NBT BANCORP INC 10-Q

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 and six months ended periods ending June 30, 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 rates, 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. 30 Table of Contents 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. 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 methodology 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 methodology 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 June 30, 2024, the quantitative model 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 June 30, 2024, the weightings were 80% and 20% for the baseline and downside economic forecasts, respectively. The baseline outlook reflects an economic environment where the Northeast unemployment rate increases slightly from 4.0% to 4.1% during the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the third quarter of 2024 at approximately 3.7% and increase slightly to 3.8% before the end of the forecast period. Key assumptions in the baseline economic outlook included the Federal Reserve cutting rates with two 25 basis point cuts at the 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, Northeast unemployment rises from 4.0% in the second quarter of 2024 to a peak of 7.2% in the fourth quarter of 2025. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of June 30, 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 June 30, 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 4% 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 June 30, 2024, the Company increased the downside scenario to 100% which resulted in a 29% 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. 31 Table of Contents Executive Summary 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. Net income for the three months ended June 30, 2024 was $32.7 million, up $2.6 million from the second quarter of 2023 and down $1.1 million from the first quarter of 2024. Diluted earnings per share were $0.69 for the three months ended June 30, 2024, down $0.01 from the second quarter of 2023 and down $0.02 from the first quarter of 2024. Net income for the six months ended June 30, 2024 was $66.5 million, or $1.40 per diluted common share, up $2.8 million from $63.7 million, or $1.48 per diluted common share for the six months ended June 30, 2023. Operating net income (1) , a non-GAAP measure, which excludes acquisition expenses and securities gains (losses), net of tax, was $32.8 million, or $0.69 per diluted common share, for the three months ended June 30, 2024, compared to $0.80 per diluted common share for the second quarter of 2023 and $0.68 per diluted common share for the first quarter of 2024. Operating net income (1) , for the six months ended June 30, 2024, was $64.9 million, or $1.37 per diluted common share, down $7.7 million from $72.6 million, or $1.68 per diluted common share for the six months ended June 30, 2023. In the first quarter of 2023, the Company incurred a $5.0 million 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. In the second quarter 2023, the Company incurred a $4.5 million securities loss on the sale of two subordinated debt securities held in the AFS portfolio. The Company completed the acquisition of Salisbury in August of 2023, a commercial bank with $1.46 billion in assets with 13 banking offices in northwestern Connecticut, the Hudson Valley region of New York and southwestern Massachusetts. The Company incurred acquisition expenses related to the merger with Salisbury of $1.2 million in the second quarter of 2023 and $1.8 million in the six months ended June 30, 2023. The following information should be considered in connection with the Company’s results for the three and six months ended June 30, 2024: ● Net interest income for the three months ended June 30, 2024 was $97.2 million, up $8.1 million, or 9.1%, from the second quarter of 2023 and up $2.0 million, or 2.1%, from the first quarter of 2024. Net interest income for the six months ended June 30, 2024 was $192.3 million, up $8.2 million, or 4.5%, from the same period in 2023. ● The Company recorded a provision for loan losses of $8.9 million for the three months ended June 30, 2024, compared to $3.6 million in the second quarter of 2023 and $5.6 million in the first quarter of 2024. Provision for loan losses was $14.5 million for the six months ended June 30, 2024 up $7.0 million from the same period in 2023. ● Excluding securities (losses) gains, noninterest income represented 31% of total revenues and was $43.3 million for the three months ended June 30, 2024, up $6.6 million, or 18.1%, from the second quarter of 2023 and up $0.1 million, or 