NBT BANCORP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS NBT Bancorp Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) March 31, December 31, (In thousands, except share and per share data) 2024 2023 Assets Cash and due from banks $ 162,460 $ 173,811 Short-term interest-bearing accounts 156,632 31,378 Equity securities, at fair value 39,470 37,591 Securities available for sale, at fair value 1,418,471 1,430,858 Securities held to maturity (fair value $ 793,319 and $ 814,524 , respectively) 890,863 905,267 Federal Reserve and Federal Home Loan Bank stock 37,336 45,861 Loans held for sale 3,263 3,371 Loans 9,688,077 9,650,713 Less allowance for loan losses 115,300 114,400 Net loans $ 9,572,777 $ 9,536,313 Premises and equipment, net 80,239 80,675 Goodwill 361,851 361,851 Intangible assets, net 38,968 40,443 Bank owned life insurance 267,476 265,732 Other assets 409,393 395,889 Total assets $ 13,439,199 $ 13,309,040 Liabilities Demand (noninterest bearing) $ 3,359,789 $ 3,413,829 Savings, NOW and money market 6,467,364 6,230,456 Time 1,368,136 1,324,709 Total deposits $ 11,195,289 $ 10,968,994 Short-term borrowings 267,134 386,651 Long-term debt 29,759 29,796 Subordinated debt, net 120,101 119,744 Junior subordinated debt 101,196 101,196 Other liabilities 284,305 276,968 Total liabilities $ 11,997,784 $ 11,883,349 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 shares issued 540 540 Additional paid-in-capital 740,792 740,943 Retained earnings 1,040,563 1,021,831 Accumulated other comprehensive loss ( 164,492 ) ( 160,934 ) Common stock in treasury, at cost, 6,819,477 and 6,864,593 shares, respectively ( 175,988 ) ( 176,689 ) Total stockholders’ equity $ 1,441,415 $ 1,425,691 Total liabilities and stockholders’ equity $ 13,439,199 $ 13,309,040 See accompanying notes to unaudited interim consolidated financial statements. 4 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Income (unaudited) Three Months Ended March 31, (In thousands, except per share data) 2024 2023 Interest, fee and dividend income Interest and fees on loans $ 133,146 $ 100,899 Securities available for sale 7,124 7,616 Securities held to maturity 5,303 5,035 Other 1,364 642 Total interest, fee and dividend income $ 146,937 $ 114,192 Interest expense Deposits $ 44,339 $ 11,144 Short-term borrowings 3,421 4,919 Long-term debt 290 47 Subordinated debt 1,800 1,334 Junior subordinated debt 1,913 1,682 Total interest expense $ 51,763 $ 19,126 Net interest income $ 95,174 $ 95,066 Provision for loan losses 5,579 3,909 Net interest income after provision for loan losses $ 89,595 $ 91,157 Noninterest income Service charges on deposit accounts $ 4,117 $ 3,548 Card services income 5,195 4,845 Retirement plan administration fees 14,287 11,462 Wealth management 9,697 8,087 Insurance services 4,388 3,931 Bank owned life insurance income 2,352 1,878 Net securities gains (losses) 2,183 ( 4,998 ) Other 3,173 2,656 Total noninterest income $ 45,392 $ 31,409 Noninterest expense Salaries and employee benefits $ 55,704 $ 48,155 Technology and data services 9,750 9,007 Occupancy 8,098 7,220 Professional fees and outside services 4,853 4,178 Office supplies and postage 1,865 1,628 FDIC assessment 1,735 1,396 Advertising 812 649 Amortization of intangible assets 2,168 536 Loan collection and other real estate owned, net 553 855 Acquisition expenses - 618 Other 6,235 5,080 Total noninterest expense $ 91,773 $ 79,322 Income before income tax expense $ 43,214 $ 43,244 Income tax expense 9,391 9,586 Net income $ 33,823 $ 33,658 Earnings per share Basic $ 0.72 $ 0.78 Diluted $ 0.71 $ 0.78 See accompanying notes to unaudited interim consolidated financial statements. 5 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended March 31, (In thousands) 2024 2023 Net income $ 33,823 $ 33,658 Other comprehensive income (loss), net of tax: Securities available for sale: Unrealized net holding (losses) gains arising during the period, gross $ ( 5,292 ) $ 15,725 Tax effect 1,323 ( 3,931 ) Unrealized net holding (losses) gains arising during the period, net $ ( 3,969 ) $ 11,794 Reclassification adjustment for net losses in net income, gross $ - $ 5,000 Tax effect - ( 1,250 ) Reclassification adjustment for net losses in net income, net $ - $ 3,750 Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross $ 96 $ 114 Tax effect ( 24 ) ( 28 ) Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net $ 72 $ 86 Total securities available for sale, net $ ( 3,897 ) $ 15,630 Pension and other benefits: Amortization of prior service cost and actuarial losses, gross $ 452 $ 649 Tax effect ( 113 ) ( 163 ) Amortization of prior service cost and actuarial losses, net $ 339 $ 486 Total pension and other benefits, net $ 339 $ 486 Total other comprehensive (loss) income $ ( 3,558 ) $ 16,116 Comprehensive income $ 30,265 $ 49,774 See accompanying notes to unaudited interim consolidated financial statements. 6 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (unaudited) (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, 2023 $ 540 $ 740,943 $ 1,021,831 $ ( 160,934 ) $ ( 176,689 ) $ 1,425,691 Net income - - 33,823 - - 33,823 Cash dividends - $ 0.32 per share - - ( 15,091 ) - - ( 15,091 ) Purchase of 1,900 treasury shares - - - - ( 63 ) ( 63 ) Net issuance of 47,016 shares to employee and other stock plans - ( 2,435 ) - - 764 ( 1,671 ) Stock-based compensation - 2,284 - - - 2,284 Other comprehensive (loss) - - - ( 3,558 ) - ( 3,558 ) Balance at March 31 , 2024 $ 540 $ 740,792 $ 1,040,563 $ ( 164,492 ) $ ( 175,988 ) $ 1,441,415 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 - - 33,658 - - 33,658 Cash dividends - $ 0.30 per share - - ( 12,871 ) - - ( 12,871 ) Net issuance of 46,509 shares to employee and other stock plans - ( 2,366 ) - - 601 ( 1,765 ) Stock-based compensation - 2,465 - - - 2,465 Other comprehensive income - - - 16,116 - 16,116 Balance at March 31 , 2023 $ 497 $ 577,952 $ 979,722 $ ( 173,918 ) $ ( 172,594 ) $ 1,211,659 See accompanying notes to unaudited interim consolidated financial statements. 7 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, (In thousands) 2024 2023 Operating activities Net income $ 33,823 $ 33,658 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 5,579 3,909 Depreciation and amortization of premises and equipment 2,855 2,579 Net amortization on securities 657 690 Amortization of intangible assets 2,168 536 Amortization of operating lease right-of-use assets 1,867 1,647 Excess tax benefit on stock-based compensation ( 116 ) ( 231 ) Stock-based compensation expense 2,284 2,465 Bank owned life insurance income ( 2,352 ) ( 1,878 ) Amortization of subordinated debt issuance costs 109 109 Proceeds from sale of loans held for sale 27,075 1,571 Originations of loans held for sale ( 26,662 ) ( 1,418 ) Net gain on sale of loans held for sale ( 40 ) ( 16 ) Net securities (gains) losses ( 2,183 ) 4,998 Net change in other assets and other liabilities ( 8,319 ) ( 26,772 ) Net cash provided by operating activities $ 36,745 $ 21,847 Investing activities Net cash used in acquisitions $ ( 743 ) $ ( 129 ) Securities available for sale: Proceeds from maturities, calls and principal paydowns 26,542 30,683 Proceeds from sales 2,284 - Purchases ( 19,676 ) - Securities held to maturity: Proceeds from maturities, calls and principal paydowns 21,143 17,870 Purchases ( 7,071 ) ( 5,494 ) Equity securities: Purchases ( 7 ) - Other: Net increase in loans ( 42,308 ) ( 118,242 ) Proceeds from Federal Home Loan Bank stock redemption 26,465 38,589 Purchases of Federal Home Loan Bank stock ( 17,940 ) ( 39,218 ) Proceeds from settlement of bank owned life insurance 608 1,773 Purchases of premises and equipment, net ( 2,425 ) ( 1,392 ) Net cash used in investing activities $ ( 13,128 ) $ ( 75,560 ) Financing activities Net increase in deposits $ 226,295 $ 185,272 Net decrease in short-term borrowings ( 119,517 ) ( 109,786 ) Proceeds from long-term debt - 25,000 Repayments of long-term debt ( 37 ) ( 25 ) Cash paid by employer for tax-withholding on stock issuance ( 1,301 ) ( 1,432 ) Purchase of treasury stock ( 63 ) - Cash dividends ( 15,091 ) ( 12,871 ) Net cash provided by financing activities $ 90,286 $ 86,158 Net increase in cash and cash equivalents $ 113,903 $ 32,445 Cash and cash equivalents at beginning of period 205,189 197,350 Cash and cash equivalents at end of period $ 319,092 $ 229,795 8 Table of Contents NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (continued) Three Months Ended March 31, 2024 2023 Supplemental disclosure of cash flow information Cash paid during the period for: Interest expense $ 55,313 $ 17,066 Income taxes paid, net of refund 3,500 15,072 Acquisitions: Fair value of assets acquired $ 693 $ 150 See accompanying notes to unaudited interim consolidated financial statements. 9 Table of Contents NBT Bancorp Inc. and Subsidiaries Notes to Unaudited Interim Consolidated Financial Statements March 31, 2024 1. Description of Business NBT Bancorp Inc. is a registered financial holding company incorporated in the state of Delaware in 1986, with its principal headquarters located in Norwich, New York. The principal assets of NBT Bancorp Inc. consist of all of the outstanding shares of common stock of its subsidiaries, including: NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT Holdings, Inc. (“NBT Holdings”), 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 principal sources of revenue for NBT Bancorp Inc. are the management fees and dividends it receives from the Bank, NBT Financial and NBT Holdings. Collectively, NBT Bancorp Inc. and its subsidiaries are referred to herein as (the “Company”). The Company’s business, primarily conducted through the Bank, consists of providing commercial banking, retail banking and wealth management services primarily to customers in its market area, which includes upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central and northwestern Connecticut. The Company has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services. The Company’s business philosophy is to operate as a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited interim consolidated financial statements include the accounts of NBT Bancorp Inc. and its wholly-owned subsidiaries: the Bank, NBT Financial and NBT Holdings. In the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods in accordance with GAAP and in accordance with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC. Accordingly, the consolidated financial statements do not include all of the information and notes necessary for complete financial statements in conformity with GAAP. