NBT BANCORP INC (NBTB) FY 2022 MD&A

ITEM 7. 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 for the fiscal years ended December 31, 2022, 2021, and 2020, and financial condition as of December 31, 2022 and 2021, including capital resources and asset/liability management. This discussion and analysis should be read in
conjunction with our consolidated financial statements and related notes.

Forward-Looking Statements

Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission (“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. The discussion in Item 1A, “Risk Factors,” lists some of the factors that could cause our actual results to vary materially from those expressed or implied by any
forward-looking statements, and such discussion is incorporated into this discussion by reference.

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.

General

NBT Bancorp Inc. is a financial holding company headquartered in Norwich, NY, with total assets of $11.74 billion at December 31, 2022. The Company’s business, primarily conducted through the Bank and
its full-service retirement plan administration and recordkeeping subsidiary and full-service insurance agency subsidiary, consists of providing commercial banking, retail banking, wealth management and other financial services primarily to
customers in its market area, which includes central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central Connecticut. The Company’s business philosophy is to operate as
a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers. The financial review that follows focuses on the factors affecting the consolidated financial
condition and results of operations of the Company and its wholly-owned subsidiaries, the Bank, NBT Financial and NBT Holdings during 2022 and, in summary form, the preceding two years. Net interest margin is presented in this discussion on a fully
taxable equivalent (“FTE”) basis. Average balances discussed are daily averages unless otherwise described. The audited consolidated financial statements and related notes as of December 31, 2022 and 2021 and for each of the years in the three-year
period ended December 31, 2022 should be read in conjunction with this review.

Critical Accounting Estimates

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles
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 accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 to the consolidated financial statements included elsewhere in this report. Refer to
Note 2 to the consolidated financial statements 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 noted below are deemed to meet the SEC’s definition of a critical accounting estimate.

The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. As a result of the Company’s January 1, 2020, adoption of Accounting
Standards Updates (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) and its related amendments, our methodology for
estimating the reserve for credit losses changed significantly from December 31, 2019. The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss. The CECL approach requires an estimate
of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.” The estimate of
expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is
generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did
not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. The allowance for credit losses for loans, as reported in our
consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. The allowance for losses on unfunded commitments
represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company.
The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.

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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. Going forward, the impact of utilizing
the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material
changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast
period. As of December 31, 2022, the model incorporated a baseline economic outlook along with an alternative downside scenario. The baseline outlook reflected an unemployment rate environment initially at 3.9% that increases slightly during the
forecast period to 4.0%. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the first quarter of 2023 at approximately 3.9% and hovering around 4.6% by the end of the forecast period. The alternative downside scenario
assumed northeast unemployment rises from 3.9% in the fourth quarter of 2022 to a peak of 6.9% in the first quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s
expectations as of December 31, 2022. 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 December 31, 2022, the Company increased the downside scenario weighting by 10% to 60% and
decreased the baseline scenario to 40% weighting which resulted in a 3% increase 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 December 31, 2022, the Company increased the downside scenario to 100% which resulted in a 16% increase in the overall estimated allowance for credit losses.

Non-GAAP Measures

This Annual Report on Form 10-K contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Where non-GAAP disclosures are used in this Annual Report on Form 10-K, 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.

Overview

Significant factors management reviews to evaluate the Company’s operating results and financial condition include, but are not limited to: net income and earnings per share, return on average assets
and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology
advancements, market share and peer comparisons. The following information should be considered in connection with the Company’s results for the fiscal year ended December 31, 2022:

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Results of Operations

Net income for the year ended December 31, 2022 was $152.0 million, or $3.52 per diluted common share, compared to $154.9 million, or $3.54 per diluted share, in the prior year.

