Collateralized mortgage obligations 211,612 ( 14,458 ) 77 374,376 ( 66,299 ) 49 585,988 ( 80,757 ) 126 Corporate 34,434 ( 2,970 ) 12 19,806 ( 3,194 ) 6 54,240 ( 6,164 ) 18 Total securities with unrealized losses $ 509,788 $ ( 36,681 ) 245 $ 1,012,964 $ ( 180,014 ) 170 $ 1,522,752 $ ( 216,695 ) 415 HTM securities: Federal agency $ - $ - - $ 79,322 $ ( 20,678 ) 4 $ 79,322 $ ( 20,678 ) 4 Mortgage-backed 91,417 ( 9,096 ) 21 138,936 ( 28,342 ) 13 230,353 ( 37,438 ) 34 Collateralized mortgage obligations 191,644 ( 13,863 ) 47 48,289 ( 10,855 ) 8 239,933 ( 24,718 ) 55 State & municipal 110,727 ( 4,930 ) 149 82,949 ( 19,315 ) 76 193,676 ( 24,245 ) 225 Total securities with unrealized losses $ 393,788 $ ( 27,889 ) 217 $ 349,496 $ ( 79,190 ) 101 $ 743,284 $ ( 107,079 ) 318 72 Table of Contents The Company does not believe the AFS securities that were in an unrealized loss position as of December 31, 2023 and 2022, which consisted of 388 and 415 individual securities, respectively, represented a credit loss impairment. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. As of December 31, 2023 and 2022, the majority of the AFS securities in an unrealized loss position consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises that carry the explicit and/or implicit guarantee of the U.S. government, which are widely recognized as “risk-free” and have a long history of zero credit losses. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities. AIR on AFS debt securities totaled $ 3.9 million at December 31, 2023 and $ 4.2 million at December 31, 2022 and is excluded from the estimate of credit losses and reported in the other assets financial statement line. None of the Bank’s HTM debt securities were past due or on nonaccrual status as of December 31, 2023 and 2022. There was no accrued interest reversed against interest income for the years ended December 31, 2023 and 2022 as all securities remained on accrual status. In addition, there were no collateral-dependent HTM debt securities as of December 31, 2023 and 2022. As of December 31, 2023 and 2022, 66 % and 70 %, respectively, of the Company’s HTM debt securities were issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, 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 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 excluded from the estimate of credit losses and reported in the other assets financial statement line. 5. Loans A summary of loans, net of deferred fees and origination costs, by category is as follows: At December 31, (In thousands) 2023 2022 Commercial & industrial $ 1,354,248 $ 1,266,031 Commercial real estate 3,626,910 2,807,941 Residential real estate 2,125,804 1,649,870 Indirect auto 1,130,132 989,587 Residential solar 917,755 856,798 Home equity 337,214 314,124 Other consumer 158,650 265,796 Total loans $ 9,650,713 $ 8,150,147 Included in the above loans are net deferred loan origination (fees) costs totaling $( 98.2 ) million and $( 109.1 ) million at December 31, 2023 and 2022, respectively. The Company had $ 0.4 million and $ 0.6 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. At December 31, 2023 and 2022, the Company had $ 1.0 million and $ 0.6 million, respectively, of mortgage servicing rights. At December 31, 2023 and 2022, the Company serviced $ 26.4 million and $ 31.0 million, respectively, of agricultural loans sold with recourse. Due to sufficient collateral on these loans and government guarantees, no reserve is considered necessary at December 31, 2023 and 2022. FHLB advances are collateralized by a blanket lien on the Company’s residential real estate mortgages. In the ordinary course of business, the Company has made loans at prevailing rates and terms to directors, officers and other related parties. Such loans, in management’s opinion, do not present more than the normal risk of collectability or incorporate other unfavorable features. The aggregate amount of loans outstanding to qualifying related parties and changes during the years are summarized as follows: (In thousands) 2023 2022 Balance at January 1 $ 2,516 $ 3,292 New loans 705 576 Adjustment due to change in composition of related parties - ( 37 ) Repayments ( 2,134 ) ( 1,315 ) Balance at December 31 $ 1,087 $ 2,516 73 Table of Contents 6. 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 31, 2022 . 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 utilized in the measurement. For periods beyond the 6-quarter forecast, the model reverts to long-term economic conditions over a 4-quarter reversion period on a straight-line basis. The Company considers a baseline, upside and downside economic forecast in measuring the allowance. The quantitative model as of December 31, 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. 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. 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 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 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 initially above pre-COVID-19 levels at 4.8% but falling below pre-COVID-19 levels by the end of the forecast period to 3.5%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2022 at approximately 9% and hover around 5% by the middle and end of the forecast period. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rose from 5.7% in the fourth quarter of 2021 to a peak of 8% in the first quarter of 2023, remaining around or above 7% for the entire forecast period. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with a swift return to full employment by the second quarter of 2022 and with northeast unemployment moving down to 3.1% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2021. At December 31, 2021, the weightings were 60%, 10% and 30% for the baseline, upside and downside economic forecasts, respectively. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in the second and third quarters of 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government sponsored loan programs. The Company also continued to monitor the level of criticized and classified loans in the fourth quarter of 2021 compared to the level contemplated by the model during similar, historical economic conditions, and an adjustment was made to estimate potential additional losses above modeled losses. Additionally, qualitative adjustments were made for Moody’s baseline economic forecast to include impacts of the Build Back Better Act not passing by December 31, 2021 and to address potential economic deterioration due to Omicron, as well as isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates in historical periods. 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. 74 Table of Contents The following tables present the activity in the allowance for credit losses by our portfolio segment: (In thousands) Commercial Loans Consumer Loans Residential Total Balance as of January 1, 2023 (after adoption of ASU 2022-02) $ 34,662 $ 50,951 $ 14,539 $ 100,152 Allowance for credit loss on PCD acquired loans 5,300 19 453 5,772 Charge-offs ( 4,154 ) ( 22,107 ) ( 517 ) ( 26,778 ) Recoveries 3,625 5,859 496 9,980 Provision 6,470 11,705 7,099 25,274 E nding Balance as of December 31, 2023 $ 45,903 $ 46,427 $ 22,070 $ 114,400 Balance as of December 31, 2021 $ 28,941 $ 44,253 $ 18,806 $ 92,000 Charge-offs ( 1,870 ) ( 16,140 ) ( 633 ) ( 18,643 ) Recoveries 2,430 7,014 852 10,296 Provision 5,221 15,824 ( 3,898 ) 17,147 Ending Balance as of De cember 31, 2022 $ 34,722 $ 50,951 $ 15,127 $ 100,800 Balance as of December 31, 2020 $ 50,942 $ 37,803 $ 21,255 $ 110,000 Charge-offs ( 4,638 ) ( 14,489 ) ( 979 ) ( 20,106 ) Recoveries 723 8,571 1,069 10,363 Provision ( 18,086 ) 12,368 ( 2,539 ) ( 8,257 ) Ending Balance as of December 31, 2021 $ 28,941 $ 44,253 $ 18,806 $ 92,000 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 deterioration in the economic forecast. The decrease in the allowance for credit losses from December 31, 2020 to December 31, 2021 was primarily due to the improvement in the economic forecast, partly offset by providing for the increase in loan balances. Individually Evaluated Loans 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. 