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2023 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation. The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified. Use of Estimates in the Preparation of Financial Statements 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 may differ from those 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. 3. Recent Accounting Pronouncements 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 November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures , to improve the reportable segment disclosure requirements by requiring disclosure of incremental segment information on an annual and interim basis. In addition, the amendments will enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment and contain other disclosure requirements. The amendments in this ASU are effective for the Company for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, and early adoption is 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 disclosures. 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. 10 Table of Contents 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 March 31, 2024 U.S. treasury $ 133,442 $ - $ ( 8,759 ) $ 124,683 Federal agency 248,375 - ( 35,071 ) 213,304 State & municipal 96,054 1 ( 10,022 ) 86,033 Mortgage-backed: Government-sponsored enterprises 387,479 3 ( 45,461 ) 342,021 U.S. government agency securities 71,036 10 ( 7,520 ) 63,526 Collateralized mortgage obligations: Government-sponsored enterprises 452,853 49 ( 50,135 ) 402,767 U.S. government agency securities 170,293 - ( 26,034 ) 144,259 Corporate 48,451 - ( 6,573 ) 41,878 Total AFS securities $ 1,607,983 $ 63 $ ( 189,575 ) $ 1,418,471 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 There was no allowance for credit losses on AFS securities as of March 31, 2024 and December 31, 2023. During the three months ended March 31, 2023, 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. The $ 5.0 million loss was reclassified out of AOCI and into earnings in net securities gains (losses) in the unaudited interim consolidated statements of income. During the three months ended March 31, 2024 the Company sold the previously written-off security and recognized a gain of $ 2.3 million into earnings in net securities gains (losses) in the unaudited interim consolidated statements of income. During the three months ended March 31, 2024, 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 March 31, 2024 Federal agency $ 100,000 $ - $ ( 18,440 ) $ 81,560 Mortgage-backed: Government-sponsored enterprises 224,344 - ( 34,187 ) 190,157 U.S. government agency securities 16,742 2 ( 736 ) 16,008 Collateralized mortgage obligations: Government-sponsored enterprises 182,813 - ( 13,466 ) 169,347 U.S. government agency securities 63,137 - ( 11,206 ) 51,931 State & municipal 303,827 99 ( 19,610 ) 284,316 Total HTM securities $ 890,863 $ 101 $ ( 97,645 ) $ 793,319 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 11 Table of Contents At March 31, 2024 and December 31, 2023, all of the mortgaged-backed HTM securities were comprised of U.S. government agency and government-sponsored enterprises securities. The Company recorded no gains from calls on HTM securities for the three months ended March 31, 2024 and 2023. AFS and HTM securities with amortized costs totaling $ 1.99 billion at March 31, 2024 and $ 2.03 billion at December 31, 2023 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at March 31, 2024 and December 31, 2023, AFS and HTM securities with an amortized cost of $ 159.3 million and $ 177.2 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: Three Months Ended March 31, (In thousands) 2024 2023 Net (losses) and gains recognized on equity securities $ ( 101 ) $ 2 Less: Net (losses) and gains recognized on equity securities sold during the period - - Unrealized (losses) and gains recognized on equity securities still held $ ( 101 ) $ 2 As of March 31, 2024 and December 31, 2023, 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 March 31, 2024 and 2023. There were no impairments, or downward or upward adjustments recognized for equity securities without readily determinable fair values during the three months ended March 31, 2024 and 2023. The following table sets forth information with regard to contractual maturities of debt securities at March 31, 2024: (In thousands) Amortized Cost Estimated Fair Value AFS debt securities: Within one year $ 50,294 $ 49,553 From one to five years 567,513 508,211 From five to ten years 314,839 277,648 After ten years 675,337 583,059 Total AFS debt securities $ 1,607,983 $ 1,418,471 HTM debt securities: Within one year $ 98,660 $ 98,460 From one to five years 125,141 119,411 From five to ten years 242,973 210,783 After ten years 424,089 364,665 Total HTM debt securities $ 890,863 $ 793,319 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 March 31, 2024 and December 31, 2023. 12 Table of Contents The following table sets forth information with regard to investment securities with unrealized losses, for which an allowance for credit losses has not been recorded, segregated according to the length of time the securities had been in a continuous unrealized loss position: Less Than 12 Months 12 Months or Longer Total (In thousands) Fair Value Unrealized Losses Number of Positions Fair Value Unrealized Losses Number of Positions Fair Value Unrealized Losses Number of Positions As of March 31, 2024 AFS securities: U.S. treasury $ - $ - - $ 124,683 $ ( 8,759 ) 8 $ 124,683 $ ( 8,759 ) 8 Federal agency - - - 213,304 ( 35,071 ) 16 213,304 ( 35,071 ) 16 State & municipal - - - 85,266 ( 10,022 ) 66 85,266 ( 10,022 ) 66 Mortgage-backed 136 ( 1 ) 9 404,618 ( 52,980 ) 158 404,754 ( 52,981 ) 167 Collateralized mortgage obligations 11,033 ( 59 ) 2 523,989 ( 76,110 ) 120 535,022 ( 76,169 ) 122 Corporate 1,459 ( 2 ) 1 40,419 ( 6,571 ) 14 41,878 ( 6,573 ) 15 Total securities with unrealized losses $ 12,628 $ ( 62 ) 12 $ 1,392,279 $ ( 189,513 ) 382 $ 1,404,907 $ ( 189,575 ) 394 HTM securities: Federal agency $ - $ - - $ 81,560 $ ( 18,440 ) 4 $ 81,560 $ ( 18,440 ) 4 Mortgage-backed 11,905 ( 489 ) 1 194,181 ( 34,434 ) 33 206,086 ( 34,923 ) 34 Collateralized mortgage obligation 8,189 ( 58 ) 1 213,088 ( 24,614 ) 52 221,277 ( 24,672 ) 53 State & municipal 4,423 ( 13 ) 4 181,355 ( 19,597 ) 205 185,778 ( 19,610 ) 209 Total securities with unrealized losses $ 24,517 $ ( 560 ) 6 $ 670,184 $ ( 97,085 ) 294 $ 694,701 $ ( 97,645 ) 300 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 Collateralized 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 The Company does not believe the AFS securities that were in an unrealized loss position as of March 31, 2024 and December 31, 2023, which consisted of 394 and 388 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 March 31, 2024 and December 31, 2023, 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 AIR from the amortized cost basis of debt securities. AIR on AFS debt securities totaled $ 3.9 million at March 31, 2024 and December 31, 2023, and is excluded from the estimate of credit losses and reported in the other assets financial statement line. 13 Table of Contents None of the Bank’s HTM debt securities were past due or on nonaccrual status as of March 31, 2024 and December 31, 2023. There was no accrued interest reversed against interest income for the three months ended March 31, 2024 or the year ended December 31, 2023 as all securities remained in accrual status. In addition, there were no collateral-dependent HTM debt securities as of March 31, 2024 and December 31, 2023. There was no allowance for credit losses on HTM securities as of March 31, 2024 and December 31, 2023. As of March 31, 2024 and December 31, 2023, 66 % 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 losses. Therefore, the Company did not record an allowance for credit losses for these securities as of March 31, 2024 and December 31, 2023. The remaining HTM debt securities at March 31, 2024 and December 31, 2023 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 March 31, 2024 and December 31, 2023. AIR on HTM debt securities totaled $ 5.1 million at March 31, 2024 and $ 4.7 million at December 31, 2023 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: (In thousands) March 31, 2024 December 31, 2023 Commercial & industrial $ 1,353,446 $ 1,354,248 Commercial real estate 3,646,739 3,626,910 Residential real estate 2,133,289 2,125,804 Home equity 328,673 337,214 Indirect auto 1,190,734 1,130,132 Residential solar 896,147 917,755 Other consumer 139,049 158,650 Total loans $ 9,688,077 $ 9,650,713 Included in the above loans are net deferred loan origination (fees) costs totaling $ 89.2 million and $ 98.2 million at March 31, 2024 and December 31, 2023, respectively. 6. Allowance for Credit Losses and Credit Quality of Loans The allowance for credit losses totaled $ 115.3 million at March 31, 2024, compared to $ 114.4 million at December 31, 2023. The allowance for credit losses as a percentage of loans was 1.19 % at March 31, 2024 and December 31, 2023. The Company’s January 1, 2023 adoption of ASU 2022-02, Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosure s resulted in an insignificant change to its methodology for estimating the allowance for credit losses on TDRs. The ASU eliminated 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 decrease in allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $ 0.6 million. 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 March 31, 2024 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 March 31, 2024, the weightings were 70% and 30% for the baseline and downside economic forecasts, respectively. The baseline outlook reflects an economic environment where the unemployment rate increases slightly from 3.8% to 4.1% during the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the second quarter of 2024 at approximately 3.3% and decrease to 2.8% before increasing to 3.4% by the end of the forecast period. Key assumptions in the baseline economic outlook included the Federal Reserve cutting rates with three 25 basis point cuts at the June, September, and December meetings, the economy remaining at full employment, and continued tapering of the Federal Reserve balance sheet. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, national unemployment rises from 3.8% in the first quarter of 2024 to a peak of 7.7% in the second quarter of 2025. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2024. Additional adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation, and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth, and policy exceptions was also conducted. 14 Table of Contents 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 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. There were no loans purchased with credit deterioration during the three months ended March 31, 2024. 