The following table sets forth certain financial highlights:

The following tables provide non-GAAP reconciliations:

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2023 Outlook

The Company’s 2022 earnings reflected a continued ability to invest in the Company’s future while managing through persistent volatility in the interest rate environment and overall economic
conditions which have challenged the financial services industry. Throughout 2022, the Company, along with other financial services companies, experienced lingering disruptions from the COVID-19 pandemic. Mainly, the volatility associated with
the rapid downward shift in the yield curve which remained fairly flat for the majority of 2021 and into early 2022, followed by the drastic rise in rates beginning in the second quarter of 2022, which resulted in an inverted yield curve for much
of the remainder of 2022 and into 2023. This rate increase was highly correlated with a significant tightening of monetary policy to combat heightened inflation.

Mixed economic indicators, persistent inflation and material inversion of the yield curve have increased the potential for a recession in 2023. While recession probabilities have increased,
excellent consumer and corporate balance sheets strengthened by government stimulus throughout the COVID-19 pandemic support a view that any form of recession could be mild. Significant items that may have an impact on 2023 results include:

The Company’s 2023 outlook is subject to factors in addition to those identified above and those risks and uncertainties that could impact the Company’s future results are explained in Item 1A. Risk Factors.

Asset/Liability Management

The Company attempts to maximize net interest income and net income, while actively managing its liquidity and interest rate sensitivity through the mix of various core deposit products and other
sources of funds, which in turn fund an appropriate mix of earning assets. The changes in the Company’s asset mix and sources of funds, and the resulting impact on net interest income, on an FTE basis, are discussed below. The following table
includes 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. Interest income for
tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 21% for 2022, 2021 and 2020.

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Average Balances and Net Interest Income

2022 OPERATING RESULTS AS COMPARED TO 2021 OPERATING RESULTS

Net Interest Income

Net interest income for the year ended December 31, 2022 was $362.2 million, up $41.1 million, or 12.8%, from 2021. PPP loan interest and fees recognized into interest income for the year ended December 31, 2022
was $3.7 million compared to $21.3 million in 2021. FTE net interest margin was 3.34% for the year ended December 31, 2022, an increase of 31 basis points (“bps”) from 2021. Interest income increased $44.2
million, or 13.0%, as the yield on average interest-earning assets increased 33 bps from 2021 to 3.54%, while average interest-earning assets of $10.90 billion increased $267.0 million primarily due to an increase in average loans and investment
securities. Interest expense was up $3.1 million, or 16.5%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021 as the cost of interest-bearing liabilities increased 4 bps to 0.33%, driven by the Company shifting
from an excess liquidity position to an overnight borrowing position. The Federal Reserve raised its target fed funds rate to 425 basis points in 2022, positively impacting our yields on earning assets.

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Analysis of Changes in FTE Net Interest Income

Loans and Corresponding Interest and Fees on Loans

The average balance of loans increased by approximately $229.8 million, or 3.0%, from 2021 to 2022 with the increases in specialty lending, commercial and industrial (“C&I”), commercial real
estate (“CRE”), indirect auto and residential mortgage portfolios being partly offset by a reduction in the average balance of PPP and other consumer loans. The yield on average loans increased from 4.01% in 2021 to 4.28% in 2022, as loans
re-priced upward due to the interest rate environment in 2022. FTE interest income from loans increased 10.1%, from $302.3 million in 2021 to $333.0 million in 2022. This increase was due to the increases in yields and an increase in the average
balance. Net interest income included interest and fees on PPP loans of $3.7 million and $21.3 million in 2022 and 2021, respectively.

Total loans were $8.15 billion and $7.50 billion at December 31, 2022 and 2021, respectively. Total PPP loans as of December 31, 2022 were $0.1 million (net of unamortized fees) with $101.5 million
of loans forgiven. Excluding PPP loans, period end loans increased $752.0 million or 10.2% from December 31, 2021. Commercial and industrial loans increased $109.8 million to $1.27 billion; commercial real estate loans increased $152.6 million to
$2.81 billion; and total consumer loans increased $489.5 million to $4.08 billion. Total loans represent approximately 69.4% of assets as of December 31, 2022, as compared to 62.4% as of December 31, 2021.