75 Table of Contents The following table sets forth information with regard to past due and nonperforming loans by loan segment: (In thousands) 31-60 Days Past Due Accruing 61-90 Days Past Due Accruing Greater Than 90 Days Past Due Accruing Total Past Due Accruing Nonaccrual Current Recorded Total Loans As of December 31, 2023 Commercial loans: C&I $ 414 $ 33 $ 1 $ 448 $ 3,441 $ 1,393,616 $ 1,397,505 CRE 803 835 - 1,638 18,126 3,413,984 3,433,748 Total commercial loans $ 1,217 $ 868 $ 1 $ 2,086 $ 21,567 $ 4,807,600 $ 4,831,253 Consumer loans: Auto $ 10,115 $ 2,011 $ 1,067 $ 13,193 $ 2,106 $ 1,084,143 $ 1,099,442 Residential solar 3,074 1,301 915 5,290 245 912,220 917,755 Other consumer 2,343 1,811 1,124 5,278 215 164,867 170,360 Total consumer loans $ 15,532 $ 5,123 $ 3,106 $ 23,761 $ 2,566 $ 2,161,230 $ 2,187,557 Residential $ 3,836 $ 399 $ 554 $ 4,789 $ 10,080 $ 2,617,034 $ 2,631,903 Total loans $ 20,585 $ 6,390 $ 3,661 $ 30,636 $ 34,213 $ 9,585,864 $ 9,650,713 (In thousands) 31-60 Days Past Due Accruing 61-90 Days Past Due Accruing Greater Than 90 Days Past Due Accruing Total Past Due Accruing Nonaccrual Current Recorded Total Loans As of December 31, 2022 Commercial loans: C&I $ 342 $ 99 $ 4 $ 445 $ 2,244 $ 1,238,468 $ 1,241,157 CRE 336 96 - 432 5,780 2,689,196 2,695,408 Total commercial loans $ 678 $ 195 $ 4 $ 877 $ 8,024 $ 3,927,664 $ 3,936,565 Consumer loans: Auto $ 8,640 $ 1,393 $ 785 $ 10,818 $ 1,494 $ 950,389 $ 962,701 Residential solar 2,858 731 474 4,063 79 852,656 856,798 Other consumer 3,483 1,838 1,789 7,110 94 272,384 279,588 Total consumer loans $ 14,981 $ 3,962 $ 3,048 $ 21,991 $ 1,667 $ 2,075,429 $ 2,099,087 Residential $ 2,496 $ 555 $ 771 $ 3,822 $ 7,542 $ 2,103,131 $ 2,114,495 Total loans $ 18,155 $ 4,712 $ 3,823 $ 26,690 $ 17,233 $ 8,106,224 $ 8,150,147 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. Commercial Grading System 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. Doubtful A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss. Substandard Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual. Although Substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard. 76 Table of Contents Special Mention Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage and/or tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent. Pass Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality. Pass loans also include any portion of a government guaranteed loan, including Paycheck Protection Program loans. Consumer and Residential Grading System Consumer and Residential loans are graded as either Nonperforming or Performing. Nonperforming Nonperforming loans are loans that are (1) over 90 days past due and interest is still accruing or (2) on nonaccrual status. Performing All loans not meeting any of the above criteria are considered Performing. 77 Table of Contents 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) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of December 31, 2023 C&I By internally assigned grade: Pass $ 229,249 $ 270,796 $ 241,993 $ 158,051 $ 74,469 $ 63,826 $ 299,248 $ 2,923 $ 1,340,555 Special mention 420 1,672 277 3,524 87 1,854 19,489 - 27,323 Substandard 1,496 2,461 1,609 282 2,266 5,632 14,266 1,607 29,619 Doubtful - 1 2 - 4 1 - - 8 Total C&I $ 231,165 $ 274,930 $ 243,881 $ 161,857 $ 76,826 $ 71,313 $ 333,003 $ 4,530 $ 1,397,505 Current-period gross charge-offs $ ( 24 ) $ ( 3,021 ) $ ( 5 ) $ ( 86 ) $ - $ ( 600 ) $ - $ - $ ( 3,736 ) CRE By internally assigned grade: Pass $ 353,161 $ 518,201 $ 561,897 $ 452,110 $ 327,804 $ 739,189 $ 294,039 $ 33,705 $ 3,280,106 Special mention 3,577 4,472 10,711 7,055 9,967 39,460 2,970 - 78,212 Substandard 370 731 21,807 1,146 2,996 37,418 10,962 - 75,430 Total CRE $ 357,108 $ 523,404 $ 594,415 $ 460,311 $ 340,767 $ 816,067 $ 307,971 $ 33,705 $ 3,433,748 Current-period gross charge-offs $ - $ - $ - $ - $ ( 114 ) $ ( 304 ) $ - $ - $ ( 418 ) Auto By payment activity: Performing $ 474,369 $ 363,516 $ 157,251 $ 42,644 $ 45,406 $ 13,071 $ 12 $ - $ 1,096,269 Nonperforming 532 1,241 830 190 306 74 - - 3,173 Total auto $ 474,901 $ 364,757 $ 158,081 $ 42,834 $ 45,712 $ 13,145 $ 12 $ - $ 1,099,442 Current-period gross charge-offs $ ( 102 ) $ ( 1,183 ) $ ( 1,066 ) $ ( 340 ) $ ( 301 ) $ ( 295 ) $ - $ - $ ( 3,287 ) Residential solar By payment activity: Performing $ 155,425 $ 430,855 $ 178,839 $ 65,382 $ 46,554 $ 39,540 $ - $ - $ 916,595 Nonperforming - 837 205 18 47 53 - - 1,160 Total residential solar $ 155,425 $ 431,692 $ 179,044 $ 65,400 $ 46,601 $ 39,593 $ - $ - $ 917,755 Current-period gross charge-offs $ ( 150 ) $ ( 1,930 ) $ ( 923 ) $ ( 45 ) $ ( 558 ) $ ( 345 ) $ - $ - $ ( 3,951 ) Other consumer By payment activity: Performing $ 13,089 $ 27,394 $ 57,876 $ 21,087 $ 14,548 $ 15,964 $ 19,042 $ 21 $ 169,021 Nonperforming - 244 685 144 56 161 4 45 1,339 Total other consumer $ 13,089 $ 27,638 $ 58,561 $ 21,231 $ 14,604 $ 16,125 $ 19,046 $ 66 $ 170,360 Current-period gross charge-offs $ ( 885 ) $ ( 3,744 ) $ ( 7,511 ) $ ( 1,329 ) $ ( 832 ) $ ( 568 ) $ - $ - $ ( 14,869 ) Residential By payment activity: Performing $ 212,799 $ 366,860 $ 453,206 $ 267,845 $ 167,860 $ 876,563 $ 260,836 $ 15,300 $ 2,621,269 Nonperforming 134 430 1,121 385 591 7,460 - 513 10,634 Total residential $ 212,933 $ 367,290 $ 454,327 $ 268,230 $ 168,451 $ 884,023 $ 260,836 $ 15,813 $ 2,631,903 Current-period gross charge-offs $ - $ - $ ( 81 ) $ ( 30 ) $ - $ ( 406 ) $ - $ - $ ( 517 ) Total loans $ 1,444,621 $ 1,989,711 $ 1,688,309 $ 1,019,863 $ 692,961 $ 1,840,266 $ 920,868 $ 54,114 $ 9,650,713 Current-period gross charge-offs $ ( 1,161 ) $ ( 9,878 ) $ ( 9,586 ) $ ( 1,830 ) $ ( 1,805 ) $ ( 2,518 ) $ - $ - $ ( 26,778 ) 78 Table of Contents (In thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of December 31, 2022 C&I By internally assigned grade: Pass $ 296,562 $ 252,480 $ 164,976 $ 91,497 $ 39,394 $ 32,413 $ 327,166 $ 3,133 $ 1,207,621 Special mention 1,044 524 4,531 194 1,108 417 5,234 - 13,052 Substandard 76 459 231 3,098 91 3,969 12,348 163 20,435 Doubtful - 20 - 28 - 1 - - 49 Total C&I $ 297,682 $ 253,483 $ 169,738 $ 94,817 $ 40,593 $ 36,800 $ 344,748 $ 3,296 $ 1,241,157 CRE By internally assigned grade: Pass $ 374,313 $ 465,990 $ 439,012 $ 333,568 $ 217,141 $ 566,783 $ 201,563 $ 24,735 $ 2,623,105 Special mention 605 764 868 2,641 4,649 24,023 850 - 34,400 Substandard 309 - 2,316 3,937 1,822 23,819 713 4,987 37,903 Total CRE $ 375,227 $ 466,754 $ 442,196 $ 340,146 $ 223,612 $ 614,625 $ 203,126 $ 29,722 $ 2,695,408 Auto By payment activity: Performing $ 488,776 $ 239,090 $ 75,853 $ 99,615 $ 44,061 $ 13,027 $ - $ - $ 960,422 Nonperforming 590 655 404 385 216 29 - - 2,279 Total auto $ 489,366 $ 239,745 $ 76,257 $ 100,000 $ 44,277 $ 13,056 $ - $ - $ 962,701 Residential solar By payment activity: Performing $ 485,942 $ 193,971 $ 74,532 $ 54,662 $ 36,119 $ 11,019 $ - $ - $ 856,245 Nonperforming 320 98 50 25 16 44 - - 553 Total residential solar $ 486,262 $ 194,069 $ 74,582 $ 54,687 $ 36,135 $ 11,063 $ - $ - $ 856,798 Other consumer By payment activity: Performing $ 52,545 $ 110,624 $ 36,412 $ 27,383 $ 15,536 $ 15,735 $ 19,218 $ 250 $ 277,703 Nonperforming 238 838 395 247 57 87 8 15 1,885 Total other consumer $ 52,783 $ 111,462 $ 36,807 $ 27,630 $ 15,593 $ 15,822 $ 19,226 $ 265 $ 279,588 Residential By payment activity: Performing $ 251,012 $ 349,498 $ 212,161 $ 156,957 $ 157,755 $ 717,621 $ 233,056 $ 28,122 $ 2,106,182 Nonperforming 267 384 408 555 1,028 5,651 - 20 8,313 Total residential $ 251,279 $ 349,882 $ 212,569 $ 157,512 $ 158,783 $ 723,272 $ 233,056 $ 28,142 $ 2,114,495 Total loans $ 1,952,599 $ 1,615,395 $ 1,012,149 $ 774,792 $ 518,993 $ 1,414,638 $ 800,156 $ 61,425 $ 8,150,147 Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The allowance for losses on unfunded commitments totaled $ 5.1 million as of December 31, 2023 and December 31, 2022 , which included $ 0.8 million of acquisition-related provision for unfunded loan commitments as of December 31, 2023, which was offset by a release of unfunded commitment reserves. 79 Table of Contents Loan Modifications to Borrowers Experiencing Financial Difficulties As discussed in Note 2, the Company’s January 1, 2023 adoption of ASU 2022-02 eliminates the recognition and measurement of TDRs. Upon adoption of this guidance, the Company no longer recognizes an allowance for credit losses for the economic concession granted to a borrower for changes in the timing and amount of contractual cash flows when a loan is restructured. The adoption of ASU 2022-02 resulted in a change to reporting for loan modifications to borrowers experiencing financial difficulties. With the adoption of ASU 2022-02 these modifications required enhanced reporting on the type of modifications granted and the financial magnitude of the concessions granted. When the Company modifies a loan with financial difficulty, 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 amount; or principal forgiveness. The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted: Year Ended December 31, 2023 Interest Rate Reduction Term Extension Combination - Term Extension and Interest Rate Reduction (Dollars in thousands) Amortized Cost % of Total Class of Financing Receivables Amortized Cost % of Total Class of Financing Receivables Amortized Cost % of Total Class of Financing Receivables Residential $ 174 0.007 % $ 311 0.012 % $ 160 0.006 % Total $ 174 $ 311 $ 160 The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulties: Year Ended December 31, 2023 Loan Type Term Extension Interest Rate Reduction Residential Added a weighted-average 12 years to the life of loans, which reduced monthly payment amounts for the borrowers. Interest rates were reduced by an average of one and a half percent The following table depicts the financing receivables that had a payment default that were modified to borrowers experiencing financial difficulty since the adoption of ASU 2022-02 effective January 1, 2023: Year Ended December 31, 2023 Amortized Cost Basis of Modified Financing Receivables that Subsequently Defaulted (In thousands) Interest Rate Reduction Term Extension Residential $ 31 $ 124 Total $ 31 $ 124 The following table depicts the performance of loans that have been modified since the adoption of ASU 2022-02 effective January 1, 2023: Payment Status (Amortized Cost Basis) (In thousands) Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due Year Ended December 31, 2023 Residential $ 490 $ 124 $ - $ 31 Total $ 490 $ 124 $ - $ 31 80 Table of Contents Troubled Debt Restructuring Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company accounted for loan modifications to borrowers experiencing financial difficulty when concessions were granted as TDRs. The following tables are disclosures related to TDRs in prior periods. The following tables illustrate the recorded investment and number of modifications designated as TDRs, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring: Year Ended December 31, 2022 (Dollars in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Residential 10 $ 829 $ 928 Total TDRs 10 $ 829 $ 928 The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the year: Year Ended December 31, 2022 Year Ended December 31, 2021 (Dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Commercial loans: C&I 1 $ 320 - $ - Total commercial loans 1 $ 320 - $ - Consumer loans: Auto 2 $ 20 3 $ 36 Total consumer loans 2 $ 20 3 $ 36 Residential 50 $ 3,387 49 $ 2,830 Total TDRs 53 $ 3,727 52 $ 2,866 7. Premises, Equipment and Leases A summary of premises and equipment follows: December 31, (In thousands) 2023 2022 Land, buildings and improvements $ 146,564 $ 121,156 Furniture and equipment 96,928 68,653 Premises and equipment before accumulated depreciation $ 243,492 $ 189,809 Accumulated depreciation ( 162,817 ) ( 120,762 ) Total premises and equipment $ 80,675 $ 69,047 Buildings and improvements are depreciated based on useful lives of five to twenty years . Furniture and equipment is depreciated based on useful lives of three to ten years . Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, included in other assets and other liabilities , respectively, on the consolidated balance sheets. The Company does not have any significant finance leases in which we are the lessee as of December 31, 2023 and December 31, 2022. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in occupancy expense in the consolidated statements of income. The Company made a policy election to exclude the recognition requirements to all classes of leases with original terms of 12 months or less. Instead, the short-term lease payments are recognized in profit or loss on a straight-line basis over the lease term. 81 Table of Contents The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes and insurance are not included in the measurement of the lease liability since they are generally able to be segregated. Our leases relate primarily to office space and bank branches, and some contain options to renew the lease. These options to renew are generally not considered reasonably certain to exercise, and are therefore not included in the lease term until such time that the option to renew is reasonably certain. As of December 31, 2023, operating lease ROU assets and liabilities were $ 26.7 million and $ 28.2 million, respectively. As of December 31, 2022, operating lease ROU assets and liabilities were $ 23.9 million and $ 25.6 million, respectively. The table below summarizes net lease cost: December 31, (In thousands) 2023 2022 Operating lease cost $ 6,843 $ 6,643 Variable lease cost 2,457 2,041 Short-term lease cost 415 297 Sublease income ( 286 ) ( 266 ) Total operating lease cost $ 9,429 $ 8,715 The table below shows future minimum rental commitments related to non-cancelable operating leases for the next five years and thereafter as of December 31, 2023: (In thousands) 2024 $ 7,102 2025 5,778 2026 4,856 2027 4,065 2028 2,739 Thereafter 7,528 Total lease payments $ 32,068 Less: interest ( 3,842 ) Present value of lease liabilities $ 28,226 The following table shows the weighted average remaining operating lease term, the weighted average discount rate and supplemental information on the consolidated statements of cash flows for operating leases: December 31, (In thousands except for percent and period data) 2023 2022 Weighted average remaining lease term, in years 6.55 6.42 Weighted average discount rate 3.68 % 3.10 % Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 6,138 $ 8,371 ROU assets obtained in exchange for lease liabilities 8,797 7,377 As of December 31, 2023 there are no new significant leases that have not yet commenced. Rental expense included in occupancy expense amounted to $ 7.9 million in 2023, $ 7.2 million in 2022 and $ 7.2 million in 2021. 8. Goodwill and Other Intangible Assets A summary of goodwill is as follows: (In thousands) January 1, 2023 $ 281,204 Goodwill acquired 80,647 December 31, 2023 $ 361,851 January 1, 2022 $ 280,541 Goodwill acquired 663 December 31, 2022 $ 281,204 82 Table of Contents The Company has intangible assets with definite useful lives capitalized on its consolidated balance sheet in the form of core deposit and other identified intangible assets. These intangible assets are amortized over their estimated useful lives, which range primarily from one to twenty years . There was no impairment of goodwill recorded during the years ended December 31, 2023, 2022 and 2021. A summary of core deposit and other intangible assets follows: December 31, (In thousands) 2023 2022 Core deposit intangibles: Gross carrying amount $ 31,188 $ 6,161 Less: accumulated amortization 2,363 6,133 Net carrying amount $ 28,825 $ 28 Identified intangible assets: Gross carrying amount $ 31,826 $ 25,179 Less: accumulated amortization 20,208 17,866 Net carrying amount $ 11,618 $ 7,313 Total intangibles: Gross carrying amount $ 63,014 $ 31,340 Less: accumulated amortization 22,571 23,999 Net carrying amount $ 40,443 $ 7,341 Amortization expense on intangible assets with definite useful lives totaled $ 4.7 million for 2023, $ 2.3 million for 2022 and $ 2.8 million for 2021. Amortization expense on intangible assets with definite useful lives is expected to total $ 8.1 million for 2024, $ 7.1 million for 2025, $ 6.2 million for 2026, $ 5.2 million for 2027, $ 4.2 million for 2028 and $ 9.7 million thereafter. Other identified intangible assets include customer lists and non-compete agreements. During the years ended December 31, 2023, 2022 and 2021, there was no impairment of intangible assets. 9. Deposits The following table sets forth the maturity distribution of time deposits: (In thousands) December 31, 2023 Within one year $ 1,206,689 After one but within two years 57,989 After two but within three years 32,950 After three but within four years 19,217 After four but within five years 7,209 After five years 655 Total $ 1,324,709 Time deposits of $250,000 or more aggregated $ 263.1 million and $ 48.4 million December 31, 2023 and 2022, respectively. 10. Borrowings Short-Term Borrowings In addition to the liquidity provided by balance sheet cash flows, liquidity must also be supplemented with additional sources such as credit lines from correspondent banks as well as borrowings from the FHLB and the Federal Reserve Bank. Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements and brokered certificate of deposit (“CD”) accounts. 83 Table of Contents Short-term borrowings totaled $ 386.7 million and $ 585.0 million at December 31, 2023 and 2022, respectively, and consist of Federal funds purchased and securities sold under repurchase agreements, which generally represent overnight borrowing transactions and other short-term borrowings, primarily FHLB advances, with original maturities of one year or less. The Company has unused lines of credit with the FHLB and access to brokered deposits available for short-term financing. Those sources totaled approximately $ 2.87 billion and $ 2.90 billion at December 31, 2023 and 2022, respectively. Borrowings on the FHLB lines are secured by FHLB stock, certain securities and one-to-four family first lien mortgage loans. Securities collateralizing repurchase agreements are held in safekeeping by nonaffiliated financial institutions and are under the Company’s control. Information related to short-term borrowings is summarized as follows: December 31, (Dollars in thousands) 2023 2022 2021 Federal funds purchased: Balance at year-end $ - $ 60,000 $ - Average during the year 24,575 14,644 17 Maximum month end balance 60,000 80,000 - Weighted average rate during the year 5.16 % 4.02 % 0.11 % Weighted average rate at year-end 5.63 % 4.28 % - Securities sold under repurchase agreements: Balance at year-end $ 93,651 $ 86,012 $ 97,795 Average during the year 70,251 69,561 100,519 Maximum month end balance 96,195 88,637 135,623 Weighted average rate during the year 1.06 % 0.10 % 0.13 % Weighted average rate at year-end 1.49 % 0.11 % 0.11 % Other short-term borrowings: Balance at year-end $ 293,000 $ 439,000 $ - Average during the year 450,377 46,371 1,302 Maximum month end balance 593,000 439,000 - Weighted average rate during the year 5.24 % 4.24 % 2.02 % Weighted average rate at year-end 5.28 % 4.45 % - See Note 4 for additional information regarding securities pledged as collateral for securities sold under the repurchase agreements. Long-Term Debt Long-term debt consists of obligations having an original maturity at issuance of more than one year. A majority of the Company’s long-term debt is comprised of FHLB advances collateralized by the FHLB stock owned by the Company, and a blanket lien on its residential real estate mortgage loans. As of December 31, 2023 the Company had no callable long-term debt. A summary is as follows: (Dollars in thousands) December 31, 2023 December 31, 2022 Maturity Amount Weighted Average Rate Amount Weighted Average Rate 2025 $ 26,603 4.35 % $ 1,519 4.39 % 2031 3,193 2.45 % 3,296 2.45 % Total $ 29,796 $ 4,815 Subordinated Debt On June 23, 2020, the Company issued $ 100.0 million aggregate principal amount of 5.00 % fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00 %, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85 %, payable quarterly in arrears commencing on October 1, 2025. The subordinated notes issuance costs of $ 2.2 million are being amortized on a straight-line basis into interest expense over five years . The Company may redeem the subordinated notes (1) in whole or in part beginning with the interest payment date of July 1, 2025, and on any interest payment date thereafter or (2) in whole but not in part upon the occurrence of a “Tax Event”, a “Tier 2 Capital Event” or in the event the Company is required to register as an investment company pursuant to the Investment Company Act of 1940, as amended. The redemption price for any redemption is 100 % of the principal amount of the subordinated notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any redemption of the subordinated notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations. The Company repurchased $ 2.0 million of the subordinated notes during the year ended December 31, 2022 at a discount of $ 0.1 million. 