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. During the three months ended March 31, 2024, the Company purchased $ 0.4 million of residential loans at a 7.0 % premium with a $ 4 thousand allowance for credit losses recorded for these loans. During 2023, the Company purchased $ 3.8 million of residential loans at a 7.0 % premium with a $ 31 thousand allowance for credit losses recorded for these loans. The Company made a policy election to report AIR in the other assets line item on the consolidated balance sheets. AIR on loans totaled $ 34.4 million at March 31, 2024 and $ 34.1 million at December 31, 2023 and there was no estimated allowance for credit losses related to AIR as of March 31, 2024 and December 31, 2023 as it is excluded from amortized cost. The following tables present the activity in the allowance for credit losses by our portfolio segments: (In thousands) Commercial Loans Consumer Loans Residential Total Balance as of December 31, 2023 $ 45,903 $ 46,427 $ 22,070 $ 114,400 Charge-offs ( 985 ) ( 5,581 ) ( 114 ) ( 6,680 ) Recoveries 198 1,651 152 2,001 Provision ( 644 ) 4,922 1,301 5,579 Ending balance as of March 31 , 2024 $ 44,472 $ 47,419 $ 23,409 $ 115,300 Balance as of January 1, 2023 (after adoption of ASC 2022-02) $ 34,662 $ 50,951 $ 14,539 $ 100,152 Charge-offs ( 169 ) ( 5,342 ) ( 339 ) ( 5,850 ) Recoveries 541 1,377 121 2,039 Provision 1,006 1,834 1,069 3,909 Ending balance as of March 31 , 2023 $ 36,040 $ 48,820 $ 15,390 $ 100,250 The allowance for credit losses as of March 31, 2024 increased compared to the allowance estimates as of December 31, 2023 primarily due to the slowing of prepayment speed assumptions partly offset by the decline in consumer loans with higher allowance levels and a decline in the PCD allowance as purchased loan balances decreased. The increase in the allowance for credit losses from March 31, 2023 to March 31, 2024 was primarily 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. Individually Evaluated Loans 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. As of March 31, 2024, there were two relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of $ 17.1 million, with no allowance for credit loss. As of December 31, 2023, the same two relationships were 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. The decrease in the amortized cost basis on an individual basis from December 31, 2023 to March 31, 2024 was primarily due to principal payments received during the first quarter of 2024. As of March 31, 2024 and December 31, 2023, there were $ 17.1 million and $ 17.3 million, respectively, of loans in nonaccrual that were specifically evaluated for individual expected credit loss without an allowance for credit losses. 15 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 March 31 , 2024 Commercial loans: C&I $ 1,711 $ 750 $ - $ 2,461 $ 3,079 $ 1,398,831 $ 1,404,371 CRE 1,929 64 - 1,993 18,743 3,424,810 3,445,546 Total commercial loans $ 3,640 $ 814 $ - $ 4,454 $ 21,822 $ 4,823,641 $ 4,849,917 Consumer loans: Auto $ 10,376 $ 1,676 $ 1,045 $ 13,097 $ 2,274 $ 1,142,702 $ 1,158,073 Residential solar 3,940 1,362 446 5,748 125 890,274 896,147 Other consumer 2,054 1,158 882 4,094 299 146,372 150,765 Total consumer loans $ 16,370 $ 4,196 $ 2,373 $ 22,939 $ 2,698 $ 2,179,348 $ 2,204,985 Residential $ 3,799 $ 858 $ 227 $ 4,884 $ 10,669 $ 2,617,622 $ 2,633,175 Total loans $ 23,809 $ 5,868 $ 2,600 $ 32,277 $ 35,189 $ 9,620,611 $ 9,688,077 (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 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 C&I and 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. 16 Table of Contents 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. 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. 17 Table of Contents The following tables illustrate the Company’s credit quality by loan class by vintage and includes gross charge-offs by loan class by vintage. Included in other consumer gross charge-offs for the three months ended March 31, 2024, the Company recorded $ 0.2 million in overdrawn deposit accounts reported as 2023 originations. Included in other consumer gross charge-offs for the year ended December 31, 2023, 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. (In thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of March 31 , 2024 C&I By internally assigned grade: Pass $ 60,820 $ 214,985 $ 243,619 $ 231,577 $ 146,409 $ 129,310 $ 318,078 $ 2,585 $ 1,347,383 Special mention - 1,795 2,802 378 3,845 1,812 15,946 251 26,829 Substandard - 2,934 3,154 1,885 289 6,845 14,880 127 30,114 Doubtful - 21 1 19 - 4 - - 45 Total C&I $ 60,820 $ 219,735 $ 249,576 $ 233,859 $ 150,543 $ 137,971 $ 348,904 $ 2,963 $ 1,404,371 Current-period gross charge-offs $ - $ ( 9 ) $ ( 900 ) $ - $ - $ ( 76 ) $ - $ - $ ( 985 ) CRE By internally assigned grade: Pass $ 81,048 $ 362,660 $ 492,661 $ 546,787 $ 449,533 $ 1,013,118 $ 308,977 $ 37,243 $ 3,292,027 Special mention - 3,602 5,971 7,842 3,875 28,841 3,547 - 53,678 Substandard - - 726 17,961 1,132 61,499 1,542 16,981 99,841 Total CRE $ 81,048 $ 366,262 $ 499,358 $ 572,590 $ 454,540 $ 1,103,458 $ 314,066 $ 54,224 $ 3,445,546 Current-period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Auto By payment activity: Performing $ 175,451 $ 430,001 $ 331,202 $ 138,915 $ 36,140 $ 43,045 $ - $ - $ 1,154,754 Nonperforming 29 1,014 1,171 724 94 287 - - 3,319 Total auto $ 175,480 $ 431,015 $ 332,373 $ 139,639 $ 36,234 $ 43,332 $ - $ - $ 1,158,073 Current-period gross charge-offs $ - $ ( 274 ) $ ( 493 ) $ ( 226 ) $ ( 12 ) $ ( 122 ) $ - $ - $ ( 1,127 ) Residential solar By payment activity: Performing $ 1,365 $ 149,789 $ 422,422 $ 176,158 $ 63,222 $ 82,620 $ - $ - $ 895,576 Nonperforming - - 432 76 - 63 - - 571 Total residential solar $ 1,365 $ 149,789 $ 422,854 $ 176,234 $ 63,222 $ 82,683 $ - $ - $ 896,147 Current-period gross charge-offs $ - $ ( 53 ) $ ( 910 ) $ ( 136 ) $ - $ ( 196 ) $ - $ - $ ( 1,295 ) Other consumer By payment activity: Performing $ 5,600 $ 10,559 $ 22,720 $ 47,947 $ 18,029 $ 25,681 $ 19,015 $ 33 $ 149,584 Nonperforming - 5 184 650 39 295 1 7 1,181 Total other consumer $ 5,600 $ 10,564 $ 22,904 $ 48,597 $ 18,068 $ 25,976 $ 19,016 $ 40 $ 150,765 Current-period gross charge-offs $ - $ ( 250 ) $ ( 811 ) $ ( 1,453 ) $ ( 364 ) $ ( 281 ) $ - $ - $ ( 3,159 ) Residential By payment activity: Performing $ 39,693 $ 258,154 $ 336,357 $ 438,007 $ 273,451 $ 1,006,816 $ 255,582 $ 14,219 $ 2,622,279 Nonperforming - 626 825 1,605 272 7,568 - - 10,896 Total residential $ 39,693 $ 258,780 $ 337,182 $ 439,612 $ 273,723 $ 1,014,384 $ 255,582 $ 14,219 $ 2,633,175 Current-period gross charge-offs $ - $ - $ - $ - $ - $ ( 114 ) $ - $ - $ ( 114 ) Total loans $ 364,006 $ 1,436,145 $ 1,864,247 $ 1,610,531 $ 996,330 $ 2,407,804 $ 937,568 $ 71,446 $ 9,688,077 Current-period gross charge-offs $ - $ ( 586 ) $ ( 3,114 ) $ ( 1,815 ) $ ( 376 ) $ ( 789 ) $ - $ - $ ( 6,680 ) 18 Table of Contents (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 ) Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The allowance for losses on unfunded commitments totaled $ 4.7 million as March 31, 2024, compared to $ 5.1 million as of December 31, 2023. Loan Modifications to Borrowers Experiencing Financial Difficulties 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. 19 Table of Contents 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: Three Months Ended March 31, 2024 Term Extension (Dollars in thousands) Amortized Cost % of Total Class of Financing Receivables Residential $ 294 0.011 % Total $ 294 Three Months Ended March 31, 2023 Term Extension (Dollars in thousands) Amortized Cost % of Total Class of Financing Receivables Residential $ 43 0.002 % Total $ 43 The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulties: Three Months Ended March 31, 2024 Loan Type Term Extension Residential Added a weighted-average 7.4 years to the life of loans, which reduced monthly payment amounts for the borrowers. Three Months Ended March 31, 2023 Loan Type Term Extension Residential Added a weighted-average 18 years to the life of loans, which reduced monthly payment amounts for the borrowers. There were no financing receivables that had a payment default during the three months ended March 31, 2024 and 2023, that were modified to borrowers experiencing financial difficulty that were modified in the twelve months prior to that default. The following table depicts the performance of loans that have been modified to borrowers experiencing financial difficulty that were modified in the prior twelve months: Payment Status (Amortized Cost Basis) (In thousands) Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due As of March 31, 2024 Loan Type Residential $ 863 $ - $ - $ 29 Total $ 863 $ - $ - $ 29 7. 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 CD accounts. Information related to short-term borrowings is summarized as follows: (In thousands) March 31, 2024 December 31, 2023 Federal funds purchased $ 78,000 $ - Securities sold under repurchase agreements 86,134 93,651 Other short-term borrowings 103,000 293,000 Total short-term borrowings $ 267,134 $ 386,651 See Note 4 for additional information regarding securities pledged as collateral for securities sold under the repurchase agreements. 20 Table of Contents 8. Defined Benefit Post-Retirement Plans The Company has a qualified, noncontributory, defined benefit pension plan (the “Plan”) covering substantially all of its employees at March 31, 2024. 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. In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives. These supplemental employee retirement plans and the Plan are collectively referred to herein as “Pension Benefits.” In addition, the Company provides certain health care benefits for retired employees. Benefits were accrued over the employees’ active service period. Only employees that were employed by the Company on or before January 1, 2000 are eligible to receive post-retirement health care benefits. 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 Company made no voluntary contributions to the Pension Benefits and Other Benefits plans during the three months ended March 31, 2024 and 2023. The components of expense for Pension Benefits and Other Benefits are set forth below: Pension Benefits Other Benefits Three Months Ended March 31, Three Months Ended March 31, (In thousands) 2024 2023 2024 2023 Components of net periodic (benefit) cost: Service cost $ 514 $ 482 $ 1 $ 1 Interest cost 1,005 1,010 55 56 Expected return on plan assets ( 1,983 ) ( 1,853 ) - - Net amortization 453 670 ( 1 ) ( 21 ) Total net periodic (benefit) cost $ ( 11 ) $ 309 $ 55 $ 36 The service cost component of 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 unaudited interim consolidated statements of income. 