The following table reflects the loan portfolio by major categories(1), net of deferred fees and origination costs,
for the years indicated:

Composition of Loan Portfolio

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 typically are usually collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. The Company offers CRE loans to
finance real estate purchases, refinancings, expansions and improvements to commercial and agricultural properties. CRE loans are loans secured by liens on real estate, which may include both owner-occupied and nonowner-occupied properties, such
as apartments, commercial structures, health care facilities and other facilities. Risks associated with the CRE portfolio include the ability of borrowers to pay interest and principal during the loan’s term, as well as the ability of the
borrowers to refinance at the end of the loan term. As of December 31, 2022, there were $196.3 million in CRE construction and development loans included in total loans.

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The Company participated in the Small Business Administration’s (“SBA”) PPP, a guaranteed, forgivable loan program created under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)
and the Consolidated Appropriation Act targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the SBA, the guarantee is backed by the full faith and credit
of the United States government. PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make
certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any
representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders receive pre-determined fees for processing and servicing PPP loans. In addition, PPP loans are risk-weighted at zero percent under the generally
applicable Standardized Approach used to calculate risk-weighted assets for regulatory capital purposes. The Company processed approximately 6,100 loans totaling $835 million in relief with approximately 99% forgiven as of December 31, 2022.

Residential real estate loans consist primarily of loans secured by a first or second mortgage on primary residences. We originate adjustable-rate and fixed-rate, one-to-four-family residential
loans for the construction or purchase of a residential property or refinancing of a mortgage. These loans are collateralized by properties located in the Company’s market area. Subprime mortgage lending, which has been the riskiest sector of the
residential housing market, is not a market that the Company has ever actively pursued. The market does not apply a uniform definition of what constitutes “subprime” lending. Our reference to subprime lending relies upon the “Statement on
Subprime Mortgage Lending” issued by the Office of Thrift Supervision and the other federal bank regulatory agencies (the “Agencies”), on June 29, 2007, which further referenced the “Expanded Guidance for Subprime Lending Programs,” or the
Expanded Guidance, issued by the Agencies by press release dated January 31, 2001. As of December 31, 2022, there were $51.3 million in residential construction and development loans included in total loans.

In 2017, the Company partnered with Sungage Financial, LLC. to offer financing to consumers for solar ownership with the program tailored for delivery through solar installers. Advances of credit
through this business line are to prime borrowers and are subject to the Company’s underwriting standards. Typically, the Company collects fees at origination that are deferred and recognized into interest income over the estimated life of the
loan.

The Company offers a variety of Consumer loan products including indirect auto, home equity and other consumer loans. Indirect auto loans include indirect installment loans to individuals, which are
primarily secured by automobiles. Although automobile loans have generally been originated through dealers, all applications submitted through dealers are subject to the Company’s normal underwriting and loan approval procedures. Other Consumer
loans consist of direct installment loans to individuals most secured by automobiles and other personal property and unsecured consumer loans across a national footprint originated through our relationship with national technology-driven consumer
lending companies that began over 10 years ago beginning with our investment in Springstone Financial LLC (“Springstone”) which was subsequently acquired by LendingClub in 2014. In addition to installment loans, the Company also offers personal
lines of credit, overdraft protection, home equity lines of credit and second mortgage loans (loans secured by a lien position on one-to-four family residential real estate) to finance home improvements, debt consolidation, education and other
uses. For home equity loans, consumers are able to borrow up to 85% of the equity in their homes, and are generally tied to Prime with a ten year draw followed by a fifteen year amortization.

Loans by Maturity and Interest Rate Sensitivity

The following table presents the maturity distribution and an analysis of loans that have predetermined and floating interest rates. Scheduled repayments are reported in the maturity category in
which the contractual maturity is due. For loans without contractual maturities, classification of maturity is consistent with the policy elections to measure the allowance for credit losses. Specifically, C&I and CRE lines of credit assume
one year maturity for relationships over $1.0 million and five year maturity for relationships under $1.0 million, while home equity line of credits maturities are classified based on their fixed rate conversion date plus five years. C&I
includes PPP and other consumer includes residential solar, home equity and other consumer loans.