84 Table of Contents The subordinated notes assumed in connection with the Salisbury acquisition included $ 25.0 million of 3.50 % fixed-to-floating rate subordinated notes due 2031. The subordinated notes, which qualify as Tier 2 capital, have a maturity date of March 31, 2031 and bear interest at an annual rate of 3.50 %, payable quarterly in arrears commencing on June 30, 2021, and a floating rate of interest equivalent to the three-month SOFR plus a spread of 2.80 %, payable quarterly in arrears commencing on June 30, 2026. The subordinated notes are redeemable, without penalty, on or after March 31, 2026 and, in certain limited circumstances, prior to that date. As of the acquisition date, the fair value discount was $ 3.0 million . The following table summarizes the Company’s subordinated debt: (Dollars in thousands) December 31, 2023 December 31, 2022 Subordinated notes issued June 2020 - fixed interest rate of 5.00 % through June 2025 and a variable interest rate equivalent to three-month SOFR plus 4.85 % thereafter, maturing July 1, 2030 $ 98,000 $ 98,000 Subordinated notes issued March 2021 and acquired August 2023 - fixed interest rate of 3.50 % through June 2026 and a variable interest rate equivalent to three-month SOFR plus 2.80 % thereafter, maturing March 31, 2031 25,000 - Subtotal subordinated notes $ 123,000 $ 98,000 Unamortized debt issuance costs and unamortized fair value discount ( 3,256 ) ( 1,073 ) Total subordinated debt, net $ 119,744 $ 96,927 Junior Subordinated Debt The Company sponsors five business trusts, CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II (collectively, the “Trusts”). The Company’s junior subordinated debentures include amounts related to the Company’s NBT Statutory Trust I and II as well as junior subordinated debentures associated with one statutory trust affiliate that was acquired from our merger with CNB Financial Corp. and two statutory trusts that were acquired from our acquisition of Alliance Financial Corporation (“Alliance”). The Trusts were formed for the purpose of issuing company-obligated mandatorily redeemable trust preferred securities to third-party investors and investing in the proceeds from the sale of such preferred securities solely in junior subordinated debt securities of the Company for general corporate purposes. The Company guarantees, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities. The Trusts are VIEs for which the Company is not the primary beneficiary, as defined by GAAP. In accordance with GAAP, the accounts of the Trusts are not included in the Company’s consolidated financial statements. See Note 1 for additional information about the Company’s consolidation policy. The debentures held by each trust are the sole assets of that trust. The Trusts hold, as their sole assets, junior subordinated debentures of the Company with face amounts totaling $ 98.0 million at December 31, 2023. The Company owns all of the common securities of the Trusts and has accordingly recorded $ 3.2 million in equity method investments classified as other assets in our consolidated balance sheets at December 31, 2023. The Company owns all of the common stock of the Trusts, which have issued trust preferred securities in conjunction with the Company issuing trust preferred debentures to the Trusts. The terms of the trust preferred debentures are substantially the same as the terms of the trust preferred securities. As of December 31, 2023, the Trusts had the following trust preferred securities outstanding and held the following junior subordinated debentures of the Company (dollars in thousands): Description Issuance Date Trust Preferred Securities Outstanding Interest Rate Trust Preferred Debt Owed To Trust Final Maturity Date CNBF Capital Trust I August 1999 $ 18,000 3-month Term SOFR + 0.26161 % plus 2.75 % $ 18,720 August 2029 NBT Statutory Trust I November 2005 5,000 3-month Term SOFR + 0.26161 % plus 1.40 % 5,155 December 2035 NBT Statutory Trust II February 2006 50,000 3-month Term SOFR + 0.26161 % plus 1.40 % 51,547 March 2036 Alliance Financial Capital Trust I December 2003 10,000 3-month Term SOFR + 0.26161 % plus 2.85 % 10,310 January 2034 Alliance Financial Capital Trust II September 2006 15,000 3-month Term SOFR + 0.26161 % plus 1.65 % 15,464 September 2036 85 Table of Contents The Company’s junior subordinated debentures are redeemable prior to the maturity date at our option upon each trust’s stated option repurchase dates and from time to time thereafter. These debentures are also redeemable in whole at any time upon the occurrence of specific events defined within the trust indenture. Our obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the issuers’ obligations under the trust preferred securities. The Company owns all of the common stock of the Trusts, which have issued trust preferred securities in conjunction with the Company issuing trust preferred debentures to the Trusts. The terms of the trust preferred debentures are substantially the same as the terms of the trust preferred securities. With respect to the Trusts, the Company has the right to defer payments of interest on the debentures issued to the Trusts at any time or from time to time for a period of up to ten consecutive semi-annual periods with respect to each deferral period. Under the terms of the debentures, if in certain circumstances there is an event of default under the debentures or the Company elects to defer interest on the debentures, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock. Despite the fact that the Trusts are not included in the Company’s consolidated financial statements, $ 97 million of the $ 101 million in trust preferred securities issued by these subsidiary trusts is included in the Tier 1 capital of the Company for regulatory capital purposes as allowed by the Federal Reserve Board (NBT Bank owns $ 1.0 million of CNBF Trust I securities). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires bank holding companies with assets greater than $ 500 million to be subject to the same capital requirements as insured depository institutions, meaning, for instance, that such bank holding companies will not be able to count trust preferred securities issued after May 19, 2010 as Tier 1 capital. The aforementioned Trusts are grandfathered with respect to this enactment based on their date of issuance. 11. Income Taxes The significant components of income tax expense attributable to operations are as follows: Years Ended December 31, (In thousands) 2023 2022 2021 Current Federal $ 22,829 $ 51,077 $ 35,483 State 5,890 12,934 8,626 Total Current $ 28,719 $ 64,011 $ 44,109 Deferred Federal $ 4,593 $ ( 15,862 ) $ 507 State 1,365 ( 3,988 ) 357 Total Deferred $ 5,958 $ ( 19,850 ) $ 864 Total income tax expense $ 34,677 $ 44,161 $ 44,973 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: December 31, (In thousands) 2023 2022 Deferred tax assets: Allowance for loan losses $ 28,039 $ 24,792 Lease liability 6,917 6,273 Deferred compensation 9,915 9,181 Fair value adjustments on acquisitions 18,306 125 Loan fees 30,778 33,389 Stock-based compensation expense 3,006 2,822 Unrealized losses on securities 45,446 53,663 Other 9,362 5,902 Total deferred tax assets $ 151,769 $ 136,147 Deferred tax liabilities: Pension benefits $ 14,742 $ 13,103 Lease right-of-use asset 6,551 5,877 Amortization of intangible assets 22,850 14,112 Premises and equipment, primarily due to accelerated depreciation 2,746 4,889 Other 1,669 846 Total deferred tax liabilities $ 48,558 $ 38,827 Net deferred tax asset at year-end $ 103,211 $ 97,320 Net deferred tax asset at beginning of year 97,320 22,038 Increase in net deferred tax asset $ 5,891 $ 75,282 86 Table of Contents Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Based on available evidence, gross deferred tax assets will ultimately be realized and a valuation allowance was not deemed necessary at December 31, 2023 and 2022. The following is a reconciliation of the provision for income taxes to the amount computed by applying the applicable Federal statutory rate to income before taxes: Years Ended December 31, (In thousands) 2023 2022 2021 Federal income tax at statutory rate $ 32,226 $ 41,193 $ 41,971 Tax exempt income ( 1,442 ) ( 984 ) ( 1,014 ) Net increase in cash surrender value of life insurance ( 1,367 ) ( 1,215 ) ( 1,230 ) Federal tax credits ( 2,855 ) ( 2,417 ) ( 1,884 ) State taxes, net of federal tax benefit 5,732 7,067 7,097 Other, net 2,383 517 33 Income tax expense $ 34,677 $ 44,161 $ 44,973 A reconciliation of the beginning and ending balance of Federal and State gross unrecognized tax benefits (“UTBs”) is as follows: (In thousands) 2023 2022 Balance at January 1 $ 1,942 $ 1,545 Additions for tax positions of prior years 647 3 Reduction for tax positions of prior years ( 104 ) - Current period tax positions 394 394 Balance at December 31 $ 2,879 $ 1,942 Amount that would affect the effective tax rate if recognized, gross of tax $ 2,274 $ 1,535 The Company recognizes interest and penalties on the income tax expense line in the accompanying consolidated statements of income. The Company monitors changes in tax statutes and regulations to determine if significant changes will occur over the next 12 months. As of December 31, 2023, no significant changes to UTBs are projected; however, tax audit examinations are possible, but it is not reasonably possible to estimate when examinations in subsequent years will be completed . The Company recognized an insignificant amount of interest expense related to UTBs in the consolidated statement of income for the year ended December 31, 2023, 2022 and 2021. As of December 31, 2023, the Company is no longer subject to U.S. Federal tax examination by tax authorities for years prior to 2020. The tax years 2017 to 2019 are currently being audited by New York State. 