0.3%, from the first quarter of 2024. Excluding securities (losses) gains, noninterest income was $86.5 million for the six months ended June 30, 2024 up $13.4 million for the same period in 2023. ● Noninterest expense, excluding acquisition expenses, was up $12.0 million, or 15.4%, from the second quarter of 2023 and was down $2.2 million, or 2.4%, from the first quarter of 2024. Noninterest expense, excluding acquisition expenses, was up $25.1 million, or 16.0%, for the same period in 2023. ● Period end total loans were $9.85 billion, up $203.6 million, or 4.2% annualized, from December 31, 2023. ● Credit quality metrics including net charge-offs to average loans were 0.15%, annualized, and allowance for loan losses to total loans was 1.22%. ● Period end total deposits were $11.27 billion, up $302.5 million, or 2.8%, from December 31, 2023. (1) Non-GAAP measure - Refer to non-GAAP reconciliation below. 32 Table of Contents Results of Operations The following table sets forth certain financial highlights: Three Months Ended Six Months Ended June 30, 2024 March 31, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Performance : Diluted earnings per share $ 0.69 $ 0.71 $ 0.70 $ 1.40 $ 1.48 Return on average assets (2) 0.98 % 1.02 % 1.02 % 1.00 % 1.09 % Return on average equity (2) 9.12 % 9.52 % 9.91 % 9.32 % 10.68 % Return on average tangible common equity (2) 13.23 % 13.87 % 13.13 % 13.55 % 14.20 % Net interest margin, (FTE) (2) 3.18 % 3.14 % 3.27 % 3.16 % 3.41 % Capital: Equity to assets 10.83 % 10.73 % 10.18 % 10.83 % 10.18 % Tangible equity ratio 8.11 % 7.98 % 7.95 % 8.11 % 7.95 % Book value per share $ 31.00 $ 30.57 $ 28.26 $ 31.00 $ 28.26 Tangible book value per share $ 22.54 $ 22.07 $ 21.55 $ 22.54 $ 21.55 Leverage ratio 10.16 % 10.09 % 10.51 % 10.16 % 10.51 % Common equity tier 1 capital ratio 11.70 % 11.68 % 12.29 % 11.70 % 12.29 % Tier 1 capital ratio 12.61 % 12.61 % 13.35 % 12.61 % 13.35 % Total risk-based capital ratio 14.88 % 14.87 % 15.50 % 14.88 % 15.50 % The following table provides non-GAAP reconciliations: Three Months Ended Six Months Ended (In thousands, except per share data) June 30, 2024 March 31, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Return on average tangible common equity: Net income $ 32,716 $ 33,823 $ 30,072 $ 66,539 $ 63,730 Amortization of intangible assets (net of tax) 1,600 1,626 344 3,226 746 Net income, excluding intangible amortization $ 34,316 $ 35,449 $ 30,416 $ 69,765 $ 64,476 Average stockholders’ equity $ 1,443,351 $ 1,429,602 $ 1,217,306 $ 1,436,477 $ 1,203,886 Less: average goodwill and other intangibles 399,968 401,756 287,974 400,862 288,163 Average tangible common equity $ 1,043,383 $ 1,027,846 $ 929,332 $ 1,035,615 $ 915,723 Return on average tangible common equity (2) 13.23 % 13.87 % 13.13 % 13.55 % 14.20 % Tangible equity ratio: Stockholders’ equity $ 1,461,955 $ 1,441,415 $ 1,210,493 $ 1,461,955 $ 1,210,493 Intangibles 398,686 400,819 287,701 398,686 287,701 Assets $ 13,501,909 $ 13,439,199 $ 11,890,497 $ 13,501,909 $ 11,890,497 Tangible equity ratio 8.11 % 7.98 % 7.95 % 8.11 % 7.95 % Tangible book value per share: Stockholders’ equity $ 1,461,955 $ 1,441,415 $ 1,210,493 $ 1,461,955 $ 1,210,493 Intangibles 398,686 400,819 287,701 398,686 287,701 Tangible equity $ 1,063,269 $ 1,040,596 $ 922,792 $ 1,063,269 $ 922,792 Diluted common shares outstanding 47,165 47,155 42,827 47,165 42,827 Tangible book value per share $ 22.54 $ 22.07 $ 21.55 $ 22.54 $ 21.55 Operating net income: Net income $ 32,716 $ 33,823 $ 30,072 $ 66,539 $ 63,730 Acquisition expenses - - 1,189 - 1,807 Securities losses (gains) 92 (2,183 ) 4,641 (2,091 ) 9,639 Adjustments to net income $ 92 $ (2,183 ) $ 5,830 $ (2,091 ) $ 11,446 Adjustments to net income (net of tax) $ 72 $ (1,703 ) $ 4,525 $ (1,631 ) $ 8,866 Operating net income $ 32,788 $ 32,120 $ 34,597 $ 64,908 $ 72,596 Operating diluted earnings per share $ 0.69 $ 0.68 $ 0.80 $ 1.37 $ 1.68 (2) Annualized. 33 Table of Contents 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 $97.2 million for the second quarter of 2024, up $2.0 million, or 2.1%, from the previous quarter. The FTE net interest margin was 3.18% for the three months ended June 30, 2024, an increase of 4 bps from the previous quarter. Interest income increased $3.8 million, or 2.6%, as the yield on average interest-earning assets increased 8 bps from the prior quarter to 4.92%, while average interest-earning assets of $12.37 billion increased $94.3 million from the prior quarter, primarily due to organic loan growth. Interest expense was up $1.8 million, or 3.5%, as the cost of interest-bearing liabilities increased 6 bps to 2.58% for the quarter ended June 30, 