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Securities and Corresponding Interest and Dividend Income

The average balance of taxable securities available for sale (“AFS”) and held to maturity (“HTM”) increased $514.3 million, or 26.9%, from 2021 to 2022. The yield on average taxable securities was
1.78% for 2022 compared to 1.67% in 2021. The average balance of tax-exempt securities AFS and HTM increased from $220.8 million in 2021 to $233.5 million in 2022. The FTE yield on tax-exempt securities decreased from 2.23% in 2021 to 2.17% in
2022.

The average balance of Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock increased to $27.0 million in 2022 from $25.3 million in 2021. The yield on investments in Federal Reserve Bank
and FHLB stock increased from 2.44% in 2021 to 3.68% in 2022.

Securities Portfolio

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 the investment portfolio.

The following tables set forth information with regard to contractual maturities of debt securities shown in amortized cost ($) and weighted average yield (%) at December 31, 2022. Weighted-average
yields are an arithmetic computation of income (not FTE adjusted) divided by amortized cost. Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual
maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

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Funding Sources and Corresponding Interest Expense

The Company utilizes traditional deposit products such as time, savings, NOW, money market and demand deposits as its primary source for funding. Other sources, such as short-term FHLB advances,
federal funds purchased, securities sold under agreements to repurchase, brokered time deposits and long-term FHLB borrowings are utilized as necessary to support the Company’s growth in assets and to achieve interest rate sensitivity objectives.
The average balance of interest-bearing liabilities totaled $6.66 billion in 2022 and increased $66.7 million from 2021. The increase was primarily driven by the increase in interest-bearing deposits, higher federal funds purchased and increased
short-term borrowings as the Company shifted from an excess liquidity position to an overnight borrowing position at the beginning of the fourth quarter of 2022. The rate paid on interest-bearing liabilities increased from 0.29% in 2021 to 0.33%
in 2022. This increase in rates caused an increase in interest expense of $3.1 million, or 16.5%, from $18.8 million in 2021 to $21.9 million in 2022.

Deposits

Average interest-bearing deposits increased $46.7 million, or 0.7%, from 2021 to 2022. Average money market deposits decreased $139.8 million, or 5.4% during 2022 compared to 2021. Average NOW
accounts increased $126.3 million, or 8.7% during 2022 as compared to 2021 due primarily to larger commercial customers taking advantage of higher yielding investment opportunities in both the Company’s wealth management solutions as well as
other attractive offerings in the market. The average balance of savings accounts increased $172.5 million, or 10.4% during 2022 compared to 2021. The average balance of time deposits decreased $112.2 million, or 19.4%, from 2021 to 2022. The
average balance of demand deposits increased $131.3 million, or 3.7%, during 2022 compared to 2021.

The rate paid on average interest-bearing deposits was down 1 basis point to 0.16% for 2022. The rate paid for money market deposit accounts remained flat at 0.20% from 2021 to 2022. The rate paid
for NOW deposit accounts increased from 0.05% in 2021 to 0.16% in 2022. The rate paid for savings deposits decreased from 0.05% in 2021 to 0.03% in 2022. The rate paid for time deposits decreased from 0.70% during 2021 to 0.38% during 2022.

The following table presents the estimated amounts of uninsured deposits based on the same methodologies and assumptions used for the bank regulatory reporting:

The following table presents the maturity distribution of time deposits of $250,000 or more:

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Borrowings

Average federal funds purchased increased to $14.6 million in 2022 as the Company moved from an excess liquidity position to an overnight borrowing position. The rate paid on federal funds purchased
was 4.02% in 2022. Average repurchase agreements decreased to $69.6 million in 2022 from $100.5 million in 2021. The average rate paid on repurchase agreements decreased from 0.13% in 2021 to 0.10% in 2022. Average short-term borrowings increased
to $46.4 million in 2022 from $1.3 million in 2021 due to a combination of loan growth and a decrease in deposits. The average rate paid on short-term borrowings increased from 2.00% in 2021 to 4.24% in 2022. Average long-term debt decreased from
$15.5 million in 2021 to $6.6 million in 2022. The average balance of junior subordinated debt remained at $101.2 million in 2022. The average rate paid for junior subordinated debt in 2022 was 3.70%, up from 2.07% in 2021.