9. Earnings Per Share Basic 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). The following is a reconciliation of basic and diluted EPS for the periods presented in the unaudited interim consolidated statements of income: Three Months Ended March 31, (In thousands, except per share data) 2024 2023 Basic EPS: Weighted average common shares outstanding 47,148 42,894 Net income available to common stockholders $ 33,823 $ 33,658 Basic EPS $ 0.72 $ 0.78 Diluted EPS: Weighted average common shares outstanding 47,148 42,894 Dilutive effect of common stock options and restricted stock 222 232 Weighted average common shares and common share equivalents 47,370 43,126 Net income available to common stockholders $ 33,823 $ 33,658 Diluted EPS $ 0.71 $ 0.78 There was a nominal number of weighted average stock options outstanding for the three months ended March 31, 2024 and March 31, 2023, 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. 21 Table of Contents 10. 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) Three Months Ended (In thousands) March 31, 2024 March 31, 2023 AFS securities: Losses on AFS securities $ - $ 5,000 Net securities (gains) losses Amortization of unrealized gains related to securities transfer 96 114 Interest income Tax effect $ ( 24 ) $ ( 1,278 ) Income tax (benefit) Net of tax $ 72 $ 3,836 Pension and other benefits: Amortization of net losses $ 454 $ 640 Other noninterest expense Amortization of prior service costs ( 2 ) 9 Other noninterest expense Tax effect $ ( 113 ) $ ( 163 ) Income tax (benefit) Net of tax $ 339 $ 486 Total reclassifications, net of tax $ 411 $ 4,322 11. 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 incom e. 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 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 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 SOFR that replaced LIBOR in certain financial contracts after June 30, 2023. In 2023, the Company transitioned all of its financial instruments to an alternative benchmark rate. As of March 31, 2024 and December 31, 2023, the Company had thirteen and twelve 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 . 22 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 March 31 , 2024 Derivatives not designated as hedging instruments Interest rate derivatives $ 1,330,997 Other assets $ 114,205 $ 1,330,997 Other liabilities $ 114,101 Risk participation agreements 71,511 Other assets 84 15,571 Other liabilities 3 Total derivatives not designated as hedging instruments $ 114,289 $ 114,104 Netting adjustments (1) 24,321 - Net derivatives in the balance sheet $ 89,968 $ 114,104 Derivatives not offset on the balance sheet $ 1,924 $ 1,924 Cash collateral (2) - - Net derivative amounts $ 88,044 $ 112,180 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 (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. The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship: Three Months Ended March 31, (In thousands) 2024 2023 Derivatives not designated as hedging instruments: Increase in other income $ 75 $ 7 12. Fair Value Measurements and Fair Value of Financial Instruments G AAP 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). 23 Table of Contents 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 flow s. 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 March 31, 2024 Assets: AFS securities: U.S. treasury $ 124,683 $ - $ - $ 124,683 Federal agency - 213,304 - 213,304 State & municipal - 86,033 - 86,033 Mortgage-backed - 405,547 - 405,547 Collateralized mortgage obligations - 547,026 - 547,026 Corporate - 41,878 - 41,878 Total AFS securities $ 124,683 $ 1,293,788 $ - $ 1,418,471 Equity securities 38,470 1,000 - 39,470 Derivatives - 89,968 - 89,968 Total $ 163,153 $ 1,384,756 $ - $ 1,547,909 Liabilities: Derivatives $ - $ 114,104 $ - $ 114,104 Total $ - $ 114,104 $ - $ 114,104 (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 24 Table of Contents 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. There were no loans individually evaluated for expected credit losses where the amortized cost was adjusted to fair value as of March 31, 2024 and December 31, 2023, respectively. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the allowance for credit losses for individually evaluated collateral dependent loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10 % to 50 % . Based on the valuation techniques used, the fair value measurements for collateral dependent individually evaluated loans are classified as Level 3. The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, AFS securities, equity securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and derivatives. March 31, 2024 December 31, 2023 (In thousands) Fair Value Hierarchy Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: HTM securities 2 $ 890,863 $ 793,319 $ 905,267 $ 814,524 Net loans 3 9,576,040 9,173,300 9,539,684 9,216,162 Financial liabilities: Time deposits 2 $ 1,368,136 $ 1,348,934 $ 1,324,709 $ 1,285,999 Long-term debt 2 29,759 29,315 29,796 29,416 Subordinated debt 1 120,628 116,563 120,380 113,757 Junior subordinated debt 2 101,196 103,202 101,196 102,337 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 includes credit risk, illiquidity risk and other market factors to calculate the exit price fair value in accordance with ASC 820. 25 Table of Contents 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. 13. Commitments and Contingencies 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. Commitments to extend credit and unused lines of credit totaled $ 2.73 billion at March 31, 2024 and $ 2.25 billion at December 31, 2023. Since many loan commitments, standby letters of credit and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third-parties. These standby letters of credit are generally issued in support of third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. Standby letters of credit totaled $ 42.0 million at March 31, 2024 and $ 44.7 million at December 31, 2023. A s of March 31, 2024 and December 31, 2023 , the fair value of the Company’s standby letters of credit was not significant. 26 Table of Contents NBT BANCORP INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion and analysis is to provide a concise description of the consolidated financial condition and results of operations of NBT Bancorp Inc. (“NBT”) and its wholly-owned subsidiaries, including NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”) and NBT Holdings, Inc. (“NBT Holdings”) (collectively referred to herein as the “Company”). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company’s Annual Report on Form 10‑K for the year ended December 31, 2023 for an understanding of the following discussion and analysis. Operating results for the three month period ending March 31, 2024 are not necessarily indicative of the results of the full year ending December 31, 2024 or any future period. Forward-Looking Statements Certain statements in this filing and future filings by the Company with the SEC, in the Company’s press releases or other public or stockholder communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control, that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local, regional, national and international economic conditions, including actual or potential stress in the banking industry, and the impact they may have on the Company and its customers and the Company’s assessment of that impact; (2) changes in the level of nonperforming assets and charge-offs; (3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (4) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the FRB; (5) inflation, interest rate, securities market and monetary fluctuations; (6) political instability; (7) acts of war, including international military conflicts, or terrorism; (8) the timely development and acceptance of new products and services and the perceived overall value of these products and services by users; (9) changes in consumer spending, borrowing and saving habits; (10) changes in the financial performance and/or condition of the Company’s borrowers; (11) technological changes; (12) acquisition and integration of acquired businesses; (13) the ability to increase market share and control expenses; (14) changes in the competitive environment among financial holding companies; (15) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including those under the Dodd-Frank Act, and the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018; (16) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the FASB and other accounting standard setters; (17) changes in the Company’s organization, compensation and benefit plans; (18) the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (19) greater than expected costs or difficulties related to the integration of new products and lines of business; and (20) the Company’s success at managing the risks involved in the foregoing items. The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including, but not limited to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the SEC, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future periods to differ materially from those anticipated or projected. Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. Non-GAAP Measures This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with GAAP. Where non-GAAP disclosures are used in this Form 10-Q, the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables. Management believes that these non-GAAP measures provide useful information that is important to an understanding of the results of the Company’s core business as well as provide information standard in the financial institution industry. Non-GAAP measures should not be considered a substitute for financial measures determined in accordance with GAAP and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation. Critical Accounting Estimates SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. The Company follows financial accounting and reporting policies that are in accordance with GAAP. The more significant of these policies are summarized in Note 1 to the consolidated financial statements presented in our 2023 Annual Report on Form 10-K. Refer to Note 3 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards. Not all significant accounting policies require management to make difficult, subjective or complex judgments. The allowance for credit losses and the allowance for unfunded commitments policies are deemed to meet the SEC’s definition of a critical accounting estimate. 