2024, driven by interest-bearing deposit costs increasing 8 bps, which were partially offset by lower average balances of short-term borrowings. Included in net interest income was $2.6 million of acquisition-related net accretion for the three months ended June 30, 2024 and $2.5 million of acquisition related net accretion for the three months ended March 31, 2024. Net interest income was $97.2 million for the second quarter of 2024, up $8.1 million, or 9.1%, from the second quarter of 2023. The FTE net interest margin was 3.18% for the three months ended June 30, 2024, a decrease of 9 bps from the second quarter of 2023. Interest income increased $30.2 million, or 25.0%, as the yield on average interest-earning assets increased 50 bps from the same period in 2023 to 4.92%, while average interest-earning assets increased $1.38 billion, or 12.6%, from the second quarter of 2023 primarily due to the Salisbury acquisition and organic loan growth. Interest expense increased $22.1 million, or 70.1%, as the cost of interest-bearing liabilities increased 78 bps to 2.58% for the quarter ended June 30, 2024, primarily due to both a 110 bps increase in interest-bearing deposit costs and a $1.69 billion increase in interest-bearing deposits as a results of the Salisbury acquisition, partly offset by a decrease of $402.7 million in the average balances of short-term borrowings and the 558 bps rate paid on those borrowings. Included in net interest income was $2.6 million of acquisition-related net accretion for the three months ended June 30, 2024. Net interest income for the six months ended June 30, 2024 was $192.3 million, up $8.2 million, or 4.5%, from the same period in 2023. FTE net interest margin was 3.16% for the six months ended June 30, 2024, a decrease of 25 bps from the same period in 2023. Interest income increased $62.9 million, or 26.8%, as the yield on average interest-earning assets increased 54 bps from the same period in 2023 to 4.88%, while average interest-earning assets of $12.32 billion increased $1.37 billion primarily due to the Salisbury acquisition and organic loan growth partially offset by the decrease in securities. Interest expense was up $54.7 million, or 108.1%, for the six months ended June 30, 2024 as compared to the same period in 2023 driven by interest-bearing deposit costs increasing 133 bps, partly offset by a decrease of $273.8 million in the average balances of short-term borrowings and the 544 bps rate paid on those borrowings. Included in net interest income was $5.1 million of acquisition-related net accretion. 34 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 June 30, 2024 June 30, 2023 (Dollars in thousands) Average Balance Interest Yield/ Rates Average Balance Interest Yield/ Rates Assets: Short-term interest-bearing accounts $ 48,861 $ 666 5.48 % $ 28,473 $ 257 3.62 % Securities taxable (1) 2,280,767 11,171 1.97 % 2,394,027 11,359 1.90 % Securities tax-exempt (1) (3) 226,032 2,001 3.56 % 201,499 1,424 2.83 % FRB and FHLB stock 40,283 742 7.41 % 51,454 913 7.12 % Loans (2) (3) 9,772,014 136,844 5.63 % 8,307,894 107,038 5.17 % Total interest-earning assets $ 12,367,957 $ 151,424 4.92 % $ 10,983,347 $ 120,991 4.42 % Other assets 1,064,487 835,424 Total assets $ 13,432,444 $ 11,818,771 Liabilities and stockholders’ equity: Money market deposit accounts $ 3,254,252 $ 29,544 3.65 % $ 2,113,965 $ 12,104 2.30 % NOW deposit accounts 1,603,695 3,126 0.78 % 1,463,953 1,391 0.38 % Savings deposits 1,586,753 181 0.05 % 1,708,874 144 0.03 % Time deposits 1,391,062 13,837 4.00 % 856,305 6,347 2.97 % Total interest-bearing deposits $ 7,835,762 $ 46,688 2.40 % $ 6,143,097 $ 19,986 1.30 % Federal funds purchased 29,945 414 5.56 % 48,407 646 5.35 % Repurchase agreements 86,405 332 1.55 % 55,627 150 1.08 % Short-term borrowings 155,159 2,153 5.58 % 557,818 7,330 5.27 % Long-term debt 29,734 291 3.94 % 29,773 290 3.91 % Subordinated debt, net 120,239 1,806 6.04 % 97,081 1,335 5.52 % Junior subordinated debt 101,196 1,908 7.58 % 101,196 1,767 7.00 % Total interest-bearing liabilities $ 8,358,440 $ 53,592 2.58 % $ 7,032,999 $ 31,504 1.80 % Demand deposits 3,323,906 3,316,955 Other liabilities 306,747 251,511 Stockholders’ equity 1,443,351 1,217,306 Total liabilities and stockholders’ equity $ 13,432,444 $ 11,818,771 Net interest income (FTE) $ 97,832 $ 89,487 Interest rate spread 2.34 % 2.62 % Net interest margin (FTE) 3.18 % 3.27 % Taxable equivalent adjustment $ 658 $ 402 Net interest income $ 97,174 $ 89,085 (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%. 