12. Employee Benefit Plans Defined Benefit Post-Retirement Plans The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at December 31, 2023. Benefits paid from the Plan are based on age, years of service, compensation and social security benefits and are determined in accordance with defined formulas. The Company’s policy is to fund the Plan in accordance with Employee Retirement Income Security Act of 1974 standards. Assets of the Plan are invested in publicly traded stocks, bonds and mutual funds. Prior to January 1, 2000, the Plan was a traditional defined benefit plan based on final average compensation. On January 1, 2000, the Plan was converted to a cash balance plan with grandfathering provisions for existing participants. Effective March 1, 2013, the Plan was amended. Benefit accruals for participants who, as of January 1, 2000, elected to continue participating in the traditional defined benefit plan design were frozen as of March 1, 2013. In May 2013, the noncontributory, frozen, defined benefit pension plan assumed from Alliance in the acquisition was merged into the Plan. In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives. The Company also assumed supplemental retirement plans for former executives in the Alliance acquisition. These supplemental employee retirement plans and the Plan are collectively referred to herein as “Pension Benefits.” 87 Table of Contents In addition, the Company provides certain health care benefits for retired employees. Benefits were accrued over the employees’ active service period. Only employees that were employed by the Company on or before January 1, 2000 are eligible to receive post-retirement health care benefits. The Plan is contributory for participating retirees, requiring participants to absorb certain deductibles and coinsurance amounts with contributions adjusted annually to reflect cost sharing provisions and benefit limitations called for in the Plan. Employees become eligible for these benefits if they reach normal retirement age while working for the Company. For eligible employees described above, the Company funds the cost of post-retirement health care as benefits are paid. The Company elected to recognize the transition obligation on a delayed basis over twenty years . In addition, the Company assumed post-retirement medical life insurance benefits for certain Alliance employees, retirees and their spouses, if applicable, in the Alliance acquisition. These post-retirement benefits are referred to herein as “Other Benefits.” Accounting standards require an employer to: (1) recognize the overfunded or underfunded status of defined benefit post-retirement plans, which is measured as the difference between plan assets at fair value and the benefit obligation, as an asset or liability in its balance sheet; (2) recognize changes in that funded status in the year in which the changes occur through comprehensive income; and (3) measure the defined benefit plan assets and obligations as of the date of its year-end balance sheet. The components of AOCI, which have not yet been recognized as components of net periodic benefit cost, related to pensions and other post-retirement benefits are summarized below: Pension Benefits Other Benefits (In thousands) 2023 2022 2023 2022 Net actuarial loss (gain) $ 29,301 $ 35,971 $ ( 178 ) $ ( 921 ) Prior service cost (credit) 198 211 ( 10 ) ( 14 ) Total amounts recognized in AOCI (pre-tax) $ 29,499 $ 36,182 $ ( 188 ) $ ( 935 ) A December 31 measurement date is used for the pension, supplemental pension and post-retirement benefit plans. The following table sets forth changes in benefit obligations, changes in plan assets and the funded status of the pension plans and other post-retirement benefits: Pension Benefits Other Benefits (In thousands) 2023 2022 2023 2022 Change in benefit obligation: Benefit obligation at beginning of year $ 75,940 $ 88,919 $ 4,183 $ 5,152 Service cost 1,904 2,024 4 7 Interest cost 4,002 2,765 240 170 Plan participants’ contributions - - 141 147 Actuarial loss (gain) 1,387 ( 11,158 ) 710 ( 695 ) Amendments 30 - - - Benefits paid ( 6,269 ) ( 6,610 ) ( 563 ) ( 598 ) Projected benefit obligation at end of year $ 76,994 $ 75,940 $ 4,715 $ 4,183 Change in plan assets: Fair value of plan assets at beginning of year $ 113,316 $ 135,867 $ - $ - Gain (loss) on plan assets 12,803 ( 17,260 ) - - Employer contributions 1,319 1,319 422 451 Plan participants’ contributions - - 141 147 Benefits paid ( 6,269 ) ( 6,610 ) ( 563 ) ( 598 ) Fair value of plan assets at end of year $ 121,169 $ 113,316 $ - $ - Funded (unfunded) status at year end $ 44,175 $ 37,376 $ ( 4,715 ) $ ( 4,183 ) An asset is recognized for an overfunded plan and a liability is recognized for an underfunded plan. The accumulated benefit obligation for pension benefits was $ 77.0 million and $ 75.9 million at December 31, 2023 and 2022, respectively. The accumulated benefit obligation for other post-retirement benefits was $ 4.7 million and $ 4.2 million at December 31, 2023 and 2022, respectively. The funded status of the pension and other post-retirement benefit plans has been recognized as follows in the consolidated balance sheets at December 31, 2023 and 2022. Pension Benefits Other Benefits (In thousands) 2023 2022 2023 2022 Other assets $ 59,889 $ 53,031 $ - $ - Other liabilities ( 15,714 ) ( 15,655 ) ( 4,715 ) ( 4,183 ) Funded status $ 44,175 $ 37,376 $ ( 4,715 ) $ ( 4,183 ) 88 Table of Contents The following assumptions were used to determine the benefit obligation and the net periodic pension cost for the years indicated: Years Ended December 31, 2023 2022 2021 Weighted average assumptions: The following assumptions were used to determine benefit obligations: Discount rate 4.91 % - 5.66 % 5.54 % - 5.66 % 3.23 % - 3.35 % Expected long-term return on plan assets 6.70 % 6.70 % 6.70 % Rate of compensation increase 3.00 % 3.00 % 3.00 % Interest rate of credit for cash balance plan 4.66 % 3.99 % 1.94 % The following assumptions were used to determine net periodic pension cost: Discount rate 3.35 % - 5.66 % 3.23 % - 3.35 % 3.08 % - 3.25 % Expected long-term return on plan assets 6.70 % 6.70 % 7.00 % Rate of compensation increase 3.00 % 3.00 % 3.00 % Interest rate of credit for cash balance plan 3.99 % 1.94 % 1.62 % Net periodic benefit cost and other amounts recognized in OCI for the years ended December 31 included the following components: Pension Benefits Other Benefits (In thousands) 2023 2022 2021 2023 2022 2021 Components of net periodic (benefit) cost: Service cost $ 1,904 $ 2,024 $ 2,069 $ 4 $ 7 $ 8 Interest cost 4,002 2,765 2,717 240 170 163 Expected return on plan assets ( 7,379 ) ( 8,884 ) ( 8,786 ) - - - Amortization of prior service cost (credit) 43 108 59 ( 4 ) 6 51 Amortization of unrecognized net loss (gain) 2,633 623 1,263 ( 32 ) - - Net periodic pension cost (benefit) $ 1,203 $ ( 3,364 ) $ ( 2,678 ) $ 208 $ 183 $ 222 Other changes in plan assets and benefit obligations recognized in OCI (pre-tax): Net (gain) loss $ ( 4,037 ) $ 14,987 $ ( 3,237 ) $ 711 $ ( 695 ) $ ( 543 ) Prior service cost 30 - - - - - Amortization of prior service (cost) credit ( 43 ) ( 108 ) ( 59 ) 4 ( 6 ) ( 51 ) Amortization of unrecognized net (loss) gain ( 2,633 ) ( 623 ) ( 1,263 ) 32 - - Total recognized in OCI $ ( 6,683 ) $ 14,256 $ ( 4,559 ) $ 747 $ ( 701 ) $ ( 594 ) Total recognized in net periodic (benefit) cost and OCI, pre-tax $ ( 5,480 ) $ 10,892 $ ( 7,237 ) $ 955 $ ( 518 ) $ ( 372 ) The service cost component of the net periodic (benefit) cost is included in Salaries and Employee Benefits and the interest cost, expected return on plan assets and net amortization components are included in Other Noninterest Expense on the consolidated statements of income. The following table sets forth estimated future benefit payments for the pension plans and other post-retirement benefit plans as of December 31, 2023: (In thousands) Pension Benefits Other Benefits 2024 $ 7,676 $ 444 2025 7,249 444 2026 7,269 442 2027 7,759 422 2028 7,382 414 2029 - 2033 33,035 1,860 The Company made no voluntary contributions to the pension and other benefit plans during the years ended December 31, 2023 and 2022. For measurement purposes, the annual rates of increase in the per capita cost of covered medical and prescription drug benefits for fiscal year 2023 were assumed to be 4.5 % to 6.5 %. The rates were assumed to decrease gradually to 4.0 % for fiscal year 2075 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on amounts reported for health care plans. 