Total short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, which generally represent overnight borrowing transactions and other short-term
borrowings, primarily FHLB advances, with original maturities of one year or less. The Company has unused lines of credit with the FHLB and access to brokered deposits available for short-term financing. Those sources totaled approximately $2.90
billion and $3.45 billion at December 31, 2022 and 2021, respectively. Securities collateralizing repurchase agreements are held in safekeeping by nonaffiliated financial institutions and are under the Company’s control. Long-term debt, which is
comprised primarily of FHLB advances, are collateralized by the FHLB stock owned by the Company, certain of its mortgage-backed securities and a blanket lien on its residential real estate mortgage loans.

On June 23, 2020, the Company issued $100.0 million aggregate principal amount of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital,
bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable
quarterly in arrears commencing on October 1, 2025. The subordinated notes issuance costs of $2.2 million are being amortized on a straight-line basis into interest expense over five years. As of December 31, 2022 and 2021 the subordinated debt
net of unamortized issuance costs was $98.5 million and $98.3 million, respectively. The Company repurchased $2.0 million of the subordinated notes during the year ended December 31, 2022 at a discount of $0.1 million.

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 years indicated:

Noninterest income for the year ended December 31, 2022 was $155.6 million, down $2.2 million, or 1.4%, from the year ended December 31, 2021. Excluding net securities (losses) gains, noninterest income for the year
ended December 31, 2022 was $156.7 million, down $0.5 million or 0.3%, from the year ended December 31, 2021. The decrease from the prior year was driven by lower card services income from the impact of the Company being subject to the statutory
price cap provisions of the Durbin Amendment of approximately $8 million as well as lower other income drive by lower commercial loan swap fees. The decrease was partly offset by the increase in income from retirement plan administration fees
driven by higher activity-based fees and continued organic growth and higher service charges on deposit accounts as the volume of transactions has normalized to near pre-pandemic levels.

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 years indicated:

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Noninterest expense for the year ended December 31, 2022 was $304.5 million, up $17.2 million or 6.0%, from the year ended December 31, 2021. In 2022, the Company incurred merger expenses of $1.0
million related to the pending acquisition of Salisbury. Excluding merger expenses, noninterest expense for the year ended December 31, 2022 was $303.5 million, up $16.2 million or 5.6%, from the year ended December 31, 2021. The increase from
the prior year was driven by higher salaries and employee benefits due to increased salaries and wages including merit pay increases and higher levels of incentive compensation accruals. In addition, the increase in technology and data services
was due to continued investment in digital platform solutions and the increase in professional fees and outside services was due to external services for several tactical and strategic initiatives. Other expenses decreased from the prior year due
to $4.3 million in estimated litigation settlement costs in 2021 related to a settled lawsuit regarding certain of the Company’s deposit products and related disclosures, partly offset by higher travel and training expenditures along with an
increase in the provision for the reserve for unfunded commitments.

Income Taxes

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year.
Adjustments based on filed returns are recorded when identified, which is generally in the fourth quarter of the subsequent year for U.S. federal and state provisions.

The amount of income taxes the Company pays is subject at times to ongoing audits by U.S. federal and state tax authorities, which may result in proposed assessments. Future results may include
favorable or unfavorable adjustments to the estimated tax liabilities in the period the assessments are proposed or resolved or when statutes of limitations on potential assessments expire. As a result, the Company’s effective tax rate may
fluctuate significantly on a quarterly or annual basis.