35 Table of Contents Six Months Ended June 30, 2024 June 30, 2023 (Dollars in thousands) Average Balance Interest Yield/ Rates Average Balance Interest Yield/ Rates Assets: Short-term interest-bearing accounts $ 48,416 $ 1,201 4.99 % $ 31,328 $ 447 2.88 % Securities taxable (1) 2,279,399 21,977 1.94 % 2,418,245 22,902 1.91 % Securities tax-exempt (1) (3) 228,250 4,053 3.57 % 201,908 2,826 2.82 % FRB and FHLB stock 41,289 1,571 7.65 % 46,327 1,365 5.94 % Loans (2) (3) 9,723,453 270,217 5.59 % 8,249,034 208,038 5.09 % Total interest-earning assets $ 12,320,807 $ 299,019 4.88 % $ 10,946,842 $ 235,578 4.34 % Other assets 1,059,937 836,148 Total assets $ 13,380,744 $ 11,782,990 Liabilities and stockholders’ equity: Money market deposit accounts $ 3,191,706 $ 57,278 3.61 % $ 2,097,678 $ 18,368 1.77 % NOW deposit accounts 1,601,992 6,120 0.77 % 1,531,021 2,824 0.37 % Savings deposits 1,597,206 352 0.04 % 1,744,969 286 0.03 % Time deposits 1,371,810 27,277 4.00 % 748,573 9,652 2.60 % Total interest-bearing deposits $ 7,762,714 $ 91,027 2.36 % $ 6,122,241 $ 31,130 1.03 % Federal funds purchased 24,857 686 5.55 % 46,381 1,184 5.15 % Repurchase agreements 84,412 649 1.55 % 63,440 164 0.52 % Short-term borrowings 184,275 4,985 5.44 % 458,064 11,697 5.15 % Long-term debt 29,753 581 3.93 % 18,598 337 3.65 % Subordinated debt, net 120,056 3,606 6.04 % 97,024 2,669 5.55 % Junior subordinated debt 101,196 3,821 7.59 % 101,196 3,449 6.87 % Total interest-bearing liabilities $ 8,307,263 $ 105,355 2.55 % $ 6,906,944 $ 50,630 1.48 % Demand deposits 3,340,257 3,409,209 Other liabilities 296,747 262,951 Stockholders’ equity 1,436,477 1,203,886 Total liabilities and stockholders’ equity $ 13,380,744 $ 11,782,990 Net interest income (FTE) $ 193,664 $ 184,948 Interest rate spread 2.33 % 2.86 % Net interest margin (FTE) 3.16 % 3.41 % Taxable equivalent adjustment $ 1,316 $ 797 Net interest income $ 192,348 $ 184,151 (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%. 36 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 June 30, Increase (Decrease) 2024 over 2023 (In thousands) Volume Rate Total Short-term interest-bearing accounts $ 238 $ 171 $ 409 Securities taxable (565 ) 377 (188 ) Securities tax-exempt 186 391 577 FRB and FHLB stock (207 ) 36 (171 ) Loans 19,738 10,068 29,806 Total FTE interest income $ 19,391 $ 11,042 $ 30,433 Money market deposit accounts $ 8,330 $ 9,110 $ 17,440 NOW deposit accounts 144 1,591 1,735 Savings deposits (11 ) 48 37 Time deposits 4,821 2,669 7,490 Federal funds purchased (256 ) 24 (232 ) Repurchase agreements 103 79 182 Short-term borrowings (5,582 ) 405 (5,177 ) Long-term debt - 1 1 Subordinated debt, net 337 134 471 Junior subordinated debt - 141 141 Total FTE interest expense $ 7,884 $ 14,204 $ 22,088 Change in FTE net interest income $ 11,507 $ (3,162 ) $ 8,345 Six Months Ended June 30, Increase (Decrease) 2024 over 2023 (In thousands) Volume Rate Total Short-term interest-bearing accounts $ 322 $ 432 $ 754 Securities taxable (1,284 ) 359 (925 ) Securities tax-exempt 405 822 1,227 FRB and FHLB stock (160 ) 366 206 Loans 40,033 22,146 62,179 Total FTE interest income $ 39,316 $ 24,125 $ 63,441 Money market deposit accounts $ 12,964 $ 25,946 $ 38,910 NOW deposit accounts 137 3,159 3,296 Savings deposits (26 ) 92 66 Time deposits 10,708 6,917 17,625 Federal funds purchased (585 ) 87 (498 ) Repurchase agreements 70 415 485 Short-term borrowings (7,343 ) 631 (6,712 ) Long-term debt 217 27 244 Subordinated debt, net 682 255 937 Junior subordinated debt - 372 372 Total FTE interest expense $ 16,824 $ 37,901 $ 54,725 Change in net FTE interest income $ 22,491 $ (13,775 ) $ 8,716 37 Table of Contents 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 June 30, Six Months Ended June 30, (In thousands) 2024 2023 2024 2023 Service charges on deposit accounts $ 4,219 $ 3,733 $ 8,336 $ 7,281 Card services income 5,587 5,121 10,782 9,966 Retirement plan administration fees 14,798 11,735 29,085 23,197 Wealth management 10,173 8,227 19,870 16,314 Insurance services 3,848 3,716 8,236 7,647 Bank owned life insurance income 1,834 1,528 4,186 3,406 Net securities (losses) gains (92 ) (4,641 ) 2,091 (9,639 ) Other 2,865 2,626 6,038 5,282 Total noninterest income $ 43,232 $ 32,045 $ 88,624 $ 63,454 Noninterest income for the three months ended June 30, 2024 was $43.2 million, down $2.2 million, or 4.8%, from the prior quarter and up $11.2 million, or 34.9%, from the second quarter of 2023. Excluding net securities (losses) gains, noninterest income for the three months ended June 30, 2024 was $43.3 million, up $0.1 million, or 0.3%, from the prior quarter and up $6.6 million, or 18.1%, from the second quarter of 2023. The increase from the prior quarter was primarily driven by an increase in retirement plan administration