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Item 2. Management’s Discussion and Analysis

2024-11-08 compared with 2024-08-09 · 322 added, 265 removed, 533 unchanged (52% of the section changed)

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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.

Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results of the

full year ending December 31, 2024 or any future period.

Forward-Looking Statements

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(12) acquisition and integration of acquired businesses;

(13) governmental approvals of the Evans merger may not be obtained, or adverse regulatory conditions may

be imposed in connection with governmental approvals of the merger;

(14) the shareholders of Evans may fail to approve the merger;

(15) 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;

(16) changes in the competitive environment among

financial holding companies;

(17) 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;

(18) 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;

(19) 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;

(20) 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;

(21) 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.

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

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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.

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

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

As of 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.

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.

As of September 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.

September 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 but remains around

4.1% during the forecast period.

Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the fourth quarter of 2024 at approximately 3.9% and remains relatively stable during the forecast period.

Key assumptions in the

baseline economic outlook included the Federal Reserve cutting rates 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 third quarter of 2024 to a peak of 7.5% 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 September 30, 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.

To demonstrate the sensitivity of the allowance

for credit losses estimate to macroeconomic forecast weightings assumptions as of September 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 September 30, 2024, the Company increased the downside scenario to 100% which resulted in a 33% 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.

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Refer to Note 3 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards.

Evans Bancorp, Inc.

On September 9, 2024, the Company and the Bank, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Evans and Evans Bank, Evans’s subsidiary, pursuant to which the Company will

acquire Evans.

Evans, with assets of approximately $2.28 billion at September 30, 2024, is headquartered in Williamsville, New York.

Its primary subsidiary, Evans Bank, is a federally-chartered national banking association with 18 banking locations

in Western New York.

Subject to the terms and conditions of the Merger Agreement, which has been approved by the boards of directors of each party, Evans will merge with and into the Company, with the Company as the

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

Under the terms of the Merger Agreement, each outstanding share of Evans common stock will be converted into the right to receive 0.91 shares of the Company’s common stock.

The Merger is subject to

customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of Evans, and is expected to close in the second quarter of 2025.

The Company incurred acquisition expenses related to the merger with Evans of $0.5 million for the three and nine months ended September 30, 2024.

Salisbury Bancorp, Inc.

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

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

of New York, and southwestern Massachusetts.

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

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

As of the acquisition date,

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

The Company established a $14.5 million allowance for acquired Salisbury

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

The Company incurred acquisition expenses related to the merger with Salisbury of $7.9 million for the three months ended September 30, 2023 and $9.7 million for the nine months ended September 30,

Executive Summary

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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.

Net income for the three months ended September 30, 2024 was $38.1 million, up $13.5 million from the third quarter of 2023 and up $5.4 million from the second quarter of 2024.

Diluted earnings per

share were $0.80 for the three months ended September 30, 2024, up $0.26 from the third quarter of 2023 and up $0.11 from the second quarter of 2024.

Net income for the nine months ended September 30, 2024 was $104.6 million, or $2.21 per diluted

common share, up $16.3 million from $88.3 million, or $2.01 per diluted common share for the nine months ended September 30, 2023.

Operating net income (1) , a non-GAAP measure, which excludes acquisition expenses, acquisition-related provision for

credit losses and securities gains (losses), net of tax, was $38.1 million, or $0.80 per diluted common share, for the three months ended September 30, 2024, compared to $0.84 per diluted common share for the third quarter of 2023 and $0.69 per

diluted common share for the second quarter of 2024.

Operating net income (1) , for the nine months ended September 30, 2024, was $103.1 million, or $2.17 per diluted

common share, down $7.9 million from $110.9 million, or $2.53 per diluted common share for the nine months ended September 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.

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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.

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.

The following information should be considered in connection with the Company’s results for the three and nine months ended September 30, 2024:

Net interest income for the three months ended September 30, 2024 was $101.7 million, up $6.8 million, or 7.1%, from the third quarter of 2023 and up $4.5 million, or 4.6%, from the second quarter of 2024.

interest income for the nine months ended September 30, 2024 was $294.0 million, up $15.0 million, or 5.4%, from the same period in 2023.

The Company recorded a provision for loan losses of $2.9 million for the three months ended September 30, 2024, compared to $12.6 million in the third quarter of 2023 and $8.9 million in the second quarter of

Provision for loan losses was $17.4 million for the nine months ended September 30, 2024 down $2.8 million from the same period in 2023.

Included in the provision expense for the three and nine months ended September 30, 2023 was $8.8

million of acquisition-related provision for loan losses.