On August 16, 2022, H.R. 5376, the Inflation Reduction Act (“IRA”), was signed into law. The IRA, among other things, introduced a corporate alternative minimum tax, excise tax on stock repurchases
and a clean vehicle credit. The Company does not expect the impact to be material and will continue to monitor the impacts of the IRA on the business to determine if any future tax impacts may result from this legislation.

Income tax expense for the year ended December 31, 2022 was $44.2 million, down $0.8 million, or 1.8%, from the year ended December 31, 2021. The effective tax rate was 22.5% in 2022 and 2021.

Risk Management – Credit Risk

Credit risk is managed through a network of loan officers, credit committees, loan policies and oversight from senior credit officers and the Board of Directors. Management follows a policy of
continually identifying, analyzing and grading credit risk inherent in each loan portfolio. An ongoing independent review of individual credits in the commercial loan portfolio is performed by the independent loan review function. These
components of the Company’s underwriting and monitoring functions are critical to the timely identification, classification and resolution of problem credits.

Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, restructured loans, other real estate owned (“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 and nonperforming loans specifically evaluated for individual credit loss is $1.0 million. OREO represents property acquired through
foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.

Nonperforming Assets

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The following tables are related to nonperforming loans in prior periods. Nonperforming loans are summarized by business line which does not align with how the Company currently assesses credit risk
in the estimate for credit losses under CECL.

Total nonperforming assets were $21.2 million at December 31, 2022, compared to $32.9 million at December 31, 2021. Nonperforming loans at December 31, 2022 were $21.1 million or 0.26% of total loans,
compared with $32.7 million or 0.44% of total loans at December 31, 2021. The decrease in nonperforming loans primarily resulted from a reduction in commercial and residential nonaccrual loans. Total nonaccrual loans were $17.2 million or 0.21% of
total loans at December 31, 2022, compared to $30.3 million or 0.40% of total loans at December 31, 2021. Past due loans as a percentage of total loans was 0.33% at December 31, 2022, up slightly from 0.29% of total loans at December 31, 2021.

The allowance for credit losses was 478.72% of nonperforming loans at December 31, 2022 as compared to 280.98% at December 31, 2021. The allowance for credit losses was 584.92% of nonaccrual loans at
December 31, 2022 as compared to 303.78% at December 31, 2021.

In addition to nonperforming loans discussed above, the Company has also identified approximately $52.0 million in potential problem loans at December 31, 2022 as compared to $74.9 million at
December 31, 2021. 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.” The decrease in potential problem loans from December 31, 2021 is primarily due to the improved economic conditions which resulted in loans coming off deferral and
returning to payment. Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations. As of December 31, 2022, 8.2% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic.
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 restructured 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.

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Allowance for Loan Losses

Beginning January 1, 2020, the Company calculated the allowance for credit losses using current expected credit losses methodology. As a result of our January 1, 2020, adoption of CECL and its
related amendments, our methodology for estimating the allowance for credit losses changed significantly from December 31, 2019. The Company recorded a net decrease to retained earnings of $4.3 million as of January 1, 2020 for the cumulative
effect of adopting ASU 2016-13. The transition adjustment included a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for unfunded commitments reserve, and $1.5 million impact to the
deferred tax asset.

Management considers the accounting policy relating to the allowance for credit losses to be a critical estimate given the degree of judgment exercised in evaluating the level of the allowance
required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.

The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required recognition of a
credit loss when it was probable a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on
the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be
charged-off.

Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a
level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the
allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed
above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

Management estimates the allowance balance for credit losses using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and
supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the
Company. Significant management judgment is required at each point in the measurement process.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics
exist. The respective quantitative allowance for each segment is measured using an econometric, discounted probability of default (PD) and loss given default (LGD) modeling methodology in which distinct, segment-specific multi-variate regression
models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the
net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that
exist in the loan portfolio at the balance sheet date.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised
the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been
combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.