fees and wealth management fees which were partially offset by a decrease in insurance services. The increase in retirement plan administration fees from the prior quarter was due primarily to organic growth, positive market performance and higher activity based fees. Wealth management fees increased from the prior quarter due primarily to organic growth and favorable market performance. Insurance services decreased from the prior quarter due to the seasonally higher income in the first quarter. The increase from the second quarter of 2023 was driven by an increase in retirement plan administration fees and wealth management fees. The increase in retirement plan administration fees from the second quarter of 2023 includes the impact from the acquisition of Retirement Direct, LLC on July 1, 2023, organic growth and higher market levels. Wealth management fees increased in the second quarter of 2023 driven by the addition of Salisbury revenues, organic growth and market performance. Noninterest income for the six months ended June 30, 2024 was $88.6 million, up $25.2 million, or 39.7%, from the same period in 2023. Excluding net securities (losses) gains, noninterest income for the six months ended June 30, 2024 was $86.5 million, up $13.4 million, or 18.4%, from the same period in 2023. The increase from the prior year was primarily due to an increase in retirement plan administration fees, wealth management fees and service charges on deposit accounts. The increase in retirement plan administration fees was driven by positive market performance, the acquisition of Retirement Direct, LLC, organic growth and higher activity based fees. The increase in wealth management fees was driven by the addition of Salisbury revenues and market performance. In addition, the increases in service charges on deposit accounts and card services income were impacted by the Salisbury acquisition revenues. 38 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 June 30, Six Months Ended June 30, (In thousands) 2024 2023 2024 2023 Salaries and employee benefits $ 55,393 $ 46,834 $ 111,097 $ 94,989 Technology and data services 9,249 9,305 18,999 18,312 Occupancy 7,671 6,923 15,769 14,143 Professional fees and outside services 4,565 4,159 9,418 8,337 Office supplies and postage 1,804 1,676 3,669 3,304 FDIC assessment 1,667 1,344 3,402 2,740 Advertising 873 525 1,685 1,174 Amortization of intangible assets 2,133 458 4,301 994 Loan collection and other real estate owned, net 715 691 1,268 1,546 Acquisition expenses - 1,189 - 1,807 Other 5,518 5,690 11,753 10,770 Total noninterest expense $ 89,588 $ 78,794 $ 181,361 $ 158,116 Noninterest expense for the three months ended June 30, 2024 was $89.6 million, down $2.2 million, or 2.4%, from the prior quarter and up $10.8 million, or 13.7%, from the second quarter of 2023. The decrease from the prior quarter was driven by lower technology and data services due to cost savings from various efficiency initiatives. In addition, the decrease in salaries and employee benefits from the prior quarter was driven by seasonally higher payroll taxes and stock-based compensation expenses in the first quarter of 2024, which were partially offset by a full quarter of merit pay increases which were effective in March and higher medical costs. Occupancy costs and other expenses decreased from the prior quarter due to lower seasonal costs including utilities and timing of initiatives. The increase from the second quarter of 2023 was driven by higher salaries and employee benefits due to the Salisbury acquisition, merit pay increases, and higher medical and other benefit costs. In addition, the increase in occupancy expense, professional fees and outside services and amortization of intangible assets were impacted by additional expenses from the Salisbury acquisition. Noninterest expense for the six months ended June 30, 2024 was $181.4 million, up $23.2 million, or 14.7%, from the same period in 2023. Excluding acquisition expenses, noninterest expense for the six months ended June 30, 2024 was $181.4 million, up $25.1 million, or 16.0%, from the same period in 2023. The increase from the prior year was driven by higher salaries and employee benefits due to the Salisbury acquisition, merit pay increases, higher levels of incentive compensation and higher medical and other benefit costs. In addition, the increase in 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 June 30, 2024 was $9.2 million, down $0.2 million from the prior quarter and up $0.5 million from the second quarter of 2023. The effective tax rate was 22.0% for the second quarter of 2024 compared to 21.7% for the prior quarter and 22.4% for the second quarter of 2023. Income tax expense for the six months ended June 30, 2024 was $18.6 million, up $0.4 million from the same period in 2023 due to an increase in pre-tax net income. The effective tax rate was 21.8% for the six months ended June 30, 2024, compared to 22.3% for the six months ended June 30, 2023. The decrease in the effective tax rate from 2023 was due to a higher level of tax-exempt income as a percentage of total taxable income. 