89 Table of Contents Plan Investment Policy The Company’s key investment objectives in managing its defined benefit plan assets are to ensure that present and future benefit obligations to all participants and beneficiaries are met as they become due; to provide a total return that, over the long-term, maximizes the ratio of the plan assets to liabilities, while minimizing the present value of required Company contributions, at the appropriate levels of risk; to meet statutory requirements and regulatory agencies’ requirements; and to satisfy applicable accounting standards. The Company periodically evaluates the asset allocations, funded status, rate of return assumption and contribution strategy for satisfaction of our investment objectives. The target and actual allocations expressed as a percentage of the defined benefit pension plan’s assets are as follows: Target 2023 2023 2022 Cash and cash equivalents 0 - 15 % 2 % 3 % Fixed income securities 30 - 60 % 38 % 38 % Equities 40 - 70 % 60 % 59 % Total 100 % 100 % Only high-quality bonds are to be included in the portfolio. All issues that are rated lower than A by Standard and Poor’s are to be excluded. Equity securities at December 31, 2023 and 2022 do not include any Company common stock. The following table presents the financial instruments recorded at fair value on a recurring basis by the Plan: (In thousands) Level 1 Level 2 December 31, 2023 Cash and cash equivalents $ 2,435 $ - $ 2,435 Foreign equity mutual funds 39,001 - 39,001 Equity mutual funds 34,281 - 34,281 U.S. government bonds - 13 13 Corporate bonds - 45,439 45,439 Total $ 75,717 $ 45,452 $ 121,169 Level 1 Level 2 December 31, 2022 Cash and cash equivalents $ 3,401 $ - $ 3,401 Foreign equity mutual funds 36,111 - 36,111 Equity mutual funds 30,859 - 30,859 U.S. government bonds - 20 20 Corporate bonds - 42,925 42,925 Total $ 70,371 $ 42,945 $ 113,316 The plan had no financial instruments recorded at fair value on a non-recurring basis as of December 31, 2023 and 2022. Determination of Assumed Rate of Return The expected long-term rate-of-return on assets was 6.7 % at December 31, 2023 and 2022, respectively. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the portfolio considering the asset distribution and related historical rates of return. The appropriateness of the assumption is reviewed annually. Employee 401(k) and Employee Stock Ownership Plans The Company maintains a 401(k) and employee stock ownership plan (the “401(k) Plan”). The Company contributes to the 401(k) Plan based on employees’ contributions out of their annual salaries. In addition, the Company may also make discretionary contributions to the 401(k) Plan based on profitability. Participation in the 401(k) Plan is contingent upon certain age and service requirements. The employer contributions associated with the 401(k) Plan were $ 4.4 million in 2023, $ 4.0 million in 2022 and $ 3.9 million in 2021. Other Retirement Benefits Included in other liabilities is $ 0.9 million and $ 1.1 million at December 31, 2023 and 2022, respectively, for supplemental retirement benefits for retired executives from legacy plans assumed in acquisitions. The Company recognized $ 0.2 million in expense for each of the years ended December 31, 2023, 2022 and 2021, related to these plans. 90 Table of Contents 13. Stock-Based Compensation In May 2018, the Company adopted the NBT Bancorp Inc. 2018 Omnibus Incentive Plan (the “Stock Plan”) replacing the 2008 Omnibus Incentive Plan which automatically expired in April 2018. Under the terms of the Stock Plan, equity-based awards are granted to directors and employees to increase their direct proprietary interest in the operations and success of the Company. The Stock Plan assumed all prior equity-based incentive plans and any new equity-based awards are granted under the terms of the Stock Plan. Restricted shares granted under the Plan typically vest after three or five years for employees and one or three years for non-employee directors. Restricted stock units granted under the Stock Plan may have different terms and conditions. Performance shares and units granted under the Stock Plan for executives may have different terms and conditions. Since 2011, the Company primarily grants restricted stock unit awards. Stock option grants since that time were reloads of existing grants which terminate ten years from the date of the grant. Under terms of the Stock Plan, stock options are granted to purchase shares of the Company’s common stock at a price equal to the fair market value of the common stock on the date of the grant. Shares issued as a result of vesting of restricted stock unit awards and stock option exercises are funded from the Company’s treasury stoc k. The Company has outstanding restricted stock granted from various plans at December 31, 2023. The Company recognized $ 5.1 million, $ 4.5 million and $ 4.4 million in stock-based compensation expense related to these stock awards for the years ended December 31, 2023, 2022 and 2021, respectively. Tax benefits recognized with respect to restricted stock units were $ 1.3 million, $ 1.2 million and $ 1.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Unrecognized compensation cost related to restricted stock units totaled $ 5.4 million at December 31, 2023 and will be recognized over 1.4 years on a weighted average basis. Shares issued are funded from the Company’s treasury stock. The following table summarizes information for unvested restricted stock units outstanding as of December 31, 2023: Number of Shares Weighted- Average Grant Date Fair Value Unvested at January 1, 2023 532,372 $ 32.15 Forfeited ( 4,597 ) 33.85 Vested ( 126,312 ) 31.41 Granted 139,187 33.73 Unvested at December 31, 2023 540,650 $ 32.72 The following table summarizes information concerning stock options outstanding: (In thousands, except share and per share data) Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value Outstanding at January 1, 2023 9,100 $ 29.89 Exercised ( 3,630 ) 25.09 Expired ( 120 ) 26.29 Outstanding at December 31, 2023 5,350 $ 33.24 2.50 $ 46 Exercisable at December 31, 2023 5,350 $ 33.24 2.50 $ 46 T here was no stock-based compensation expense for stock option awards for the years ended December 31, 2023, 2022 and 2021. Cash proceeds, tax benefits and intrinsic value related to total stock options exercised is as follows: Years Ended December 31, (In thousands) 2023 2022 2021 Proceeds from stock options exercised $ 91 $ - $ 112 Tax benefits related to stock options exercised 13 - 13 Intrinsic value of stock options exercised 50 - 52 The Company has 182,418 securities remaining available to be granted as part of the Plan at December 31, 2023. 91 Table of Contents 14. Stockholders’ Equity In accordance with GAAP, unrecognized prior service costs and net actuarial gains or losses associated with the Company’s pension and postretirement benefit plans and unrealized gains and losses on AFS securities are included in AOCI, net of tax. For the years ended December 31, components of AOCI are: (In thousands) 2023 2022 2021 Unrecognized prior service cost and net actuarial (losses) on pension plans $ ( 21,983 ) $ ( 26,435 ) $ ( 16,269 ) Unrealized net holding (losses) on AFS securities ( 138,951 ) ( 163,599 ) ( 7,075 ) AOCI $ ( 160,934 ) $ ( 190,034 ) $ ( 23,344 ) Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends. The approval of the Office of the Comptroller of the Currency (“OCC”) is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations. At December 31, 2023, approximately $ 106.6 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends also is subject to the Bank’s being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus. The Company purchased 155,500 shares of its common stock during the year ended December 31, 2023, for a total of $ 4.9 million at an average price of $ 31.79 per share under its previously announced share repurchase program. This repurchase program under which these shares were purchased was due to expire on December 31, 2023; however, on December 18, 2023, the Board of Directors authorized and approved an amendment to the repurchase program. Pursuant to the amended stock repurchase program, the Company may repurchase up to 2,000,000 shares of the outstanding shares of its common stock with all repurchases under the stock repurchase program to be made by December 31, 2025 . The Company may repurchase shares of its common stock from time to time to mitigate the potential dilutive effects of stock-based incentive plans and other potential uses of common stock for corporate purposes. As of December 31, 2023, there were 2,000,000 shares available for repurchase under this plan which is set to expire on December 31, 2025 . 15. Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of NBT Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 Capital to risk-weighted assets and of Tier 1 capital to average assets. In addition to maintaining minimum capital ratios, the Company is subject to a capital conservation buffer (“Buffer”) of 2.50% above the minimum to avoid restriction on capital distributions and discretionary bonus paychecks to officers. At December 31, 2023 and 2022, the Company and the Bank meet all capital adequacy requirements to which they were subject. Under their prompt corrective action regulations, regulatory authorities are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on an institution’s financial statements. The regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2023 and 2022, the most recent notifications from the Bank’s regulators categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 Capital to Average Asset ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category. 