Additional information about our Allowance for Loan Losses is included in Notes 1 and 6 to the consolidated financial statements as well as in the Critical Accounting Estimates section of the
Management Discussion and Analysis. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

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The allowance for credit losses totaled $100.8 million at December 31, 2022, compared to $92.0 million at December 31, 2021. The allowance for credit losses as a percentage of loans was 1.24% at
December 31, 2022, compared to 1.23% at December 31, 2021. The increase in the allowance for credit losses from December 31, 2021 to December 31, 2022 was primarily due to the increase in loan balances, primarily due to the increase in
residential solar loans, during 2022 and the slight deterioration in the economic forecast compared to prior year.

Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables related to the allowance for loan
losses in prior periods under the incurred methodology. Charge-off and recoveries are summarized by business line which does not align with how the Company currently assesses credit risk in the estimate for credit losses under CECL.

The provision for loan losses was $17.1 million for the year ended December 31, 2022, compared to a net benefit of $8.3 million for the year ended December 31, 2021. Provision expense increased from
the prior year primarily due to deteriorated economic condition forecast in the current year as compared to significant improvements experienced in the economic condition forecast in the prior year and loan growth experienced during the current
year. Net charge-offs totaled $8.3 million for 2022, down from $9.7 million in 2021. Net charge-offs to average loans was 11 bps for 2022 compared to 13 bps for 2021.

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Allocation of the Allowance for Loan Losses

Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following table relates to the allowance for loan
losses in prior periods. Category percentage of loans are summarized by business line which does not align with how the Company currently assesses credit risk in the estimate for credit losses under CECL.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is
unconditionally cancellable by the Company. The allowance for losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense. The estimate includes consideration of the likelihood that funding will occur and
an estimate of expected credit losses on commitments expected to be funded over their estimated lives. As of December 31, 2022 and 2021, the allowance for losses on unfunded commitments totaled $5.1 million. Prior to January 1, 2020, the Company
calculated the allowance for losses on unfunded commitments using the incurred loss methodology.

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. Management’s Asset Liability Committee (“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
December 31, 2022, the Company’s Basic Surplus measurement was 13.2% of total assets, or $1.55 billion, as compared to the December 31, 2021 Basic Surplus of 28.5%, or $3.43 billion, and was above the Company’s minimum of 5% (calculated at $587.0
million and $600.6 million, of period end total assets as of December 31, 2022 and December 31, 2021, respectively) set forth in its liquidity policies.

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At December 31, 2022 and 2021, FHLB advances outstanding totaled $443.8 million and $14.0 million, respectively. At December 31, 2022 and 2021, the Bank had $8.0 million and $81.0 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 $1.17 billion at December 31, 2022 and $1.67 billion at December
31, 2021. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $898.1 million and $999.1 million at December 31, 2022 and 2021, 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 $1.92 billion at
December 31, 2022 and $2.03 billion at December 31, 2021. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral. At December 31, 2022 and 2021, the Bank
had the capacity to borrow $622.7 million and $580.8 million, respectively, from this program. The Company’s internal policies authorize borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $2.41
billion at December 31, 2022 and $2.89 billion at December 31, 2021.

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 2023. Higher 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%.
Significant monetary and fiscal policy actions taken by the federal government during the COVID-19 pandemic have helped to mitigate these risks. Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during
the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.

At December 31, 2022, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is depleted, 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.

Net cash flows provided by operating activities totaled $183.2 million and $159.2 million in 2022 and 2021, respectively. The critical elements of net operating cash flows include net income,
adjusted for non-cash income and expense items such as the provision for loan losses, deferred income tax expense, depreciation and amortization and cash flows generated through changes in other assets and liabilities.

Net cash flows used in investing activities totaled $926.2 million and $547.6 million in 2022 and 2021, respectively. Critical elements of investing activities are loan and investment securities
transactions.

Net cash flows used in financing activities totaled $328.7 million in 2022 and net cash flows provided by financing activities totaled $984.8 million in 2021. The critical elements of financing
activities are proceeds from deposits, borrowings and stock issuance. In addition, financing activities are impacted by dividends and treasury stock transactions.