39 Table of Contents ANALYSIS OF FINANCIAL CONDITION Securities Total securities decreased $15.3 million, or 0.6%, from December 31, 2023 to June 30, 2024. The securities portfolio represented 17.5% of total assets as of June 30, 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: June 30, 2024 December 31, 2023 Mortgage-backed securities: With maturities 15 years or less 11 % 12 % With maturities greater than 15 years 10 % 10 % Collateral mortgage obligations 37 % 36 % Municipal securities 16 % 17 % U.S. agency notes 22 % 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) June 30, 2024 December 31, 2023 Commercial & industrial $ 1,397,935 $ 1,354,248 Commercial real estate 3,784,214 3,626,910 Residential real estate 2,134,875 2,125,804 Home equity 326,556 337,214 Indirect auto 1,225,786 1,130,132 Residential solar 861,883 917,755 Other consumer 123,098 158,650 Total loans $ 9,854,347 $ 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 $203.6 million, or 4.2% annualized, from December 31, 2023 to June 30, 2024. Excluding the other consumer and residential solar portfolios that are in a planned run-off status, period end loans increased $294.9 million, or 6.9% annualized. Commercial and industrial loans increased $43.7 million to $1.40 billion; commercial real estate loans increased $157.3 million to $3.78 billion; and total consumer loans increased $2.6 million to $4.67 billion. Total loans represent approximately 73.0% of assets as of June 30, 2024, as compared to 72.5% as of December 31, 2023. 40 Table of Contents 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 80% comprises Non-Owner Occupied CRE, with the remaining 20% being Owner-Occupied CRE. Non-Owner Occupied CRE includes diverse sectors across the Company’s markets such as residential rental properties (41%), and office spaces (19%), along with retail, manufacturing, mixed use, hotels and others. Notably, office CRE loans account for 6% 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 $1.9 million, with 9% maturing over the next two years. As of June 30, 2024 and December 31, 2023, the total CRE construction and development loans amounted to $246.6 million and $347.2 million, respectively. 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 methodology 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, adjusted for expected prepayments. 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. 41 Table of Contents 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 $120.5 million at June 30, 2024, as compared to $115.3 million at March 31, 2024 and $100.4 million at June 30, 2023. The allowance for credit losses as a percentage of loans was 1.22% at June 30, 2024, compared to 1.19% at March 31, 2024 and 1.20% at June 30, 2023. The increase in the allowance for credit losses from March 31, 2024 to June 30, 2024 was due to providing for loan growth, changes in model assumptions, including a change in prepayment speed assumptions and a $1.7 million additional specific reserve established relating to the commercial relationship previously placed on nonaccrual status in the fourth quarter of 2023, partly offset by a change in forecast scenario weightings from 70% baseline and 30% downside to 80% baseline and 20% downside. The increase in the allowance for credit losses from June 30, 2023 to June 30, 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 as well as the slowing of prepayment speed assumptions and providing for organic loan growth. The allowance for credit losses was 316.37% of nonperforming loans at June 30, 2024, compared to 305.12% at March 31, 2024 and 510.01% at June 30, 2023. The allowance for credit losses was 346.71% of nonaccrual loans at June 30, 2024, compared to 327.66% of nonaccrual loans at March 31, 2024 and 593.00% of nonaccrual loans at June 30, 2023. The decline in the coverage of the allowance to nonperforming and nonaccrual loans from June 30, 2023 to June 30, 2024 largely relates to one nonperforming relationship that is individually evaluated for purposes of the allowance for credit losses which had a $1.8 million specific reserve established during the three months ended June 30, 2024. The provision for loan losses was $8.9 million for