Excluding securities gains (losses), noninterest income represented 31% of total revenues and was $45.3 million for the three months ended September 30, 2024, up $4.9 million, or 12.1%, from the third quarter of

2023 and up $2.0 million, or 4.6%, from the second quarter of 2024.

Excluding securities gains (losses), noninterest income was $131.8 million for the nine months ended September 30, 2024 up $18.3 million from the same period in 2023.

Noninterest expense, excluding acquisition expenses, was up $12.3 million, or 14.9%, from the third quarter of 2023 and was up $5.6 million, or 6.3%, from the second quarter of 2024.

Noninterest expense, excluding

acquisition expenses, for the nine months ended September 30, 2024, was up $37.4 million, or 15.6%, for the same period in 2023.

Period end total loans were $9.91 billion, up $256.3 million, or 3.5% annualized, from December 31, 2023.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Performance :

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Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except per share data)

September 30,

Return on average tangible common equity:

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Acquisition expenses

Securities losses (gains)

Acquisition-related provision for credit losses

Acquisition-related reserve for unfunded loan commitments

Securities (gains) losses

Adjustments to net income

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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,

Net interest income was $101.7 million for the third quarter of 2024, up $4.5 million, or 4.6%, from the previous quarter.

The FTE net interest margin was 3.27% for the three months ended September

30, 2024, an increase of 9 bps from the previous quarter.

Interest income increased $5.5 million, or 3.6%, as the yield on average interest-earning assets increased 9 bps from the prior quarter to 5.01%, while average interest-earning assets of

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,

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.

$12.45 billion increased $79.2 million from the prior quarter, primarily due to organic loan growth slightly offset by a decrease in the average balance of securities.

Interest expense was up $1.0 million, or 1.8%, as the cost of interest-bearing

liabilities increased 2 bps to 2.60% for the quarter ended September 30, 2024, driven by interest-bearing deposit costs increasing 6 bps, which were partially offset by lower average balances of short-term borrowings.

Included in net interest

income was $2.7 million of acquisition-related net accretion for the three months ended September 30, 2024 and $2.6 million of acquisition-related net accretion for the three months ended June 30, 2024.

Net interest income was $101.7 million for the third quarter of 2024, up $6.8 million, or 7.1%, from the third quarter of 2023.

The FTE net interest margin was 3.27% for the three months ended

September 30, 2024, an increase of 6 bps from the third quarter of 2023.

Interest income increased $19.1 million, or 14.0%, as the yield on average interest-earning assets increased 38 bps from the same period in 2023 to 5.01%, while average

interest-earning assets increased $644.2 million, or 5.5%, from the third quarter of 2023 primarily due to the Salisbury acquisition and organic loan growth.

Interest expense increased $12.4 million, or 29.3%, as the cost of interest-bearing

liabilities increased 42 bps to 2.60% for the quarter ended September 30, 2024, primarily due to both a 67 bps increase in interest-bearing deposit costs and a $1.13 billion increase in interest-bearing deposits as a result of the Salisbury

acquisition, which were partially offset by a decrease of $491.5 million in the average balance of short-term borrowings and the 574 bps rate paid on those borrowings.

Included in net interest income was $2.7 million of acquisition-related net

accretion for the three months ended September 30, 2024 and $1.4 million of acquisition-related net accretion for the three months ended September 30, 2023.

Net interest income for the nine months ended September 30, 2024 was $294.0 million, up $15.0 million, or 5.4%, from the same period in 2023.

FTE net interest margin was 3.20% for the nine months

ended September 30, 2024, a decrease of 14 bps from the same period in 2023.

Interest income increased $82.1 million, or 22.1%, as the yield on average interest-earning assets increased 49 bps from the same period in 2023 to 4.93%, while average

interest-earning assets of $12.36 billion increased $1.13 billion primarily due to the Salisbury acquisition and organic loan growth, partially offset by the decrease in securities.

Interest expense was up $67.1 million, or 72.3%, for the nine

months ended September 30, 2024 as compared to the same period in 2023 driven by interest-bearing deposit costs increasing 109 bps and a $1.47 billion increase in interest-bearing deposits as a result of the Salisbury acquisition, partially offset

by a decrease of $347.0 million in the average balances of short-term borrowings and the 548 bps rate paid on those borrowings.

Included in net interest income was $7.8 million of acquisition-related net accretion for the nine months ended

September 30, 2024 and $1.4 million of acquisition-related net accretion for the nine months ended September 30, 2023.

Average Balances and Net Interest Income

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Three Months Ended

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

(Dollars in thousands)

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Interest income for tax-exempt securities and loans have been adjusted to an FTE basis using the statutory Federal income tax rate of 21%.