92 Table of Contents In Mar ch 2020, the OCC, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”) announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses (after-tax) has been deferred and will phase into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, the Company is allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020 and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020 and December 31, 2021, will also phase into regulatory capital at 25% per year commencing January 1, 2022. The Company adopted the capital transition relief over the permissible five-year period . The Company and NBT Bank’s actual capital amounts and ratios are presented as follows: Actual Regulatory Ratio Requirements (Dollars in thousands) Amount Ratio Minimum Capital Adequacy Minimum plus Buffer For Classification as Well- Capitalized As of December 31, 2023 Tier 1 Capital (to average assets) Company $ 1,301,560 9.71 % 4.00 % 5.00 % NBT Bank 1,223,551 9.16 % 4.00 % 5.00 % Common Equity Tier 1 Capital Company 1,204,560 11.57 % 4.50 % 7.00 % 6.50 % NBT Bank 1,223,551 11.84 % 4.50 % 7.00 % 6.50 % Tier 1 Capital (to risk-weighted assets) Company 1,301,560 12.50 % 6.00 % 8.50 % 8.00 % NBT Bank 1,223,551 11.84 % 6.00 % 8.50 % 8.00 % Total Capital (to risk-weighted assets) Company 1,534,826 14.75 % 8.00 % 10.50 % 10.00 % NBT Bank 1,333,817 12.91 % 8.00 % 10.50 % 10.00 % As of December 31, 2022 Tier 1 Capital (to average assets) Company $ 1,193,336 10.32 % 4.00 % 5.00 % NBT Bank 1,133,481 9.86 % 4.00 % 5.00 % Common Equity Tier 1 Capital Company 1,096,336 12.12 % 4.50 % 7.00 % 6.50 % NBT Bank 1,133,481 12.63 % 4.50 % 7.00 % 6.50 % Tier 1 Capital (to risk-weighted assets) Company 1,193,336 13.19 % 6.00 % 8.50 % 8.00 % NBT Bank 1,133,481 12.63 % 6.00 % 8.50 % 8.00 % Total Capital (to risk-weighted assets) Company 1,391,182 15.38 % 8.00 % 10.50 % 10.00 % NBT Bank 1,233,327 13.74 % 8.00 % 10.50 % 10.00 % 16. Earnings Per Share The following is a reconciliation of basic and diluted EPS for the years presented in the consolidated statements of income: Years Ended December 31, 2023 2022 2021 (In thousands except per share data) Net Income Weighted Average Shares Per Share Amount Net Income Weighted Average Shares Per Share Amount Net Income Weighted Average Shares Per Share Amount Basic EPS $ 118,782 44,528 $ 2.67 $ 151,995 42,917 $ 3.54 $ 154,885 43,421 $ 3.57 Effect of dilutive securities: Stock-based compensation 242 264 298 Diluted EPS $ 118,782 44,770 $ 2.65 $ 151,995 43,181 $ 3.52 $ 154,885 43,719 $ 3.54 There was a nominal number of weighted average stock options outstanding for the years ended December 31, 2023, 2022 and 2021, that were not considered in the calculation of diluted EPS since the stock options’ exercise prices were greater than the average market price during these periods. 93 Table of Contents 17. Reclassification Adjustments Out of Other Comprehensive Income (Loss) The following table summarizes the reclassification adjustments out of AOCI: Detail About AOCI Components Amount Reclassified from AOCI Affected Line Item in the Consolidated Statements of Comprehensive Income (Loss) (In thousands) Years Ended December 31, 2023 2022 2021 AFS securities: Losses on AFS securities $ 9,450 $ - $ - Net securities losses (gains) Amortization of unrealized gains related to securities transfer 427 513 577 Interest income Tax effect $ ( 2,470 ) $ ( 128 ) $ ( 145 ) Income tax (benefit) Net of tax $ 7,407 $ 385 $ 432 Cash flow hedges: Net unrealized losses on cash flow hedges reclassified to interest expense $ - $ - $ 21 Interest expense Tax effect $ - $ - $ ( 5 ) Income tax (benefit) Net of tax $ - $ - $ 16 Pension and other benefits: Amortization of net losses $ 2,601 $ 623 $ 1,263 Other noninterest expense Amortization of prior service costs 39 114 110 Other noninterest expense Tax effect $ ( 660 ) $ ( 184 ) $ ( 343 ) Income tax (benefit) Net of tax $ 1,980 $ 553 $ 1,030 Total reclassifications, net of tax $ 9,387 $ 938 $ 1,478 18. Commitments and Contingent Liabilities The Company’s concentrations of credit risk are reflected in the consolidated balance sheets. The concentrations of credit risk with standby letters of credit, unused lines of credit, commitments to originate new loans and loans sold with recourse generally follow the loan classifications. At December 31, 2023, approximately 63 % of the Company’s loans were secured by real estate located in upstate New York, northeastern Pennsylvania, western Massachusetts, southern New Hampshire, Vermont, southern Maine and central and northwestern Connecticut. Accordingly, the ultimate collectability of a substantial portion of the Company’s portfolio is susceptible to changes in market conditions of those areas. Management is not aware of any material concentrations of credit to any industry or individual borrowers. The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, standby letters of credit and certain agricultural real estate loans sold to investors with recourse, with the sold portion having a government guarantee that is assignable back to the Company upon repurchase of the loan in the event of default. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, unused lines of credit, standby letters of credit and loans sold with recourse is represented by the contractual amount of those instruments. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness. At December 31, (In thousands) 2023 2022 Unused lines of credit $ 429,430 $ 384,370 Commitments to extend credits, primarily variable rate 2,254,841 2,033,549 Standby letters of credit 44,735 53,307 Loans sold with recourse 26,423 31,021 Since many loan commitments, standby letters of credit and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. 94 Table of Contents The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third-parties. These standby letters of credit are generally issued in support of third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. As of December 31, 2023 and 2022, the fair value of the Company’s standby letters of credit was not significant. In the normal course of business there are various outstanding legal proceedings. If legal costs are deemed material by management, the Company accrues for the estimated loss from a loss contingency if the information available indicates that it is probable that a liability had been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. The Company is required to maintain reserve balances with the Federal Reserve Bank. The required average total reserve for NBT Bank for the 14 -day maintenance period ending December 28, 2023 was $ 99.6 million. 19. Derivative Instruments and Hedging Activities The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Generally, the Company may use derivative financial instruments to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments. Currently, the Company has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. Derivatives Not Designated as Hedging Instruments The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the consolidated balance sheets at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statements of income. The Company is subject to over-the-counter derivative clearing requirements, which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company clears certain derivative transactions through the Chicago Mercantile Exchange Clearing House (“CME”). The CME requires the Company to post initial and variation margin payments to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company’s financial statements are not equal and offsetting. In 2017, the U.K. Financial Conduct Authority announced its intention to stop compelling banks to submit rates for the calculation of London Interbank Offered Rate (“LIBOR”) after 2021. In 2022, the Federal Reserve adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on the Secured Overnight Financing Rate (“SOFR”) that replaced LIBOR in certain financial contracts after June 30, 2023. As of December 31, 2023, the Company has transitioned all of its financial instruments to an alternative benchmark rate. As of December 31, 2023 and 2022, the Company had twelve and fifteen risk participation agreements, respectively, with financial institution counterparties for interest rate swaps related to participated loans. Risk participation agreements provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions. Derivatives Designated as Hedging Instruments The Company has previously entered into interest rate swaps to modify the interest rate characteristics of certain short-term FHLB advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges with currently none outstanding. 