three months ended June 30, 2024, compared to $5.6 million in the prior quarter and $3.6 million for the same period in the prior year. Provision expense increased from the prior quarter and the second quarter of 2023 primarily due to providing for the second quarter’s loan growth, changes in model assumptions, including the extension of the expected duration of the portfolio and a specific reserve related to a commercial relationship previously placed in nonaccrual in the fourth quarter of 2023. Net charge-offs totaled $3.7 million during the three months ended June 30, 2024, compared to net charge-offs of $4.7 million during the first quarter of 2024 and $3.5 million in the second quarter of 2023. Net charge-offs to average loans was 15 bps for the three months ended June 30, 2024, compared to 19 bps for the first quarter of 2024 and 17 bps for the three months ended June 30, 2023. The provision for loan losses was $14.5 million for the six months ended June 30, 2024, compared to $7.5 million for the six months ended June 30, 2023. Provision expense increased from the same period in the prior year due primarily to providing for loan growth, the slowing of prepayment speed assumptions, changes in model assumptions, including the extension of the expected duration of the portfolio and a specific reserve related to a commercial relationship previously placed in nonaccrual in the fourth quarter of 2023. Net charge-offs totaled $8.4 million during the six months ended June 30, 2024, compared to net charge-offs of $7.3 million during the six months ended June 30, 2023. Net charge-offs to average loans was 17 bps for the six months ended June 30, 2024, compared to 18 bps for the six months ended June 30, 2023. As of June 30, 2024, the unfunded commitment reserve totaled $4.3 million, compared to $4.7 million as of March 31, 2024 and $4.4 million as of June 30, 2023. 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 individually evaluated for 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. 42 Table of Contents June 30, 2024 December 31, 2023 (Dollars in thousands) Amount % Amount % Nonaccrual loans: Commercial $ 20,943 60 % $ 21,567 63 % Residential 10,641 31 % 9,632 28 % Consumer 2,460 7 % 2,566 8 % Troubled loan modifications 711 2 % 448 1 % Total nonaccrual loans $ 34,755 100 % $ 34,213 100 % Loans over 90 days past due and still accruing: Commercial $ 12 - $ 1 - Residential 496 15 % 554 15 % Consumer 2,825 85 % 3,106 85 % Total loans over 90 days past due and still accruing $ 3,333 100 % $ 3,661 100 % Total nonperforming loans $ 38,088 $ 37,874 OREO 74 - Total nonperforming assets $ 38,162 $ 37,874 Total nonaccrual loans to total loans 0.35 % 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 316.37 % 302.05 % Total allowance for loan losses to nonaccrual loans 346.71 % 334.38 % Total nonperforming assets were $38.2 million at June 30, 2024, compared to $37.9 million at December 31, 2023 and $19.9 million at June 30, 2023. Nonperforming loans at June 30, 2024 were $38.1 million or 0.39% of total loans, compared with $37.9 million or 0.39% of total loans at December 31, 2023 and $19.7 million or 0.24% of total loans at June 30, 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, as noted above, a $1.7 specific reserve was established during the three months ended June 30, 2024 for this relationship. Total nonaccrual loans were $34.8 million or 0.35% of total loans at June 30, 2024, compared to $34.2 million or 0.35% of total loans at December 31, 2023 and $16.9 million or 0.20% of total loans at June 30, 2023. Past due loans as a percentage of total loans was 0.30% at June 30, 2024, down from 0.32% at December 31, 2023 and down from 0.45% at June 30, 2023. In addition to nonperforming loans discussed above, the Company has also identified approximately $125.2 million in potential problem loans at June 30, 2024 as compared to $87.7 million at December 31, 2023 and $90.6 million at June 30, 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 at June 30, 2024 compared to December 31, 2023 and June 30, 2023 is primarily due to the migration of commercial loan balances of $35.1 million and $38.0 million, respectively, to substandard, the majority of which is adequately secured by real estate collateral. 