Six Months Ended

June 30, 2024

June 30, 2023

Nine Months Ended

September 30, 2024

September 30, 2023

(Dollars in thousands)

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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,

Three Months Ended September 30,

Increase (Decrease)

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Change in FTE net interest income

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

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Bank owned life insurance income

Net securities (losses) gains

Net securities gains (losses)

Total noninterest income

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.

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.

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.

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.

Noninterest income for the three months ended September 30, 2024 was $45.8 million, up $2.5 million, or 5.9%, from the prior quarter and up $5.5 million, or 13.8%, from the third quarter of 2023.

Excluding net securities gains (losses), noninterest income for the three months ended September 30, 2024 was $45.3 million, up $2.0 million, or 4.6%, from the prior quarter and up $4.9 million, or 12.1%, from the third quarter of 2023.

increase from the prior quarter was primarily driven by an increase in wealth management fees and insurance services.

Wealth management fees increased from the prior quarter due to organic growth and seasonal activity-based fees.

Insurance services

increased from the prior quarter due to seasonal renewals.

The increase from the third quarter of 2023 was driven by an increase in retirement plan administration fees, wealth management fees and insurance services.

Retirement plan administration

fees increased from the third quarter of 2023 driven by organic growth and higher market levels.

Wealth management fees increased in the third quarter of 2023 driven by the addition of Salisbury revenues, organic growth and market performance.

Insurance services increased from the third quarter of 2023 due to organic growth.

Noninterest income for the nine months ended September 30, 2024 was $134.4 million, up $30.7 million, or 29.6%, from the same period in 2023.

Excluding net securities gains (losses), noninterest

income for the nine months ended September 30, 2024 was $131.8 million, up $18.3 million, or 16.1%, from the same period in 2023.

The increase from the prior year was primarily due to an increase in retirement plan administration fees and wealth

management fees.

The increase in retirement plan administration fees was driven by higher market level, 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, organic growth and market performance.

Noninterest Expense

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands)

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Total noninterest expense

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.

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 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.

Noninterest expense for the three months ended September 30, 2024 was $95.7 million, up $6.2 million, or 6.9%, from the prior quarter and up $4.9 million, or 5.4%, from the third quarter of 2023.

Excluding acquisition expenses, noninterest expense for the three months ended September 30, 2024 was $95.2 million, up $5.6 million, or 6.3%, from the prior quarter and up $12.3 million, or 14.9%, from the third quarter of 2023.

The increase from

the prior quarter was primarily driven by higher salaries and employee benefits due to one additional payroll day and an increase in other benefits including higher levels of incentive compensation.

In addition, the increase from the prior quarter

was driven by higher technology and data services due to timing of planned initiatives and continued investment in digital platform solutions.

The increase from the third quarter of 2023 was driven by higher salaries and employee benefits due to

the Salisbury acquisition, merit pay increases, higher levels of incentive compensation, along with 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 nine months ended September 30, 2024 was $277.1 million, up $28.2 million, or 11.3%, from the same period in 2023.

Excluding acquisition expenses, noninterest expense for

the nine months ended September 30, 2024 was $276.6 million, up $37.4 million, or 15.6%, 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 tax expense for the three months ended September 30, 2024 was $10.7 million, up $1.5 million from the prior quarter and up $3.6 million from the third quarter of 2023.

The effective tax rate

was 21.9% for the third quarter of 2024 compared to 22.0% for the prior quarter and 22.4% for the third quarter of 2023.

Income tax expense for the nine months ended September 30, 2024 was $29.3 million, up $3.9 million from the same period in 2023 due to an increase in pre-tax net income.

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.

21.9% for the nine months ended September 30, 2024, compared to 22.3% for the nine months ended September 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

ANALYSIS OF FINANCIAL CONDITION

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.

Total securities increased $32.5 million, or 1.4%, from December 31, 2023 to September 30, 2024.

The securities portfolio represented 17.4% of total assets as of September 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

September 30, 2024

December 31, 2023

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(In thousands)

June 30, 2024

September 30, 2024

December 31, 2023

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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.

Total loans increased by $256.3 million, or 3.5% annualized, from December 31, 2023 to September 30, 2024.

Excluding the other consumer and residential solar portfolios that are in a planned run-off

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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.

decreased $13.9 million to $4.66 billion.

Total loans represent approximately 71.6% of assets as of September 30, 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.

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These loans carry an average size of $1.9 million, with 10% maturing over the next two years.

As of June 30, 2024 and December 31, 2023, the total CRE construction and

As of September 30, 2024 and December 31, 2023, the total CRE construction and

development loans amounted to $286.9 million and $347.2 million, respectively.

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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.