27 Table of Contents Allowance for Credit Losses and Unfunded Commitments The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. The measurement of CECL on financial instruments requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. The allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. The impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings. One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast period. As of March 31, 2024, the quantitative model incorporates a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model. At March 31, 2024, the weightings were 70% and 30% for the baseline and downside economic forecasts, respectively. The baseline outlook reflects an economic environment where the unemployment rate increases slightly from 3.8% to 4.1% during the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the second quarter of 2024 at approximately 3.3% and decrease to 2.8% before increasing to 3.4% by the end of the forecast period. Key assumptions in the baseline economic outlook included the Federal Reserve cutting rates with three 25 basis point cuts at the June, September, and December meetings, the economy remaining at full employment, and continued tapering of the Federal Reserve balance sheet. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, national unemployment rises from 3.8% in the first quarter of 2024 to a peak of 7.7% in the second quarter of 2025. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2024. All else held equal, the changes in the weightings of our forecasted scenarios would impact the amount of estimated allowance for credit losses through changes in the quantitative reserve and scenario-specific qualitative adjustments. To demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of March 31, 2024, the Company attributed the change in scenario weightings to the change in the allowance for credit losses, with a 10% decrease to the downside scenario and a 10% increase to the baseline scenario causing a 3% decrease in the overall estimated allowance for credit losses. To further demonstrate the sensitivity of the allowance for credit losses estimate to macroeconomic forecast weightings assumptions as of March 31, 2024, the Company increased the downside scenario to 100% which resulted in a 23% increase in the overall estimated allowance for credit losses. The Company’s policies on the CECL methodology for allowance for credit losses are disclosed in Note 1 to the consolidated financial statements presented in our 2023 Annual Report on Form 10-K. All accounting policies are important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements presented in our 2023 Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported. Refer to Note 3 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards. 28 Table of Contents Overview Significant factors management reviews to evaluate the Company’s operating results and financial condition include, but are not limited to: net income and EPS, return on average assets and equity, NIM, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology advancements, market share and peer comparisons. The following information should be considered in connection with the Company’s results for the three months ended March 31, 2024: ● Net income for the three months ended March 31, 2024 was $33.8 million, comparable to the first quarter of 2023 and up $3.4 million from the fourth quarter of 2023. ● Diluted earnings per share were $0.71 for the three months ended March 31, 2024, down $0.07 from the first quarter of 2023 and up $0.07 from the fourth quarter of 2023. ● Operating net income (1) , a non-GAAP measure, which excludes acquisition expenses, securities gains (losses) and an impairment of a minority interest equity investment, net of tax, was $32.1 million, or $0.68 per diluted common share, for the three months ended March 31, 2024, compared to $0.88 for the first quarter of 2023 and $0.72 for the fourth quarter of 2023. ● Excluding securities gains (losses), noninterest income represented 31% of total revenues and was $43.2 million for the three months ended March 31, 2024, up $5.2 million, or 13.8%, from the fourth quarter of 2023 and up $6.8 million, or 18.7%, from the first quarter of 2023. ● Period end total loans were $9.69 billion, up $37.4 million, or 1.6%, annualized, from December 31, 2023. ● Credit quality metrics including net charge-offs to average loans were 0.19%, annualized, and allowance for loan losses to total loans was 1.19%. ● Period end total deposits were $11.20 billion, up $226.3 million, or 2.1%, from December 31, 2023. ● Book value per share was $30.57 at March 31, 2024; tangible book value per share (1) was $22.07 at March 31, 2024, $21.72 at December 31, 2023 and $21.52 at March 31, 2023. (1) Non-GAAP measure - Refer to non-GAAP reconciliation below. Results of Operations Net income for the three months ended March 31, 2024 was $33.8 million, or $0.71 per diluted common share, up $3.4 million from $30.4 million, or $0.64 per diluted common share for the three months ended December 31, 2023 and up $0.2 million from $33.7 million, or $0.78 per diluted common share for the first quarter of 2023. ● The Company generated $0.68 per diluted share of operating earnings (1) in the first quarter of 2024, compared to $0.88 for the first quarter of 2023 and $0.72 for the fourth quarter of 2023. ● Net interest income for the three months ended March 31, 2024 was $95.2 million, down $4.0 million, or 4.0% from the fourth quarter of 2023 and up $0.1 million, or 0.1%, from the first quarter of 2023. ● The Company recorded a provision for loan losses of $5.6 million ($0.09 per diluted share) for the three months ended March 31, 2024, compared to $3.9 million ($0.07 per diluted share) in the first quarter of 2023 and $5.1 million ($0.08 per diluted share) in the fourth quarter of 2023. ● Noninterest expense, excluding $0.3 million of acquisition expenses in the fourth quarter of 2023 and $0.6 million of acquisition expenses in the first quarter of 2023, and the $4.8 million impairment of a minority interest equity investment in the fourth quarter of 2023, increased 4.6% compared to the previous quarter and increased 16.6% from the first quarter of 2023. ● In the first quarter of 2023, the Company incurred a $5.0 million ($0.09 per diluted share) securities loss on the write-off of an AFS subordinated debt investment of a failed financial institution. In the first quarter of 2024, the Company sold the previously written-off subordinated debt security and recognized a gain of $2.3 million ($0.04 per diluted share). ● The Company incurred acquisition expenses of $0.3 million and $0.6 million related to the merger with Salisbury in the fourth quarter of 2023 and the first quarter of 2023, respectively. ● In the fourth quarter of 2023, the Company recorded a $4.8 million ($0.08 per diluted share) impairment of its minority interest equity investment in a provider of financial and technology services to residential solar equipment installers due to the uncertainty in the realizability of the investment in other noninterest expense in the consolidated statements of income. The following table sets forth certain financial highlights: Three Months Ended March 31, 2024 December 31, 2023 March 31, 2023 Performance: Diluted earnings per share $ 0.71 $ 0.64 $ 0.78 Return on average assets (2) 1.02 % 0.89 % 1.16 % Return on average equity (2) 9.52 % 8.79 % 11.47 % Return on average tangible common equity (2) 13.87 % 13.08 % 15.31 % Net interest margin, (FTE) (2) 3.14 % 3.15 % 3.55 % Capital: Equity to assets 10.73 % 10.71 % 10.23 % Tangible equity ratio 7.98 % 7.93 % 7.99 % Book value per share $ 30.57 $ 30.26 $ 28.24 Tangible book value per share $ 22.07 $ 21.72 $ 21.52 Leverage ratio 10.09 % 9.71 % 10.43 % Common equity tier 1 capital ratio 11.68 % 11.57 % 12.28 % Tier 1 capital ratio 12.61 % 12.50 % 13.34 % Total risk-based capital ratio 14.87 % 14.75 % 15.53 % 29 Table of Contents The following tables provide non-GAAP reconciliations: Three Months Ended (In thousands, except per share data) March 31, 2024 December 31, 2023 March 31, 2023 Return on average tangible common equity: Net income $ 33,823 $ 30,446 $ 33,658 Amortization of intangible assets (net of tax) 1,626 1,599 402 Net income, excluding intangible amortization $ 35,449 $ 32,045 $ 34,060 Average stockholders’ equity $ 1,429,602 $ 1,373,643 $ 1,190,316 Less: average goodwill and other intangibles 401,756 401,978 288,354 Average tangible common equity $ 1,027,846 $ 971,665 $ 901,962 Return on average tangible common equity (2) 13.87 % 13.08 % 15.31 % Tangible equity ratio: Stockholders’ equity $ 1,441,415 $ 1,425,691 $ 1,211,659 Intangibles 400,819 402,294 288,159 Assets $ 13,439,199 $ 13,309,040 $ 11,839,730 Tangible equity ratio 7.98 % 7.93 % 7.99 % Tangible book value per share: Stockholders’ equity $ 1,441,415 $ 1,425,691 $ 1,211,659 Intangibles 400,819 402,294 288,159 Tangible equity $ 1,040,596 $ 1,023,397 $ 923,500 Diluted common shares outstanding 47,155 47,110 42,904 Tangible book value per share $ 22.07 $ 21.72 $ 21.52 Operating net income: Net income $ 33,823 $ 30,446 $ 33,658 Acquisition expenses - 254 618 Impairment of a minority interest equity investment - 4,750 - Securities (gains) losses (2,183 ) (507 ) 4,998 Adjustments to net income $ (2,183 ) $ 4,497 $ 5,616 Adjustments to net income (net of tax) $ (1,703 ) $ 3,435 $ 4,341 Operating net income $ 32,120 $ 33,881 $ 37,999 Operating diluted earnings per share $ 0.68 $ 0.72 $ 0.88 (2) Annualized. Net Interest Income Net interest income is the difference between interest income on earning assets, primarily loans and securities and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on interest-earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings. Net interest income was $95.2 million for the first quarter of 2024, down $4.0 million, or 4.0%, from the previous quarter. The FTE net interest margin was 3.14% for the three months ended March 31, 2024, a decrease of 1 bp from the previous quarter. Interest income decreased $4.0 million, or 2.6%, as the yield on average interest-earning assets increased 5 bps from the prior quarter to 4.84%, while average interest-earning assets of $12.27 billion decreased $290.4 million from the prior quarter, primarily due to a decrease in average short-term interest-bearing accounts (“excess liquidity”) and the interest on those funds and one less day in the first quarter of 2024 compared to the fourth quarter of 2023. Interest expense for the three months ended March 31, 2024 was consistent with prior quarter due to lower average balances of short-term borrowings which were offset by the increase in the cost of interest-bearing deposits. Included in net interest income was $2.5 million of acquisition-related net accretion for the three months ended March 31, 2024 and $2.6 million of acquisition-related net accretion for the three months ended December 31, 2023. Net interest income was $95.2 million for the first quarter of 2024, up $0.1 million, or 0.1%, from the first quarter of 2023. The FTE net interest margin was 3.14% for the three months ended March 31, 2024, a decrease of 41 bps from the first quarter of 2023. Interest income increased $32.7 million, or 28.7%, as the yield on average interest-earning assets increased 58 bps from the same period in 2023 to 4.84%, while average interest-earning assets increased $1.36 billion, or 12.5%, from the first quarter of 2023 primarily due to the Salisbury acquisition and organic loan growth. Interest expense increased $32.6 million, or 170.6%, as the cost of interest-bearing liabilities increased 138 bps to 2.52% for the quarter ended March 31, 2024, primarily due to both a 158 bps increase in interest-bearing deposit costs and a $1.59 billion increase in interest-bearing deposits as a result of the Salisbury acquisition. Included in net interest income was $2.5 million of acquisition-related net accretion for the three months ended March 31, 2024. 