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. Deposits Total deposits were $11.27 billion at June 30, 2024, up $302.5 million, or 2.8%, from December 31, 2023. As of June 30, 2024, there were $218.5 million of brokered time deposits, up from $155.2 million as of December 31, 2023. The increase in deposits was primarily due to higher consumer deposit balances and accounts and the inflow of seasonal municipal deposits. The Company continues to experience some incremental migration from noninterest bearing and low interest checking and savings accounts into higher cost money market and time deposit instruments. The Company’s composition of total deposits is diverse and granular with over 562,000 accounts with an average per account balance of $20,052 as of June 30, 2024. As of June 30, 2024 and December 31, 2023 the estimated amounts of uninsured deposits based on the methodologies and assumptions used for the bank regulatory reporting were $4.47 billion and $4.08 billion, respectively. Total average deposits increased $1.57 billion, or 16.5%, 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 $224.7 million at June 30, 2024 compared to $386.7 million at December 31, 2023. Long-term debt was $29.7 million at June 30, 2024 compared to $29.8 million at December 31, 2023. For more information about the Company’s borrowing capacity and liquidity position, see “Liquidity Risk” below. 43 Table of Contents 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 June 30, 2024 and December 31, 2023 the subordinated debt net of unamortized issuance costs and fair value discount was $120.5 million and $119.7 million, respectively. Capital Resources Stockholders’ equity of $1.46 billion represented 10.83% of total assets at June 30, 2024 compared with $1.43 billion, or 10.71% of total assets, as of December 31, 2023. Stockholders’ equity increased $36.3 million from December 31, 2023 driven by net income generation of $66.5 million for the six months ended June 30, 2024, partially offset by dividends declared of $30.2 million and a $2.0 million increase in accumulated other comprehensive loss due primarily to the change in the fair value of securities available for sale. The Company purchased 5,700 shares of its common stock during the three months ended June 30, 2024 at an average price of $33.02 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 effects of stock-based incentive plans and other potential uses of common stock for corporate purposes. As of June 30, 2024, there were 1,992,400 shares available for repurchase under this 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 June 30, 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 June 30, 2024 December 31, 2023 Tier 1 leverage ratio 10.16 % 9.71 % Common equity tier 1 capital ratio 11.70 % 11.57 % Tier 1 capital ratio 12.61 % 12.50 % Total risk-based capital ratio 14.88 % 14.75 % Cash dividends as a percentage of net income 45.36 % 47.05 % Per common share: Book value $ 31.00 $ 30.26 Tangible book value (1) $ 22.54 $ 21.72 Tangible equity ratio (2) 8.11 % 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. 44 Table of Contents 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. 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 June 30, 2024 balance sheet position: Interest Rate Sensitivity Analysis Change in interest rates Percent change in (in bps) net interest income +200 (0.26%) +100 0.19% -200 (0.15%) 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 . 45 Table of Contents 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 June 30, 2024, the Company’s Basic Surplus measurement was 15.6% of total assets, or $2.11 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 $675.1 million and $665.5 million of period end total assets as June 30, 2024 and December 31, 2023, respectively) set forth in its liquidity policies. At June 30, 2024 and December 31, 2023, FHLB advances outstanding totaled $143.7 million and $322.7 million, respectively. At June 30, 2024 and December 31, 2023, the Bank had $154.0 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 $1.69 billion at June 30, 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 $784.4 million and $823.3 million at June 30, 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 June 30, 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 June 30, 2024 and December 31, 2023, the Bank had the capacity to borrow $1.10 billion and $1.02 billion, respectively, from this program. The Company’s internal policy authorizes borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $3.20 billion at June 30, 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 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 June 30, 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 June 30, 2024, approximately $84.3 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends 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. 46 Table of Contents 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 the Management’s Discussion and Analysis of Financial Condition and Results of Operations.