Commitments to Extend Credit

The Company makes contractual commitments to extend credit, which include unused lines of credit, which are subject to the Company’s credit approval and monitoring procedures. At December 31, 2022
and 2021, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $2.42 billion and $2.30 billion, respectively. In the opinion of management, there are no material commitments to extend credit, including
unused lines of credit that represent unusual risks. All commitments to extend credit in the form of loans, including unused lines of credit, expire within one year.

Standby Letters of Credit

The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company guarantees the obligations or performance of
customers by issuing standby letters of credit to third-parties. These standby letters of credit are generally issued in support of third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk
involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management
procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash
requirements. At December 31, 2022 and 2021, outstanding standby letters of credit were approximately $53.3 million and $55.1 million, respectively. The fair value of the Company’s standby letters of credit at December 31, 2022 and 2021 was not
significant.

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The following table sets forth the commitment expiration period for standby letters of credit at:

Interest Rate Swaps

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company
has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the
exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to
variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the
recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter
into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated and
that qualify as cash flow hedges, changes in fair value of the cash flow hedges are reported in AOCI. When the cash flows associated with the hedged item are realized, the gain or loss included in AOCI is subsequently reclassified and recognized in
the consolidated statements of income.

When the Company purchases or sells a portion of a commercial loan that has an existing interest rate swap, it may enter into a risk participation agreement to provide credit protection to the
financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions
and those in which it provides credit protection to other financial institutions. Any fee paid to the Company under a risk participation agreement is in consideration of the credit risk of the counterparties and is recognized in the income
statement. Credit risk on the risk participation agreements is determined after considering the risk rating, probability of default and loss given default of the counterparties.

Loans Serviced for Others and Loans Sold with Recourse

The total amount of loans serviced by the Company for unrelated third parties was approximately $576.0 million and $575.9 million at December 31, 2022 and 2021, respectively. At December 31, 2022
and 2021, the Company had approximately $0.6 million and $1.0 million, respectively, of mortgage servicing rights. In addition, as of December 31, 2022 and 2021, the Company serviced Springstone consumer loans of $6.2 million and $11.4 million,
respectively. At December 31, 2022 and 2021, the Company serviced $31.0 million and $25.6 million, respectively, of agricultural loans sold with recourse. Due to sufficient collateral on these loans and government guarantees, no reserve is
considered necessary at December 31, 2022 and 2021.

Capital Resources

Consistent with its goal to operate a sound and profitable financial institution, the Company actively seeks to maintain a “well-capitalized” institution in accordance with regulatory standards. The
principal source of capital to the Company is earnings retention. The Company’s capital measurements are in excess of both regulatory minimum guidelines and meet the requirements to be considered well-capitalized.

The Company’s primary source of funds to pay interest on trust preferred debentures and pay cash dividends to its stockholders are 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.

The Bank also is subject to substantial regulatory restrictions on its ability to pay dividends to the Company. Under Office of the Comptroller of the Currency (“OCC”) regulations, the Bank may not
pay a dividend, without prior OCC approval, if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net
income over the preceding two years. At December 31, 2022 and 2021, approximately $145.3 million and $164.6 million, respectively, of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without
approval by the OCC. The Bank’s ability to pay dividends also is subject to the Bank 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.

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Stock Repurchase Plan

The Company purchased 400,000 shares of its common stock during the year ended December 31, 2022 at an average price of $36.78 per share under its previously announced share repurchase program. As
of December 31, 2022, there were 1,600,000 shares available for repurchase under this plan authorized on December 20, 2021 and set to expire on December 31, 2023.

Recent Accounting Updates

See Note 2 to the consolidated financial statements for a detailed discussion of new accounting pronouncements.

2021 OPERATING RESULTS AS COMPARED TO 2020 OPERATING RESULTS

For similar operating and financial data and discussion of our results for the year ended December 31, 2021 compared to our results for the year ended December 31, 2020, refer to
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 1, 2022 and is incorporated
herein by reference.

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