30 Table of Contents Average Balances and Net Interest Income The following tables include the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing liabilities on a taxable equivalent basis. Three Months Ended March 31, 2024 December 31, 2023 March 31, 2023 (Dollars in thousands) Average Balance Interest Yield/ Rates Average Balance Interest Yield/ Rates Average Balance Interest Yield/ Rates Assets: Short-term interest-bearing accounts $ 47,972 $ 534 4.48 % $ 319,907 $ 4,508 5.59 % $ 34,215 $ 191 2.26 % Securities taxable (1) 2,278,029 10,806 1.91 % 2,310,409 10,959 1.88 % 2,442,732 11,543 1.92 % Securities tax-exempt (1) (3) 230,468 2,052 3.58 % 232,575 2,055 3.51 % 202,321 1,402 2.81 % FRB and FHLB stock 42,296 830 7.89 % 47,994 1,086 8.98 % 41,144 451 4.45 % Loans (2) (3) 9,674,892 133,373 5.54 % 9,653,191 132,975 5.47 % 8,189,520 101,000 5.00 % Total interest-earning assets $ 12,273,657 $ 147,595 4.84 % $ 12,564,076 $ 151,583 4.79 % $ 10,909,932 $ 114,587 4.26 % Other assets 1,055,386 1,052,024 836,879 Total assets $ 13,329,043 $ 13,616,100 $ 11,746,811 Liabilities and stockholders’ equity: Money market deposit accounts $ 3,129,160 $ 27,734 3.56 % $ 3,045,531 $ 26,368 3.43 % $ 2,081,210 $ 6,264 1.22 % NOW deposit accounts 1,600,288 2,994 0.75 % 1,645,401 3,309 0.80 % 1,598,834 1,433 0.36 % Savings deposits 1,607,659 171 0.04 % 1,666,915 188 0.04 % 1,781,465 142 0.03 % Time deposits 1,352,559 13,440 4.00 % 1,343,548 12,888 3.81 % 639,645 3,305 2.10 % Total interest-bearing deposits $ 7,689,666 $ 44,339 2.32 % $ 7,701,395 $ 42,753 2.20 % $ 6,101,154 $ 11,144 0.74 % Federal funds purchased 19,769 272 5.53 % 217 3 5.48 % 44,334 538 4.92 % Repurchase agreements 82,419 317 1.55 % 82,387 330 1.59 % 71,340 14 0.08 % Short-term borrowings 213,390 2,832 5.34 % 345,250 4,618 5.31 % 357,200 4,367 4.96 % Long-term debt 29,772 290 3.92 % 29,809 294 3.91 % 7,299 47 2.61 % Subordinated debt, net 119,873 1,800 6.04 % 119,531 1,795 5.96 % 96,966 1,334 5.58 % Junior subordinated debt 101,196 1,913 7.60 % 101,196 1,948 7.64 % 101,196 1,682 6.74 % Total interest-bearing liabilities $ 8,256,085 $ 51,763 2.52 % $ 8,379,785 $ 51,741 2.45 % $ 6,779,489 $ 19,126 1.14 % Demand deposits 3,356,607 3,535,815 3,502,489 Other liabilities 286,749 326,857 274,517 Stockholders’ equity 1,429,602 1,373,643 1,190,316 Total liabilities and stockholders’ equity $ 13,329,043 $ 13,616,100 $ 11,746,811 Net interest income (FTE) $ 95,832 $ 99,842 $ 95,461 Interest rate spread 2.32 % 2.34 % 3.12 % Net interest margin (FTE) 3.14 % 3.15 % 3.55 % Taxable equivalent adjustment $ 658 $ 669 $ 395 Net interest income $ 95,174 $ 99,173 $ 95,066 (1) Securities are shown at average amortized cost. (2) For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding. (3) Interest income for tax-exempt securities and loans have been adjusted to an FTE basis using the statutory Federal income tax rate of 21%. 31 Table of Contents The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume) and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change. Three Months Ended March 31, Increase (Decrease) 2024 over 2023 (In thousands) Volume Rate Total Short-term interest-bearing accounts $ 100 $ 243 $ 343 Securities taxable (691 ) (46 ) (737 ) Securities tax-exempt 219 431 650 FRB and FHLB stock 13 366 379 Loans 20,254 12,119 32,373 Total FTE interest income $ 19,895 $ 13,113 $ 33,008 Money market deposit accounts $ 4,460 $ 17,010 $ 21,470 NOW deposit accounts 1 1,560 1,561 Savings deposits (15 ) 44 29 Time deposits 5,587 4,548 10,135 Federal funds purchased (327 ) 61 (266 ) Repurchase agreements 3 300 303 Short-term borrowings (1,856 ) 321 (1,535 ) Long-term debt 209 34 243 Subordinated debt, net 345 121 466 Junior subordinated debt - 231 231 Total FTE interest expense $ 8,407 $ 24,230 $ 32,637 Change in FTE net interest income $ 11,488 $ (11,117 ) $ 371 Noninterest Income Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of operations. The following table sets forth information by category of noninterest income for the periods indicated: Three Months Ended March 31, (In thousands) 2024 2023 Service charges on deposit accounts $ 4,117 $ 3,548 Card services income 5,195 4,845 Retirement plan administration fees 14,287 11,462 Wealth management 9,697 8,087 Insurance services 4,388 3,931 Bank owned life insurance income 2,352 1,878 Net securities gains (losses) 2,183 (4,998 ) Other 3,173 2,656 Total noninterest income $ 45,392 $ 31,409 Noninterest income for the three months ended March 31, 2024 was $45.4 million, up $6.9 million, or 17.9%, from the prior quarter and up $14.0 million, or 44.5%, from the first quarter of 2023. During the three months ended March 31, 2023, the Company incurred a $5.0 million securities loss on the write-off of a subordinated debt security of a failed financial institution. During the three months ended March 31, 2024, the Company sold the previously written-off subordinated debt security and recognized a gain of $2.3 million. Excluding net securities gains (losses), noninterest income for the three months ended March 31, 2024 was $43.2 million, up $5.2 million, or 13.8%, from the prior quarter and up $6.8 million, or 18.7%, from the first quarter of 2023. The increase from the prior quarter was primarily driven by an increase in retirement plan administration fees, wealth management fees and insurance services. The increase in retirement plan administration fees from the prior quarter was due primarily to certain seasonal activity-based fees in the first quarter, organic growth and market performance. Wealth management fees increased from the prior quarter due primarily to organic growth and market performance. Insurance services increased from the prior quarter due to organic growth, higher levels of policy renewals and first quarter seasonality. The increase from the first quarter of 2023 was driven by an increase in retirement plan administration fees, wealth management fees and insurance services. The increase in retirement plan administration fees from the first quarter of 2023 includes the impact from the acquisition of Retirement Direct, LLC on July 1, 2023, organic growth and market performance. Wealth management fees increased from the first quarter of 2023 driven by the Salisbury acquisition, organic growth and market performance. Insurance services increased from the first quarter of 2023 due to higher levels of policy renewals and organic growth. In addition, the increases in service charges on deposit accounts and card services income were impacted by the Salisbury acquisition revenues. 32 Table of Contents Noninterest Expense Noninterest expenses are also an important factor in the Company’s results of operations. The following table sets forth the major components of noninterest expense for the periods indicated: Three Months Ended March 31, (In thousands) 2024 2023 Salaries and employee benefits $ 55,704 $ 48,155 Technology and data services 9,750 9,007 Occupancy 8,098 7,220 Professional fees and outside services 4,853 4,178 Office supplies and postage 1,865 1,628 FDIC assessment 1,735 1,396 Advertising 812 649 Amortization of intangible assets 2,168 536 Loan collection and other real estate owned, net 553 855 Acquisition expenses - 618 Other 6,235 5,080 Total noninterest expense $ 91,773 $ 79,322 Noninterest expense for the three months ended March 31, 2024 was $91.8 million, down $1.0 million, or 1.1%, from the prior quarter and up $12.5 million, or 15.7%, from the first quarter of 2023. The Company incurred acquisition expenses in the fourth quarter of 2023 and the first quarter of 2023 of $0.3 million and $0.6 million, respectively related to the merger with Salisbury. Included in other noninterest expenses in the fourth quarter of 2023, the Company recorded a $4.8 million impairment of a minority interest equity investment in a provider of financial and technology services to residential solar equipment installers due to the uncertainty in the realizability of the investment. Excluding acquisition expenses and the impairment of a minority interest equity investment, noninterest expense for the three months ended March 31, 2024 was $91.8 million, up $4.0 million, or 4.6%, from the prior quarter and up $13.1 million, or 16.6%, from the first quarter of 2023. The increase from the prior quarter was driven by higher salaries and employee benefits due to higher incentive compensation costs, seasonally higher payroll taxes and stock-based compensation expenses and merit pay increases which were effective in March. In addition, the increase in occupancy costs was driven by seasonal costs including utilities expenses, timing of maintenance activities and additional expenses from the Salisbury acquisition. These costs were partially offset by decreases in other expenses due primarily to timing of expenses including travel and lower amortization expenses associated with the Company’s retirement plans. The increase from the first quarter of 2023 was driven by higher salaries and employee benefits due to the Salisbury acquisition and higher stock-based compensation expenses. In addition, the increase in technology and data services, occupancy expense professional fees and outside services and amortization of intangible assets were impacted by additional expenses from the Salisbury acquisition. Income Taxes Income tax expense for the three months ended March 31, 2024 was $9.4 million, up $0.1 million from the prior quarter and down $0.2 million from the first quarter of 2023. The effective tax rate was 21.7% for the first quarter of 2024 compared to 23.5% for the prior quarter and 22.2% for the first quarter of 2023. The decrease in the effective tax rate from the prior quarter and the first quarter of 2023 was due to a higher level of tax-exempt income as a percentage of total taxable income. 