95 Table of Contents The following table summarizes the derivatives outstanding: (In thousands) Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value As of December 31, 2023 Derivatives not designated as hedging instruments Interest rate derivatives $ 1,303,711 Other assets $ 95,972 $ 1,303,711 Other liabilities $ 95,869 Risk participation agreements 62,112 Other assets 19 16,146 Other liabilities 6 Total derivatives not designated as hedging instruments $ 95,991 $ 95,875 Netting adjustments (1) 20,849 - Net derivatives in the balance sheet $ 75,142 $ 95,875 Derivatives not offset on the balance sheet $ 2,930 $ 2,930 Cash collateral (2) - - Net derivative amounts $ 72,212 $ 92,945 As of December 31, 2022 Derivatives not designated as hedging instruments Interest rate derivatives $ 1,275,708 Other assets $ 117,247 $ 1,275,708 Other liabilities $ 117,247 Risk participation agreements 88,963 Other assets 47 18,421 Other liabilities 10 Total derivatives not designated as hedging instruments $ 117,294 $ 117,257 Netting adjustments (1) 24,109 - Net derivatives in the balance sheet $ 93,185 $ 117,257 Derivatives not offset on the balance sheet $ 352 $ 352 Cash collateral (2) - - Net derivative amounts $ 92,833 $ 116,905 (1) Netting adjustments represents the amounts recorded to convert derivatives assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance on the settle to market rules for cleared derivatives. The CME legally characterizes the variation margin posted between counterparties as settlements of the outstanding derivative contracts instead of cash collateral. (2) Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s short-term rate borrowings. During 2021 the Company’s final cash flow hedge of interest rate risk matured and the remaining balance was reclassified from AOCI as a reduction to interest expense. There is no additional amount that will be reclassified from AOCI as a reduction to interest expense. The following table indicates the effect of cash flow hedge accounting on AOCI and on the consolidated statements of income: Years Ended December 31, (In thousands) 2023 2022 2021 Derivatives designated as hedging instruments: Interest rate derivatives - included component Amount of loss reclassified from AOCI into interest expense $ - $ - $ 21 The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship: Years Ended December 31, (In thousands) 2023 2022 2021 Derivatives not designated as hedging instruments: Decrease in other income $ ( 70 ) $ ( 155 ) $ ( 356 ) 96 Table of Contents 20. Fair Value Measurements and Fair Values of Financial Instruments GAAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted prices for such instruments. The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or quote from alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the methodologies used by its third-party providers in pricing the securities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flows. 97 Table of Contents The following tables set forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted for at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement: (In thousands) Level 1 Level 2 Level 3 December 31, 2023 Assets: AFS securities U.S. treasury $ 125,024 $ - $ - $ 125,024 Federal agency - 214,740 - 214,740 State & municipal - 86,306 - 86,306 Mortgage-backed - 422,268 - 422,268 Collateralized mortgage obligations - 541,544 - 541,544 Corporate - 40,976 - 40,976 Total AFS securities $ 125,024 $ 1,305,834 $ - $ 1,430,858 Equity securities 36,591 1,000 - 37,591 Derivatives - 75,142 - 75,142 Total $ 161,615 $ 1,381,976 $ - $ 1,543,591 Liabilities: Derivatives $ - $ 95,875 $ - $ 95,875 Total $ - $ 95,875 $ - $ 95,875 (In thousands) Level 1 Level 2 Level 3 December 31, 2022 Assets: AFS securities U.S. treasury $ 121,658 $ - $ - $ 121,658 Federal agency - 206,419 - 206,419 State & municipal - 82,851 - 82,851 Mortgage-backed - 473,694 - 473,694 Collateralized mortgage obligations - 588,363 - 588,363 Corporate - 54,240 - 54,240 Total AFS securities $ 121,658 $ 1,405,567 $ - $ 1,527,225 Equity securities 29,784 1,000 - 30,784 Derivatives - 93,185 - 93,185 Total $ 151,442 $ 1,499,752 $ - $ 1,651,194 Liabilities: Derivatives $ - $ 117,257 $ - $ 117,257 Total $ - $ 117,257 $ - $ 117,257 GAAP requires disclosure of assets and liabilities measured and recorded at fair value on a non-recurring basis such as goodwill, loans held for sale, other real estate owned, collateral-dependent loans individually evaluated for expected credit losses and HTM securities. The non-recurring fair value measurements recorded during the years ended December 31, 2023 and 2022 were related to loans individually evaluated for expected credit losses. Loans with fair value of $ 1.1 million as of December 31, 2022 were individually evaluated for expected credit losses where the amortized cost was adjusted to fair value. There were no loans individually evaluated expected credit losses where the amortized cost was adjusted to fair value for the year ended December 31, 2023. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the allowance for credit losses for individually evaluated collateral dependent loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10 % to 50 %. Based on the valuation techniques used, the fair value measurements for collateral dependent individually evaluated loans are classified as Level 3. The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, AFS securities, equity securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and derivatives. December 31, 2023 December 31, 2022 (In thousands) Fair Value Hierarchy Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: HTM securities 2 $ 905,267 $ 814,524 $ 919,517 $ 812,647 Net loans 3 9,539,684 9,216,162 8,049,909 7,840,350 Financial liabilities: Time deposits 2 $ 1,324,709 $ 1,285,999 $ 433,772 $ 413,868 Long-term debt 2 29,796 29,416 4,815 4,539 Subordinated debt 1 120,380 113,757 98,000 92,883 Junior subordinated debt 2 101,196 102,337 101,196 98,372 98 Table of Contents Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial wealth operation that contributes net fee income annually. The wealth management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value. HTM Securities The fair value of the Company’s HTM securities is primarily measured using information from a third-party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Net Loans Net loans include portfolio loans and loans held for sale. Loans were first segregated by type and then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments, and those expected future cash flows also include credit risk, illiquidity risk and other market factors to calculate the exit price fair value in accordance with ASC 820. Time Deposits The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value. Long-Term Debt The fair value of long-term debt was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. Subordinated Debt The fair value of subordinated debt has been measured using the observable market price as of the period reported. Junior Subordinated Debt The fair value of junior subordinated debt has been estimated using a discounted cash flow analysis. 21. Parent Company Financial Information Condensed Balance Sheets December 31, (In thousands) 2023 2022 Assets Cash and cash equivalents $ 162,364 $ 116,129 Equity securities, at estimated fair value 28,739 24,499 Investment in subsidiaries, on equity basis 1,464,980 1,245,459 Other assets 42,435 39,339 Total assets $ 1,698,518 $ 1,425,426 Liabilities and Stockholders’ Equity Total liabilities $ 272,827 $ 251,872 Stockholders’ equity 1,425,691 1,173,554 Total liabilities and stockholders’ equity $ 1,698,518 $ 1,425,426 99 Table of Contents Condensed Statements of Income Years Ended December 31, (In thousands) 2023 2022 2021 Dividends from subsidiaries $ 116,250 $ 119,000 $ 118,900 Management fee from subsidiaries 7,093 2,005 2,653 Net securities (losses) gains ( 82 ) ( 618 ) 543 Interest, dividends and other income 715 638 564 Total revenue $ 123,976 $ 121,025 $ 122,660 Operating expenses 22,930 14,035 11,956 Income before income tax benefit and equity in undistributed income of subsidiaries $ 101,046 $ 106,990 $ 110,704 Income tax expense (benefit) ( 3,785 ) ( 3,027 ) ( 2,250 ) Equity in undistributed income of subsidiaries 13,951 41,978 41,931 Net income $ 118,782 $ 151,995 $ 154,885 Condensed Statements of Cash Flows Years Ended December 31, (In thousands) 2023 2022 2021 Operating activities Net income $ 118,782 $ 151,995 $ 154,885 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of premises and equipment 353 582 1,113 Excess tax benefit on stock-based compensation ( 296 ) ( 288 ) ( 385 ) Stock-based compensation expense 5,102 4,530 4,414 Net securities losses (gains) 82 618 ( 543 ) Equity in undistributed income of subsidiaries ( 13,950 ) ( 41,978 ) ( 41,931 ) Bank owned life insurance income ( 271 ) ( 238 ) ( 326 ) Amortization of subordinated debt issuance costs 437 437 438 Discount on repurchase of subordinated debt - ( 106 ) - Net change in other assets and other liabilities ( 4,930 ) ( 8,376 ) ( 7,127 ) Net cash provided by operating activities $ 105,309 $ 107,176 $ 110,538 Investing activities Net cash provided by (used in) acquisitions $ 3,542 $ - $ - Proceeds from calls of equity securities - - 1,000 Net cash provided by investing activities $ 3,542 $ - $ 1,000 Financing activities Repurchase of subordinated debt $ - $ ( 2,000 ) $ - Proceeds from the issuance of shares to employee and other stock plans 91 - 112 Cash paid by employer for tax-withholding on stock issuance ( 1,877 ) ( 1,751 ) ( 2,931 ) Purchases of treasury shares ( 4,944 ) ( 14,713 ) ( 21,714 ) Cash dividends ( 55,886 ) ( 49,765 ) ( 47,738 ) Net cash (used in) financing activities $ ( 62,616 ) $ ( 68,229 ) $ ( 72,271 ) Net increase in cash and cash equivalents $ 46,235 $ 38,947 $ 39,267 Cash and cash equivalents at beginning of year 116,129 77,182 37,915 Cash and cash equivalents at end of year $ 162,364 $ 116,129 $ 77,182 A statement of changes in stockholders’ equity has not been presented since it is the same as the consolidated statement of changes in stockholders’ equity previously presented. 100 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.