The January 1, 2023 decrease in the allowance for credit loss on TDR loans relating to the

adoption of ASU 2022-02 was $0.6 million, which increased retained earnings by $0.5 million and decreased the deferred tax asset by $0.1 million.

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

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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.

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.

The allowance for credit losses totaled $119.5 million at September 30, 2024, as compared to $120.5 million at June 30, 2024 and $114.6 million at September 30, 2023.

The allowance for credit losses

as a percentage of loans was 1.21% at September 30, 2024, compared to 1.22% at June 30, 2024 and 1.19% at September 30, 2023.

The allowance for credit losses as of September 30, 2024 was consistent with the allowance estimates as of June 30, 2024.

The increase in the allowance for credit losses from September 30, 2023 to September 30, 2024 was primarily due to providing for organic loan growth, the slowing of prepayment speed assumptions, including the change in prepayment model assumptions

and an additional specific reserve established in the second quarter of 2024 relating to a commercial relationship individually evaluated for credit loss.

These increases to the allowance for credit losses were partially offset by a change in

forecast scenario weightings from 70% baseline and 30% downside to 80% baseline and 20% downside, and the shift in loan composition driven by other consumer and residential solar portfolios that are in a planned run-off status.

The allowance for credit losses as of September 30, 2023 incorporates the recording of $14.5 million of allowance for acquired Salisbury loans as of the acquisition date, which included both the $8.8

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

The allowance for credit losses was 320.21% of nonperforming loans at September 30, 2024, compared to 316.37% at June 30, 2024 and 472.31% at September 30, 2023.

The allowance for credit losses was

358.45% of nonaccrual loans at September 30, 2024, compared to 346.71% of nonaccrual loans at June 30, 2024 and 552.67% of nonaccrual loans at September 30, 2023.

The decline in the coverage of the allowance to nonperforming and nonaccrual loans

from September 30, 2023 to September 30, 2024 largely relates to one nonperforming relationship that is individually evaluated for purposes of the allowance for credit losses which had a $1.7 million specific reserve established during the three

months ended June 30, 2024.

The provision for loan losses was $2.9 million for three months ended September 30, 2024, compared to $8.9 million in the prior quarter and $12.6 million for the same period in the prior year.

Included in the

provision expense for the three months ended September 30, 2023, was $8.8 million of acquisition-related provision for loan losses due to the Salisbury acquisition.

Provision expense decreased compared to the prior quarter due lower levels of loan

growth the third quarter of 2024 including the run-off of the other consumer and residential solar portfolios, the stabilization of expected prepayment assumptions impacting the expected life of the loan portfolio and a specific reserve established

in the prior quarter relating to a commercial relationship previously placed in nonaccrual in the fourth quarter of 2023.

Net charge-offs totaled $3.9 million during the three months ended September 30, 2024, compared to net charge-offs of $3.7

million during the second quarter of 2024 and $4.2 million in the third quarter of 2023.

Net charge-offs to average loans was 16 bps for the three months ended September 30, 2024, compared to 15 bps for the second quarter of 2024 and 18 bps for the

three months ended September 30, 2023.

The provision for loan losses was $17.4 million for the nine months ended September 30, 2024, compared to $20.1 million for the nine months ended September 30, 2023.

Provision expense decreased from the same period

in the prior year due to the $8.8 million of acquisition-related provision for loan losses due to the Salisbury acquisition recorded during the nine months ended September 30, 2023, partially offset by providing for current year loan growth, the

slowing of prepayment speed assumptions in the current year, 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 $12.3 million during the nine months ended September 30, 2024, compared to net charge-offs of $11.5 million during the nine months ended September 30, 2023.

Net charge-offs to average loans was

17 bps for the nine months ended September 30, 2024, compared to 18 bps for the nine months ended September 30, 2023.

As of September 30, 2024, the unfunded commitment reserve totaled $4.6 million, compared to $4.3 million as of June 30, 2024 and $4.8 million as of September 30, 2023.

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, troubled loans modifications, OREO and nonperforming securities.

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

June 30, 2024

September 30, 2024

December 31, 2023

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Total allowance for loan losses to nonaccrual loans

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.

Total nonperforming assets were $37.4 million at September 30, 2024, compared to $37.9 million at December 31, 2023 and $24.3 million at September 30, 2023.

Nonperforming loans at September 30, 2024

were $37.3 million or 0.38% of total loans, compared with $37.9 million or 0.39% of total loans at December 31, 2023 and $24.3 million or 0.25% of total loans at September 30, 2023.

The increase in nonperforming assets from the same period in the

prior year 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 million specific reserve was established during the three months ended June 30, 2024 for this relationship.