33 Table of Contents ANALYSIS OF FINANCIAL CONDITION Securities Total securities decreased $24.9 million, or 1.0%, from December 31, 2023 to March 31, 2024. The securities portfolio represented 17.5% of total assets as of March 31, 2024 as compared to 17.8% of total assets as of December 31, 2023. The following table details the composition of securities AFS, securities HTM and equity securities for the periods indicated: March 31, 2024 December 31, 2023 Mortgage-backed securities: With maturities 15 years or less 12 % 12 % With maturities greater than 15 years 10 % 10 % Collateral mortgage obligations 36 % 36 % Municipal securities 17 % 17 % U.S. agency notes 21 % 21 % Corporate 2 % 2 % Equity securities 2 % 2 % Total 100 % 100 % The Company’s mortgage-backed securities, U.S. agency notes and collateralized mortgage obligations are all guaranteed by Fannie Mae, Freddie Mac, FHLB, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). GNMA securities are considered similar in credit quality to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in our investment portfolio. Loans A summary of the loan portfolio by major categories (1) , net of deferred fees and origination costs, for the periods indicated is as follows: (In thousands) March 31, 2024 December 31, 2023 Commercial & industrial $ 1,353,446 $ 1,354,248 Commercial real estate 3,646,739 3,626,910 Residential real estate 2,133,289 2,125,804 Home equity 328,673 337,214 Indirect auto 1,190,734 1,130,132 Residential solar 896,147 917,755 Other consumer 139,049 158,650 Total loans $ 9,688,077 $ 9,650,713 (1) Loans are summarized by business line which do not align to how the Company assesses credit risk in the allowance for credit losses. Total loans increased by $37.4 million, or 1.6% annualized, from December 31, 2023 to March 31, 2024. Excluding the other consumer and residential solar portfolios that are in a planned run-off status, period end loans increased $77.9 million, or 3.6% annualized. Commercial and industrial loans decreased $0.8 million to $1.35 billion; commercial real estate loans increased $19.8 million to $3.65 billion; and total consumer loans increased $18.3 million to $4.69 billion. Total loans represent approximately 72.1% of assets as of March 31, 2024, as compared to 72.5% as of December 31, 2023. Loans in the C&I and CRE portfolios consist primarily of loans made to small and medium-sized entities. The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion, equipment purchases, livestock purchases and seasonal crop expenses. These loans are usually collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. The Company extends CRE loans to facilitate various real estate transactions, encompassing acquisitions, refinancing, expansions and enhancements to both commercial and agricultural properties. These loans are secured by liens on real estate assets, covering a spectrum of properties including apartments, commercial structures, healthcare facilities and others, whether occupied by owners or non-owners. Risks associated with the CRE portfolio pertain to the borrowers’ capacity to meet interest and principal payments throughout the loan’s duration, as well as their ability to secure financing upon the loan’s maturity. The Company has a risk management framework that includes rigorous underwriting standards, targeted portfolio stress testing, interest rate sensitivities on commercial borrowers and comprehensive credit risk monitoring mechanisms. The Company remains vigilant in monitoring market trends, economic indicators and regulatory developments to promptly adapt our risk management strategies as needed. Within the CRE portfolio, approximately 79% comprises Non-Owner Occupied CRE, with the remaining 21% being Owner-Occupied CRE. Non-Owner Occupied CRE includes diverse sectors across the Company’s markets such as apartments (31%), office spaces (17%) and construction (14%), along with retail, manufacturing, small commercial, accommodations and others. Notably, office CRE loans account for 5% of the total outstanding loans, predominantly serving suburban medical and professional tenants across suburban and small urban markets. These loans carry an average size of $2.5 million, with 12% maturing over the next two years. As of March 31, 2024 and December 31, 2023, the total CRE construction and development loans amounted to $373.4 million and $347.2 million, respectively. 34 Table of Contents Allowance for Credit Losses, Provision for Loan Losses and Nonperforming Assets Beginning January 1, 2023, the Company adopted ASU 2022-02 Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures which resulted in an insignificant change to the Company’s methodology for estimating the allowance for credit losses on TDRs since December 31, 2022. The January 1, 2023 decrease in the allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $0.6 million, which increased retained earnings by $0.5 million and decreased the deferred tax asset by $0.1 million. Management considers the accounting policy relating to the allowance for credit losses to be a critical estimate given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations. 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. Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio. Management estimates the allowance balance for credit losses using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required at each point in the measurement process. The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted probability of default and loss given default modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled. Additional information about our allowance for credit losses is included in Note 6 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q as well as in the “Critical Accounting Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio. The allowance for credit losses totaled $115.3 million at March 31, 2024, compared to $114.4 million at December 31, 2023 and $100.3 million at March 31, 2023. The allowance for credit losses as a percentage of loans was 1.19% at March 31, 2024 and December 31, 2023, compared to 1.21% at March 31, 2023. The increase in allowance for credit losses from December 31, 2023 compared to March 31, 2024 was primarily due the slowing of prepayment speeds partly offset by the decline in consumer loans with higher allowance levels and a decline in the PCD allowance as purchased loan balances decreased. The increase in the allowance for credit losses from March 31, 2023 to March 31, 2024 was primarily due to the $14.5 million of allowance for acquired Salisbury loans which included both the $5.8 million allowance for PCD loans reclassified from loans and the $8.8 million allowance for non-PCD loans recognized through the provision for loan losses. The allowance for credit losses was 305.12% of nonperforming loans at March 31, 2024, compared to 302.05% at December 31, 2023 and 538.63% at March 31, 2023. The allowance for credit losses was 327.66% of nonaccrual loans at March 31, 2024, compared to 334.38% of nonaccrual loans at December 31, 2023 and 615.63% of nonaccrual loans at March 31, 2023. The decline in the coverage of the allowance to nonperforming and nonaccrual loans from March 31, 2023 to March 31, 2024 largely relates to one nonperforming relationship that is individually evaluated for purposes of the allowance for credit losses which had no reserve established at March 31, 2024 and December 31, 2023. The provision for loan losses was $5.6 million for three months ended March 31, 2024, compared to $5.1 million in the prior quarter and $3.9 million for the same period in the prior year. Provision expense increased from the prior quarter due to the slowing of prepayment speeds offset by a slight decline in net charge-offs. The increase in provision expense from March 31, 2023, was driven largely due to higher net charge-offs. Net charge-offs totaled $4.7 million during the three months ended March 31, 2024, compared to net charge-offs of $5.3 million during the fourth quarter of 2023 and $3.8 million in the first quarter of 2023. Net charge-offs to average loans was 19 bps for the three months ended March 31, 2024, compared to 22 bps for the fourth quarter of 2023 and 19 bps for the three months ended March 31, 2023. As of March 31, 2024, the unfunded commitment reserve totaled $4.7 million, compared to $5.1 million as of December 31, 2023 and $4.5 million as of March 31, 2023. 35 Table of Contents Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, troubled loans modifications, OREO and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. The threshold for evaluating classified, commercial and commercial real estate loans risk graded substandard or doubtful, and nonperforming loans specifically evaluated for individual credit loss is $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs. March 31, 2024 December 31, 2023 (Dollars in thousands) Amount % Amount % N o naccrual loans: Commercial $ 21,822 62 % $ 21,567 63 % Residential 10,153 29 % 9,632 28 % Consumer 2,698 8 % 2,566 8 % Troubled loan modifications 516 1 % 448 1 % Total nonaccrual loans $ 35,189 100 % $ 34,213 100 % Loans over 90 days past due and still accruing: Commercial $ - - $ 1 - Residential 227 9 % 554 15 % Consumer 2,373 91 % 3,106 85 % Total loans over 90 days past due and still accruing $ 2,600 100 % $ 3,661 100 % Total nonperforming loans $ 37,789 $ 37,874 OREO - - Total nonperforming assets $ 37,789 $ 37,874 Total nonaccrual loans to total loans 0.36 % 0.35 % Total nonperforming loans to total loans 0.39 % 0.39 % Total nonperforming assets to total assets 0.28 % 0.28 % Total allowance for loan losses to total nonperforming loans 305.12 % 302.05 % Total allowance for loan losses to nonaccrual loans 327.66 % 334.38 % Total nonperforming assets were $37.8 million at March 31, 2024, compared to $37.9 million at December 31, 2023 and $18.7 million at March 31, 2023. Nonperforming loans at March 31, 2024 were $37.8 million or 0.39% of total loans, compared with $37.9 million or 0.39% of total loans at December 31, 2023 and $18.6 million or 0.23% of total loans at March 31, 2023. The increase in nonperforming assets was attributable to a diversified, multi-tenant commercial real estate development relationship that was placed into a nonaccrual status in the fourth quarter of 2023, in which NBT is a participant. The relationship is being actively managed and recent appraised values continue to support its carrying value, and as such, no specific reserve has been established. Total nonaccrual loans were $35.2 million or 0.36% of total loans at March 31, 2024, compared to $34.2 million or 0.35% of total loans at December 31, 2023 and $16.3 million or 0.20% of total loans at March 31, 2023. Past due loans as a percentage of total loans was 0.33% at March 31, 2024, up from 0.32% at December 31, 2023 and up from 0.30% at March 31, 2023. In addition to nonperforming loans discussed above, the Company has also identified approximately $112.7 million in potential problem loans at March 31, 2024 as compared to $87.7 million at December 31, 2023 and $55.9 million at March 31, 2023. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” Potential problem loans have increased to more normalized levels and the increase primarily relates to a few commercial real estate relationships reflecting changing conditions in commercial real estate markets including construction delays, rising costs and delays in leasing up spaces. The increase in potential problem loans from March 31, 2023 is primarily due to the migration of $75.7 million to substandard, partially offset by an increase of $18.9 million in nonaccrual loan balances. Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become over 90 days past due, be placed on nonaccrual, become troubled loans modifications or require increased allowance coverage and provision for loan losses. To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint. 36 Table of Contents Deposits Total deposits were $11.20 billion at March 31, 2024, up $226.3 million, or 2.1%, from December 31, 2023. As of March 31, 2024 there were $134.5 million of brokered time deposits, down from $155.2 million as of December 31, 2023. The Company continues to experience the migration from no interest and low interest checking and savings accounts into higher cost money market and time deposit instruments. The increase in deposits was primarily due to the inflow of seasonal municipal deposits during the first quarter of 2024. The Company’s composition of total deposits is diverse and granular with over 561,000 accounts with an average per account balance of $19,947 as of March 31, 2024. As of March 31, 2024 and December 31, 2023 the estimated amounts of uninsured deposits based on the same methodologies and assumptions used for the bank regulatory reporting was $4.1 billion. Total average deposits increased $1.44 billion, or 15.0%, from the same period last year. The increase in average balances was primarily due to the $1.31 billion in deposits acquired from Salisbury in the third quarter of 2023. Borrowed Funds The Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $267.1 million at March 31, 2024 compared to $386.7 million at December 31, 2023. Long-term debt was $29.8 million at March 31, 2024 and December 31, 2023. For more information about the Company’s borrowing capacity and liquidity position, see “Liquidity Risk” below. Subordinated Debt On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month SOFR plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated debt issuance cost of $2.2 million is being amortized on a straight-line basis into interest expense over five years. The Company repurchased $2.0 million of the subordinated notes in 2022 at a discount of $0.1 million. Subordinated notes assumed in connection with the Salisbury acquisition included $25.0 million of 3.50% fixed-to-floating rate subordinated notes due 2031. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 3.50%, payable quarterly in arrears commencing on June 30, 2021, and a floating rate of interest equivalent to the three-month SOFR plus a spread of 2.80%, payable quarterly in arrears commencing on June 30, 2026. As of the acquisition date, the fair value discount was $3.0 million, which will be amortized into interest expense over the expected call or maturity date. As of March 31, 2024 and December 31, 2023 the subordinated debt net of unamortized issuance costs and fair value discount was $120.1 million and $119.7 million, respectively. Capital Resources Stockholders’ equity of $1.44 billion represented 10.73% of total assets at March 31, 2024 compared with $1.43 billion, or 10.71% of total assets, as of December 31, 2023. Stockholders’ equity increased $15.7 million from December 31, 2023 driven by net income of $33.8 million for the three months ended March 31, 2024, partially offset by dividends declared of $15.1 million and a $3.6 million increase in accumulated other comprehensive loss due primarily to the change in the fair value of securities available for sale. 37 Table of Contents The Company purchased 1,900 shares of its common stock during the three months ended March 31, 2024 at an average price of $33.03 per share under its previously announced share repurchase program. The Company may repurchase shares of its common stock from time to time to mitigate the potential dilutive effect of stock-based incentive plans and other potential uses of common stock for corporate purposes. As of March 31, 2024, there were 1,998,100 shares available for repurchase under the plan authorized on December 18, 2023, which is set to expire on December 31, 2025. As the capital ratios in the following table indicate, the Company remained “well capitalized” at March 31, 2024 under applicable bank regulatory requirements. Capital measurements are well in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based capital ratios must be 5%, 6.5%, 8% and 10%, respectively. Capital Measurements March 31, 2024 December 31, 2023 Tier 1 leverage ratio 10.09 % 9.71 % Common equity tier 1 capital ratio 11.68 % 11.57 % Tier 1 capital ratio 12.61 % 12.50 % Total risk-based capital ratio 14.87 % 14.75 % Cash dividends as a percentage of net income 44.62 % 47.05 % Per common share: Book value $ 30.57 $ 30.26 Tangible book value (1) $ 22.07 $ 21.72 Tangible equity ratio (2) 7.98 % 7.93 % (1) Stockholders’ equity less goodwill and intangible assets divided by common shares outstanding. (2) Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. In March 2020, the OCC, the Board of Governors of the Federal Reserve System and the 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 was 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. Liquidity and Interest Rate Sensitivity Management 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 (the “Board”). 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. 38 Table of Contents 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 (i.e. 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 March 31, 2024 balance sheet position: Interest Rate Sensitivity Analysis Change in interest rates Percent change in (in bps) net interest income +200 (0.15%) +100 0.22% -200 (0.22%) The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of short to mid-term interest rates which are heavily driven by inflationary pressures and FOMC monetary policy. In response to the economic impact of the pandemic, the federal funds rate was reduced to near zero in March 2020, term interest rates fell sharply across the yield curve and the Company reduced deposit rates. Post-pandemic, inflationary pressures have resulted in a higher overall yield curve with Federal Funds increases of 425 bps in 2022 with an additional 100 bps of increases in 2023. While deposit rates increased meaningfully in 2023 and have continued to increase in 2024 in conjunction with elevated short term interest rates, there has been some moderation to the level of increase. The Company continues to focus on managing deposit expense in an environment of elevated interest rates while allowing assets to reprice upward. Liquidity Risk Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources. The objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. ALCO is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies, along with regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. Management continually monitors marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments. The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At March 31, 2024, the Company’s Basic Surplus measurement was 16.2% of total assets, or $2.18 billion, as compared to the December 31, 2023 Basic Surplus of 11.6%, or $1.54 billion, and was above the Company’s minimum of 5% (calculated at $672.0 million and $665.5 million of period end total assets at March 31, 2024 and December 31, 2023, respectively) set forth in its liquidity policies. 39 Table of Contents At March 31, 2024 and December 31, 2023, FHLB advances outstanding totaled $132.7 million and $322.7 million, respectively. At March 31, 2024 and December 31, 2023, the Bank had $99.0 million and $77.0 million, respectively, of collateral encumbered by municipal letters of credit. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.81 billion at March 31, 2024 and $1.11 billion at December 31, 2023. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $662.9 million and $823.3 million at March 31, 2024 and December 31, 2023, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $2.03 billion at March 31, 2024 and $2.01 billion at December 31, 2023. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile and residential solar loans as collateral. At March 31, 2024 and December 31, 2023, the Bank had the capacity to borrow $1.06 billion and $1.02 billion, respectively, from this program. The Company’s internal policies authorize borrowings up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $3.13 billion at March 31, 2024 and $2.99 billion at December 31, 2023. This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considers its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2024. Continued increases to interest rates could result in deposit declines as depositors have alternative opportunities for yield on their excess funds. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Note, enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity. While the pandemic has come to an end, this enhanced monitoring continues as rising interest rates and the recent bank failures have led to a deposit decline in the banking system and increased volatility to liquidity risk. At March 31, 2024, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is reduced, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements. The Company’s primary source of funds is dividends from its subsidiaries. Various laws and regulations restrict the ability of banks to pay dividends to their stockholders. Generally, the payment of dividends by the Company in the future as well as the payment of interest on the capital securities will require the generation of sufficient future earnings by its subsidiaries. Certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends. The approval of the 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 March 31, 2024, approximately $77.1 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 is also subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.