Total nonaccrual loans were $33.3 million or 0.34% of total loans at September 30, 2024, compared to $34.2

million or 0.35% of total loans at December 31, 2023 and $20.7 million or 0.21% of total loans at September 30, 2023.

Past due loans as a percentage of total loans was 0.36% at September 30, 2024, up from 0.32% at December 31, 2023 and down from

0.49% at September 30, 2023.

In addition to nonperforming loans discussed above, the Company has also identified approximately $119.9 million in potential problem loans at September 30, 2024 as compared to $87.7 million at

December 31, 2023 and $92.4 million at September 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

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.

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

Such loans may need to be disclosed as nonperforming at some

time in the future.

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 September 30, 2024 compared to December 31, 2023

and September 30, 2023 is primarily due to the net migration of commercial loan balances of $32.9 million and $27.2 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.

Total deposits were $11.59 billion at September 30, 2024, up $619.3 million, or 5.6%, from December 31, 2023.

As of September 30, 2024, there were $250.0 million of brokered time deposits, up from

$155.2 million as of December 31, 2023.

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The Company’s composition of total deposits is diverse and granular with over 563,000 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

account balance of $20,560 as of September 30, 2024.

As of September 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 $4.81 billion and

$4.08 billion, respectively.

Total average deposits increased $1.39 billion, or 14.1%, 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

The increase in average balances was primarily due to the $1.31 billion in deposits acquired from Salisbury in the third quarter

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.

Short-term borrowings totaled $205.0 million at September 30, 2024 compared to $386.7 million at December 31, 2023.

Long-term debt was $29.7 million at September 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.

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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.

As of September 30, 2024 and December 31, 2023 the subordinated debt net of unamortized issuance costs and fair value discount was $120.8 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 of $1.52 billion represented 11.00% of total assets at September 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.

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.

increased $96.3 million from December 31, 2023 driven by net income generation of $104.6 million for the nine months ended September 30, 2024 and a decrease of $35.2 million in accumulated other comprehensive loss due primarily to the change in the

fair value of securities available for sale, partially offset by dividends declared of $46.2 million.

The Company did not purchase shares of its common stock during the three months ended September 30, 2024.

The Company purchased 7,600 shares of its common stock in the first and second quarters of

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 September 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 September 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

September 30, 2024

December 31, 2023

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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.

Four additional models are run in

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

Under these scenarios, assets subject to prepayments

are adjusted to account for faster or slower prepayment assumptions.

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

The resulting changes in net interest income are then measured

against the flat rate scenario.

The resulting changes in net

interest income are then measured against the flat rate scenario.

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

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

The Company’s Interest Rate Sensitivity has remained in a near neutral position.

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

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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:

Net interest income for the next twelve months in the +200/+100/-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 September 30, 2024 balance sheet position:

Interest Rate Sensitivity Analysis

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net interest income

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

driven by inflationary pressures and FOMC monetary policy.

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

reduced deposit rates.

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 .

However, the tightening cycle ended in September of

2024 with the Federal Reserve lowering the federal funds rate by 50 bps.

While deposit rates increased meaningfully in 2023 and have continued to increase in early 2024 in conjunction with elevated short-term interest rates, the recent federal

funds rate reduction has provided the catalyst for the Company to begin reducing deposit rates.

The Company continues to focus on managing deposit expense in an environment of still elevated but declining short-term interest rates while allowing

assets to reprice upward in relation to existing portfolio asset yields.

Liquidity Risk

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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.

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.

30, 2024 and December 31, 2023, the Bank had the capacity to borrow $1.10 billion and $1.02 billion, respectively, from this program.

30, 2024, the Company’s Basic Surplus measurement was 16.4% of total assets, or $2.26 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 $692.0 million

and $665.5 million of period end total assets as September 30, 2024 and December 31, 2023, respectively) set forth in its liquidity policies.

At September 30, 2024 and December 31, 2023, FHLB advances outstanding totaled $129.6 million and $322.7 million, respectively.

At September 30, 2024 and December 31, 2023, the Bank had $194.0 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 $1.63 billion at September 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 $807.7 million and $823.3 million at September 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 $2.06 billion at September 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

At September 30, 2024 and December 31, 2023, the Bank had the capacity to borrow $1.12 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.

policy, remaining available borrowing capacity totaled $3.41 billion at September 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.

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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.

While short-term interest rates have declined, they remain elevated related to recent history, which 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.

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 elevated interest rates and the recent bank failures have led to a deposit decline in the banking system and

increased volatility to liquidity risk.

At September 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.

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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.

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.

September 30, 2024, approximately $95.8 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.

4 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis